Multinational tax: the OECD’s Pillar One proposal

By Andrew Maslaris (Economic Policy Section, Australian Parliamentary Library)

Against a background of increasing public and fiscal pressures, countries are continuing to grapple with how to get a ‘fair share’ of tax from highly digitalised multinational enterprises without adversely impacting on productivity, innovation or trade relationships.

Despite on-going attempts by the Organisation for Economic Co-operation and Development (OECD) to fundamentally re-write the international tax framework, many countries have become increasingly frustrated at a perceived lack of progress and a lack of co-operation from the United States. In response, a number of European countries have turned to unilateral action in the form of an interim Digital Services Tax (DST)—that is, a tax levied on the income earned by large digitalised multinationals that provide digital advertising and digital platform services to citizens of that country.

On 20 March 2019, the Treasurer, Josh Frydenberg, announced that following public consultation, Australia’s focus was on pursuing a long-term solution at the OECD rather than an interim DST. However, in light of reports in June 2020 that the United States had sought to delay talks on an OECD-led long-term solution, and with the increasing fiscal pressures arising from COVID-19, Australia may need to reconsider its position should progress stall.[3]

This paper seeks to provide readers with background information about the OECD’s attempts to provide countries with a greater share of tax from multinationals that have a significant economic presence, but a limited, or no, physical presence in that country (broadly known as the Pillar One proposal). The paper also draws out some of the technical design issues and political tensions underlying Pillar One and concludes that these may continue to delay the resolution of Pillar One and ultimately undermine an effective and meaningful long-term solution being reached. In turn, this may increase the incentive for countries to explore a DST as an interim response until such time as the OECD can find a solution that appeases all OECD members.

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