At a presentation on 12 October 2020 introducing Blueprint reports on Pillar 1 and Pillar 2 of the proposals on taxation of the digital economy, the OECD presented an economic impact analysis of the proposals.

Pillar One

Pillar One would grant countries a new taxing right that is no longer exclusively linked to the physical presence of the taxpayer in a jurisdiction, identifying market jurisdictions eligible to receive Amount A, with detailed sourcing rules.

For the purposes of the economic impact assessment only the impact of Amount A of Pillar One was included. The effect of Amount B (the fixed return for baseline marketing and distribution operations) and the tax certainty component would be relatively small on a global basis although the effect could be significant for some individual jurisdictions.

The analysis found that Amount A could lead to a significant redistribution of taxing rights across jurisdictions on around USD 100 billion of profits.

Pillar Two

Pillar Two would give countries a right to tax profits charged at or below a minimum rate of tax, operating on a top-up basis to ensure the group tax charge is at least the minimum rate. The impact assessment assumed it would apply on a jurisdiction by jurisdiction basis. It also assumed that the US GILTI would co-exist with Pillar Two.

Methodology

The analysis used forward-looking tax rates and took into account the profit-shifting behaviour of multinational groups. It employed a version of Pillar One (Amount A) and Pillar Two and looked at 70 jurisdictions, taking into account the location of the assets and activities of multinational groups across jurisdictions. The average and marginal effective tax rates were looked at before and after the reform.

Economic Impact

Based on the assumptions and available data the implementation of Pillars 1 and 2 would increase global corporate income tax revenue by between 50 and 80 billion US dollars. The combined effect with the US Global Intangible Low Taxed Income (GILTI) provisions would be an increase in corporate income tax revenue of 60 to 100 billion US dollars per year, the equivalent of around 4% of global GDP. Pillar 2 would result in revenue gains for low income countries of up to 3%.

There would also be a more favourable climate for investment and growth than would be the case if no global consensus can be reached. The investment costs for multinational enterprises would be slightly increased, but the negative impact would be small as the proposals are targeting highly profitable multinational groups. The reduction in differences between national tax rates would reduce incentives for profit shifting.

Pillar One and Pillar Two could also support global growth indirectly. Increased tax revenue and a lessening of tax competition would have a beneficial effect on public finances and domestic resource mobilisation. Developing countries could also be in a position to reduce costly tax incentives. There would however be an increase in compliance costs for taxpayers and for tax administrations, the amounts depending on the final design of the reforms.

Without a consensus-based solution a proliferation of unilateral measures is likely, causing significant costs from tax and trade disputes. The negative impact on global growth is estimated to be a reduction of more than 1% of global GDP in the worst-case scenario.