Pillar One is unlikely to succeed for three reasons. First, it requires an MTC to be implemented because Amount A requires overriding Articles 5 (Permanent Establishment, PE), 7 (Business Profits) and 9 (Associated Enterprises) of every tax treaty to abolish the PE and Arm’s Length Principle (ALP) limits enshrined therein. But negotiating an MTC is hard, especially when over 100 countries are involved and there are fundamental disagreements among them.
Second, because Pillar One (despite its October 2021 expansion) is still aimed primarily at taxing the US digital giants (Big Tech), it is hard to envisage it being implemented without the United States. But despite the support of the Biden administration, since the Republicans are adamantly opposed, an MTC implementing Pillar One cannot be ratified by the Senate (which requires 67 votes) or enacted as a Congressional Executive Agreement (which requires passage in the Republican controlled House). In theory other countries can adopt a Pillar One MTC without the US, but as discussed below that could lead to massive double taxation and a trade war, so that seems implausible.
Third, Pillar One is premised on all the countries that have adopted DSTs repealing them. But DSTs are popular politically and, in some cases (e.g. the UK), brought in significant revenue. The only reason countries agreed to suspend DSTs was US pressure, and now that the US cannot ratify an MTC, there is no reason for those countries not to implement their DSTs as scheduled in January 2024.
What will happen then? This article discusses what options countries have to tax Big Tech without Pillar One, and then addresses the US response.
Comparative and Foreign Law | Law and Economics | Tax Law
Date of this Version
Working Paper Citation
Avi-Yonah, Reuven S., "After Pillar One" (2023). Law & Economics Working Papers. 247.