Stabilizing “Pillar One”: Corporate Profit Reallocation in an Uncertain Environment

Abstract

This Article is about how the world reestablishes international tax order.

The Article focuses on the OECD’s work on profit reallocation and asks whether this multilateral effort can be successful in stabiliz­ing the international tax system. The analysis centers on the current leading concepts for reallocating profit among jurisdictions under what is known as “Pillar One” of the OECD work programme. To analyze whether any Pillar One concept can be turned into a stable multilateral regime, it is necessary to specify certain elements of what a proposal to reallocate profits might entail. Accordingly, this Article sets out two strawman proposals. One strawman uses a “market intangibles” con­cept that explicitly separates routine and residual returns. The other strawman may reach a similar result, but does not explicitly attempt to separate routine and residual returns. Instead, in current OECD par­lance, it might be described as a “distribution-based” approach.

The Article asks whether either of the two strawmen could be agreed upon and stabilized multilaterally given the tools of modern international tax diplomacy. I conclude that the current procedural and institutional architecture for cementing international tax rela­tions among states is inadequate to stabilize either of the strawmen.Nevertheless, with certain changes, reestablishing order may be possi­ble. Moreover, I conclude that there are six key structural decisions that impact the ability to stabilize the international tax architecture of any Pillar One approach and that these decisions are likely to be implicitly made in the course of choosing a political direction for Pillar One work in 2019. The choices made with regard to these decisions determine whether or not it will be possible to stabilize Pillar One.

Even if good resolutions are reached along these six dimensions, there are only a couple of paths to stabilize the system. One path would involve using every tool in the current OECD arsenal in new and more expansive ways, and then substantially depoliticizing international tax matters and removing G20 involvement, such that logics of appropri­ateness developed among tax administrators isolated from political pressures and acting through transnational networks could lend stabil­ity to a new set of rules and principles. Even then, only a few Pillar One compromises could be stabilized this way. The alternative path, which could stabilize a broader range of proposals, requires formaliz­ing the new regime in international law through a true multilateral treaty.