Who will pay Amount A?

On July 1, 2021, the OECD’s Inclusive Framework agreed the outline of two fundamental reforms to the international tax system. One of these, Pillar 1, will allocate part of the profit of very large multinational companies that earn a rate of return over a threshold to countries in which they make sales. This allocation is known as Amount A. 

In the OECD’s October 2020 Blueprint proposal, it was suggested that Pillar 1 should be applied only to businesses with revenues above €750 million that offer automated digital services (ADS) or are consumer-facing (CFB). The last-minute proposal by the US administration, released in April, changed this in two ways. First, the focus on companies in particular sectors (CFB or ADS) has been dropped, although financial sector firms and extractive industry firms are still excluded. Second, the US proposed that the revenue threshold should be increased to $20 billion. 

In a new Policy Brief, we explore the implications of these scoping rules for which companies will be liable to Pillar 1, and the amounts of profit involved. Based on three different datasets, the Policy Note investigates the consequences of: (a) the profitability threshold; (b) the exclusion of the financial sector; (c) the revenue threshold; (d) the types of business now included, in place of only ADS and CFB; and (e) the use of pre-tax profits over equity instead of pre-tax profits over sales as profitability criteria.  

The key results are as follows:

• Based on the agreed Pillar 1 threshold of profitability of 10% (and given that financial and extractive companies are excluded), only 78 of the world’s 500 largest companies will be affected. If the proportion of profit above this threshold liable to Amount A is set to 20% (from the range 20% to 30%) then the total allocation of Amount A for these companies would be $87 billion.
• Around 64% of this total ($56 billion) would be generated by US-headquartered companies.
• Around 45% of this total ($39 billion) would be generated by technology companies, and around $28 billion would be generated from the largest 5 technology US companies (Apple, Microsoft, Alphabet, Intel and Facebook).  
• The decision to exclude financial companies reduces the total Amount A allocation by around half, although this is estimate is complicated by the different accounting treatment of banks.
• Reducing the revenue threshold from $20 billion to €750 million (alongside Pillar 2) would double the aggregate Amount A but would increase the number of companies affected by a factor of 13. The relative gain of reducing the threshold below $5 billion is small relative to the increase in the number of companies involved. 
• Reducing the revenue threshold would have a less significant impact on companies in the automated digital services (ADS) and consumer facing business (CFB) sectors (the sectors that had been targeted in earlier proposals) than on companies outside those sectors. 
• The sectoral composition of companies subject to Pillar 1 is strongly affected by the definition of profitability - pre-tax profits as a proportion of revenues. Among European firms with revenues above $20 billion, there are almost twice as many companies that have a return on equity above 10% compared to those that have a return on revenue above 10%. 

These results shed some light on the political compromise underlining the agreement on Pillar 1. 

Among other things, the use of a threshold of 10% for pre-tax profits over sales ensures that only a small fraction of highly profitable (measured as the rate of return on equity) companies are subject to Pillar 1. Adding the exclusion of financial and extractive companies goes in the same direction. 

In principle, this is an important reform, introducing for the first time the principle of taxing profit in the market country. But it is only a tentative step in that direction.