An Analysis of the United States' Stance on BEPS: Pillar One

AuthorAlex McNichol
PositionLLB(Hons)/BCom, University of Canterbury
Canterbury Law Review Student Prize 2020
e current refor mation of the traditiona l nexus and prof‌it allocatio n tax principles
by the Organis ation for Econom ic Co-operat ion and Develo pment comes as a w elcome
relief for the major ity of global economie s, who lose billions wor th of tax revenue through
their inappli cability to the m odern, digi tal economy. Howeve r, recent actions by th e United
States threaten to s tall any meaning ful progress on d evelopment s and act to highlig ht
its national istic stance on an issue whic h threatens multinational s headquartered in its
jurisdict ion and its own domestic e conomy. is article co nsiders the rational e for such a
stance, ident ifying the multitude of re asons why the United States may w ish to protect its
own interests i n these circumstan ces. Ultimately, the a rticle conclu des that for the purpose
of facilitating g lobal agreemen t on an issue whic h requires conse nsus, the United States
ought to engage more p roactively in refor mation disc ussions an d be willing to sac rif‌ice
its own self-inter est to provide an outcome tha t will benef‌it smaller, devel oping nations.
“We must, inde ed, all hang together or, most as suredly, we shall all hang sepa rately.”
Benjamin Franklin
I. Introduction
The abilit y of modern businesses t o gain access t o global marke ts remotely
has hig hlight ed the ina dequacies of tr aditiona l tax pr inciples creat ed over a
centur y ago. Now, businesses a re able to operat e in juri sdiction s whilst avoid ing
the requisite physical presence typically required to incur any t ax obligations.1 The
1 OECD Addressing t he Tax Challen ges of the Digital Economy, A ction 1 – 2015 Final Repor t (OECD
Publish ing, 5 Oct ober 2015) at [184].
* LLB(Hon s)/BCom, Uni versity of Ca nterbur y. I would like t o than k my superv isor, Profess or
Adria n Sawyer, for his assi stance in t he completion of my diss ertation. A ll errors or omi ssions
made are my ow n.
162 [Vol 28, 2021]
f‌iscal ra mif‌ications of t hese practices are eye-wat ering, wit h an estimate d USD 100
billion to 2 40 billion lost glob ally per year.2
Over the las t decade, a raf t of measur es has been propo sed to reform the
internat ional tax fra mework by the Inclusive Frame work group – a working group
of the Orga nisation for Econom ic Co-Oper ation and Development (OEC D) – to
address the se practices. T hese measur es have collect ively been ter med the base
erosion and prof‌it s hifting P roject (BEPS). This a rticle addresses A ction Plan 1 of the
BEPS Project ’s 15-point Action Plan.3
Action Plan 1 a ims to tackle t he direct and indi rect tax chal lenges arising from
the increa sed digit alis ation of the economy – a n uncontent ious facili tator for the
aforementioned da magin g practices. 4 Work in tackl ing thes e challeng es has been
separate d into two pillar s. Pillar One focuse s on the re-allocation of t axing right s,
reviewi ng the cur rent prof‌it al location and n exus rule s to determ ine where ta x
ought to be pa id and on what basis.5 Pi llar Two focuses on ident ifying a sys tem that
ensures mu ltinationals p ay a minimum level of ta x and stops the shi fting of prof‌its
to low or no-ta x jurisd ictions by crea ting a glob al anti-b ase erosion mecha nism. 6
This ar ticle will focus on de velopments under Pilla r One.
A consensus-b ased solution to Pil lar One is intended t o be reached by mid-2021
by the Inclusi ve Framework g roup, a timeli ne which has a lready felt the eects of
COVID-19 delay.7 The consensus-ba sed solution is a method ty pically employed b y
the OECD in order t o create equ alit y in voting r ights a mongst its memb ers, as it
require s all par ticipati ng juri sdictions t o come to an ag reement before a solut ion
can be pass ed, whilst allow ing nations to abst ain from voting to a void impacting a
However, a proposal made by S teven Mnuchin , the United St ates’ Secret ary of the
Treasu ry, to implement Pil lar One as a safe ha rbour regi me has undoubted ly caused
concern for the Incl usive Fra mework.8 Essent ially, the safe harbou r would operate
to allow mu ltinationa ls that were caug ht in the scope of Pi llar One to opt -in or out of
the consensus-based solution.9 For reasons ex plored further i n this art icle, the safe
harbour pr oposal by t he United St ates is unsurpri sing. However, the pa rticipation
of the United S tates in, and subseq uent ratif‌ication of, a consens us-based solution
2 OECD “Endi ng oshore prof‌it sh iftin g” .
3 OECD “Action 1: T ax Challen ges Arisi ng from Digit alisation” .
4 OE CD, above n 3.
5 OECD, above n 3 .
6 OEC D, above n 3.
7 OECD Tax Challenges Ar ising from D igitalisa tion – Repor t on Pillar On e Blueprin t (OECD
Publish ing, 14 Oc tober 2020) at 9.
8 Lett er from Steven T Mnuch in (United Stat es Secretary of t he Treasury) t o Jose Angel Gurr ía
(OECD Secret ary-Gener al) regard ing a safe ha rbour approach t o Pillar O ne (3 December 201 9).
9 OE CD, above n 7, at [167].
An Analysis of the Un ited States’ Stance on BEP S: Pillar One
to Pil lar One is in arguably c ritica l given the over whelmin g contribut ion of their
multin ationals to the iss ue at hand. Without the Un ited States’ par ticipation, Pil lar
One risks i neectiveness a nd any progr ess made towa rds a multi latera l solution
will l ikely be ruined by u nilateral me asures such as dig ital servic es taxes (DSTs).
This ar ticle outlines why the Un ited States’ safe ha rbour proposal is in tuitively
workable. It subm its that t he proposal a ligns w ith the gener al hesita ncy of the
United St ates to accept a c onsensus-ba sed solution wh ich is inconsi stent wit h the
protection of it s own self-interest. The a rticle adv ises aga inst such a n ational istic
approach, consid ering the g ravit y of the issue Pi llar O ne aims to r esolve and the
likely cons equences that may ar ise if agreement fa ils to be reached.
Part II w ill out line the cu rrent int ernationa l tax f ramework an d the specif‌ic
tradit ional pri nciples of the ta x system t hat the BEPS P roject ai ms to reform.
Part II I will def‌i ne the digital econom y, specif‌ical ly identif ying how it ha s created
problems for trad itional t ax princ iples. Par t IV wil l address the c hronologica l
histor y of the BEPS Project, feed ing in to Part V wh ich provides an overview of t he
current Bluepr int for Pil lar One. Pa rt VI w ill addre ss the safe ha rbour propos al
made by the Unit ed State s and ulti mately conclude on its unworkabi lity. Par t VII,
the most subs tantive part of th is article, wil l address what the wri ter perceives as
the underly ing ration ale for such a proposa l by the United States . To conclude the
article , Part VIII w ill address t he potential conse quences of a rejection of Pil lar One
by the Unite d States.
II. International Tax Framework and
Traditional Tax Principles
First , this article w ill discuss the i nternational ta x framework and the spe cif‌ic
tradit ional ta x principles t hat Pil lar One ai ms to reform a nd upon which th e
framework i s based. An unders tanding of t hese principles is essent ial to gra sp their
inadequac ies in a global dig ital economy.
A. International Tax Framework
The import ance of a cohesive intern ational tax sy stem cannot be under stated.10
However, the phrase “ internat ional tax system” is s omewhat of a misnomer, g iven
there is no one overa rching re gime th at all jur isdict ions comply wit h, nor one
overarchi ng authority t o which taxpayers a re subject.11 Therefore, t he internationa l
10 James Coleman and others, New Zealand Taxation (Thomson Reuters, Well ington, 201 6) at 747.
11 Kevin Holmes Interna tional Tax Policy and D ouble Tax Treaties: An Intro duction to Princ iples and
Application (IBFD, Ams terdam, 20 07) at 3.

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