Does Pillar One Amount A Effectively Tax the Digital Economy?

Abstract

This article examines to what extent Pillar One Amount A of the OECD's new ‘Two-Pillar’ solution effectively taxes the largest digital multinational enterprises (MNEs). The original purpose behind the OECD’s proposal was to tax the digital economy by defining a sales-based allocation key. However, the metrics behind Amount A – a global turnover of €20bn, a profitability margin of 10% and a limited list of excluded industries – diverge from that policy. This article first examines the policy objective of ‘taxing the digital economy’, and how Amount A is understood to work by exploring how the ‘residual profits’ criterion and the allocation key apply. By comparing the UNCTAD’s list of the top 100 digital MNEs to those meeting the Amount A metrics using the Orbis database, it is concluded that the majority of digital MNEs would not be subject to Amount A. This article then analyses the economic incidence of Amount A and concludes that, if ‘residual profits’ is a proxy for economic rent and the allocation key remains sales-based, Amount A could successfully target digital MNEs, as they are prone to producing such economic rent and cannot reduce their tax burden by shifting it onto other economic players.