Cover of EconPol Policy Brief 36

Who Will Pay Amount A?

Michael Devereux and Martin Simmler (Oxford University Centre for Business Taxation)

The latest OECD tax reform will affect only 78 of the world’s 500 largest companies and only about 37 European companies, this EconPol Policy Brief reveals. The number of companies is so low, mainly because the tax applies only to companies with revenues above USD 20 billion which earn a rate of return on revenue above 10%. Reducing the revenue threshold for multinational companies from USD 20 billion to EUR 750 million would increase the number of companies affected by a factor of 13. The relative gain of reducing the threshold below USD 5 billion is small relative to the increase in the number of companies involved, the authors estimate. These are some of the key findings of the study examining the consequences of the OECD’s Pillar 1 reform.

 

Abstract
  • Based on the agreed Pillar 1 threshold of profitability of 10% (and given that financial and extractive companies are excluded), then only 78 of the world’s 500 largest companies will be aected. 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-headquarted 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 billionto €750 million (alongside Pil-lar 2) would double the aggregate Amount A butwould 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%.
Citation

Michael Devereux, Martin Simmler: "Who Will Pay Amount A?", EconPol Policy Brief 36, July 2021