When the U.S. Congress Discussed Pillar 1

1. Introduction

Article 48 and Annex 1 of the draft Multilateral Convention to Implement Pillar One’s Amount A (MLC) state that the U.S. must ratify the MLC for it to enter into force. The OECD has assigned countries points, seemingly based on the likelihood that they host industries covered by Amount A. Countries representing 600 out of a total of 999 points must ratify the MLC. Since the U.S. has been allocated 486 points, the remaining countries (sharing a total of 513 points) cannot reach the 600-point threshold.[1]

Thus, the future of Pillar 1 lies entirely in the hands of the U.S. Congress. Against this backdrop, it is particularly interesting to examine the video-recording of the congressional hearing on Pillar 1 held by the Ways & Means Tax Subcommittee of the House of Representatives on March 7, 2024.

At the time (as now), the House was controlled by the Republicans, and the hearing was initiated by the subcommittee’s Republican chairman, Mike Kelly. Four private-sector representatives participated as experts.

When watching the recording, keep in mind that the Biden administration deliberately avoided keeping Congress informed about the Pillar 1 negotiations. The hearing therefore provided a rare opportunity for Republican members of Congress to educate themselves and voice their opinions on the matter.

2. The Hearing[2]

   
   

If one word could summarize the hearing, it would be "confusion."

The Complexity of Amount A

Committee members clearly struggled to grasp the core issues. Chairman Mike Kelly noted that Amount A is "one of the most complicated issues that has ever come up [in the Tax Subcommittee]." The questions posed to the experts also revealed that the members failed to understand how Amount A works, even at a cursory level. Due to its complexity, the experts made no real attempt to explain the mechanics of the rules to the committee.

One expert described the rules in a written submission as "incredibly complex" and further noted that "it is difficult to see how they can be complied with or administered without much uncertainty and disputes over implementation."

The Difficulty of Estimating Amount A’s Impact on U.S. Tax Base

Adding to the confusion was the fact that no one present could provide figures on how Pillar 1 would affect U.S. tax revenue. Days before the hearing, Congress’s nonpartisan research arm, the Joint Committee on Taxation, published a report estimating that the U.S. would lose between USD 0.1–4.4 billion annually in tax revenue. The report emphasized that the number of variables affecting tax calculations under Amount A is so vast that predicting the outcome in advance is practically impossible. One expert at the meeting clarified, however, that Amount A would—under any circumstances—result in a net loss for the U.S. Treasury. This conclusion is hardly surprising, as the U.S. tech industry is expected to account for the majority of profits to be reallocated under Amount A.[3]

Digital Taxes to Be Abolished

The committee members also failed to get a satisfactory answer on whether the implementation of Amount A would ensure that all countries abolish their digital service taxes. It was clarified that the digital service taxes listed in Annex A of the MLC would be phased out. However, the experts lamented that the MLC’s definition of "prohibited" digital service taxes in Article 39 was inadequate and far too easy to circumvent in its current form.[4]

The Tech Industry’s View on Amount A

Despite the experts’ unanimous criticism of Pillar 1 in its current form, none of them wanted the U.S. to withdraw from the OECD’s Pillar 1 negotiations. Why?

It is now well-known that multinational corporations have managed to substantially reduce their corporate tax liabilities through aggressive tax planning in recent decades. However, the U.S. tech industry has been even more successful — they effectively pay no corporate tax at all outside the U.S.[5]  From the tech industry’s perspective, the emerging national digital service taxes are catastrophic because they are nearly impossible to circumvent. An average industrialized country generates roughly USD 1-2 billion in revenue from a digital tax with a 3% rate. If the rate rises to 5–6% or the tax base expands, digital service taxes could generate even more — perhaps double that amount. If digital service taxes would spread globally, the tech industry’s tax burden outside the U.S. could skyrocket from nearly zero to close to a hundred billion per year. Collectively, digital service taxes have the potential to generate more tax revenue than any legal tax framework the OECD has ever introduced. This is why the U.S. and tech industry representatives are fighting digital service taxes tooth and nail.

Amount A, despite its laughable complexity,[6] is a far cheaper alternative for the U.S. tech industry, estimated to cost around $15 billion annually.[7] Thus, the U.S. is not opposing digital service taxes because it genuinely believes they are "discriminatory," "unprincipled," or "inconsistent with principles of international taxation",[8]  but because they cost the U.S. tech industry a fortune. If the U.S. allowed digital taxes to be creditable, they would cost the U.S. Treasury a fortune.[9]

If the U.S. truly cared about preserving the current international tax framework and combating discriminatory tax rules, it would never have introduced the Base Erosion and Anti-Avoidance Tax (BEAT) in its 2017 tax reform.[10] 

3. What Conclusions Can Be Drawn from the Hearing?

Republicans were overwhelmingly critical of Pillar 1 during the hearing. At the outset, Chairman Mike Kelly held up a sign listing all members of the Inclusive Framework and rhetorically asked why these countries even attempt to interfere with U.S. tax policy. From a Republican perspective, the fundamental problem with Amount A is that it undermines Congress’s taxing authority. The fact that the rules appear incomprehensible to lawmakers and impossible to cost only makes matters worse. My September 2021 prediction — that Amount A would never be implemented — is therefore likely to hold true.

However, this does not mean Amount A is dead. The tech industry fears digital service taxes more than Amount A and will pressure the Trump administration to seek some form of global solution. The tech industry does not believe Congress overtime will be able to stifle the spread of digital taxes using tariffs alone. I therefore would not rule out that the Amount A framework may resurface again — next time though based on voluntary industry participation and incentives rather than on coercion and on a binding multilateral convention.

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[1]     Among the Nordic countries, only Denmark has been allocated points in Annex 1 of the MLC. This is likely because Danish companies Maersk and Novo Nordisk clearly meet all threshold requirements for Amount A. Swedish companies such as Volvo Group, Volvo Cars, and Ericsson meet the revenue threshold of €20 billion but probably not the profitability requirement (i.e., having a profit margin exceeding 10%).

[2]     The committee’s discussion on Amount B is not commented on here due to space constraints.

[3]     Amount A does not exclusively target the tech industry. However, the defined thresholds mean in practice that the rules primarily affect tech companies.

[4]     Scott Levine, former Acting Treasury Deputy Assistant Secretary for International Tax Affairs, noted in June 2024 that “we view the refined definition [of Article 39] as a significant improvement to the one you saw last fall.”  Thus, Article 39 has been revised since the draft MLC was published in October 2023. See Tax Notes International, “Significant Progress on Definition of DSTs in Amount A Treaty”, 1 July 2024.

[5]     Apple alone managed to avoid €100 billion in taxes through aggressive tax planning over a ten-year period! See Fensby, “Apple’s Tax Planning from Three Tax Policy Perspectives”, Skattenytt 2021, p. 583.

[6]     Rick Minor (U.S. Council for International Business) notes in his submission to the committee hearing that “[t]he level of detail in the data required for calculations under the MLC is beyond any tax compliance regime in place in the world today.”

[7]     Strictly speaking, Amount A is not a new tax but rather focuses on reallocating profits from home jurisdictions to market jurisdictions. The reason why tax liabilities will still increase for affected industries is because profits currently taxed in low-tax jurisdictions and regimes (e.g., patent boxes) will be reallocated to market jurisdictions with higher corporate tax rates.

[8]     See the submission by Megan Funkhouser (Information Technology Industry Council) to the committee hearing here.

[9]     The U.S. Treasury has explicitly clarified that foreign digital taxes cannot be credited in the U.S.

[10]  See further Fensby, “The U.S. Tax Reform from a Tax Policy Perspective – Part 2”, SvSkT 2021, p. 583.