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Columbia FDI Perspectives

Perspectives on topical foreign direct investment issues
No. 303  April 19, 2021

Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Riccardo Loschi ([log in to unmask])
In a recent Perspective, Pierce O’Reilly summarized and explained the OECD’s flagship effort to rearrange the world of corporate taxation.[1] Nearing the end of its multi-year Base Erosion and Profit Shifting (BEPS) initiative, the OECD is making a valiant push for two tax “pillars” (released in October 2020): (i) assign a chunk of corporate earnings to countries where internet consumers live (Pillar One); and (ii) establish a global minimum corporate tax rate (Pillar Two). The “pillars” have a solid sound, but if adopted they will spawn tax confusion. Moreover, they could deprive the US Treasury of significant revenue at a time when President Biden is committed to extract higher corporate taxes.
Pillar One applies to two types of industries. The primary targets are automated digital services provided by US tech giants (e.g., Facebook, Amazon, Netflix, Google); the secondary targets are in-country sales by so-called “consumer facing businesses” (e.g., Proctor & Gamble, Walmart, Kraft Heinz). The proposal is designed to overturn the established international tax system whereby corporations are not taxed on profits earned from their sales abroad unless they have a physical presence in the foreign country. Pillar One would, instead, assign some percentage of corporate group earnings to each country where users live. The rationale is that digital firms gain valuable knowledge from their users—and hence the countries where the consumers are located are entitled to a tax bite.
The Pillar One proposal was designed as a multilateral framework for digital taxes at the national level, starting with the French digital services tax. The idea was to impose digital taxes on the US tech giants for purveying their internet services, along with targeted advertisements, to users around the globe. Added to the tax framework were other “consumer facing businesses” that reach users through digital technology. No doubt, digital firms gain valuable insights as to the purchasing proclivities of their users. The problem with this rationale is that—contrary to the wishes of the French Treasury and other digital tax advocates—the rationale is not confined to firms that use digital technology. All firms that serve consumers and most that serve industrial buyers constantly learn from their customers. This is just as true for Veuve Clicquot, Ferrari, LVMH, and Airbus, as it is for Facebook or Google.
As more and more firms “go digital”, figuring out which firms are covered by the new taxes and which are not will be increasingly difficult. The extension of Pillar One to a range of goods will expose many imports to national corporate taxation. The outcome will be burdensome for MNEs, both in compliance costs and tax burdens. Advocates of Pillar One should beware of what they wish: eventually new corporate taxes on merchandise trade could substantially exceed new tax revenues collected from tech giants. Given the persistently large US trade deficit, the US Treasury might be inspired to make up tax revenues lost on its tech giants through new taxes on foreign “consumer facing businesses.” 
Only tax lawyers and accountants could find delight in this brave new world. Pillar One will lead to far more tax confusion than the established international principle of physical presence that has served international commerce well for the past century. Countries that want to tax consumption—indirectly the goal of the digital taxes—should instead fine tune their value-added tax systems, not complicating their already complex corporate tax systems.
Pillar Two is equally fraught, though the prospect of a global minimum corporate tax has great appeal. As Senator Russell Long famously said, there is a secret to raising taxes: “Don’t tax you, don’t tax me, tax the fellow behind the tree.” The fellow truly behind the tree is the MNE, currently criticized for paying its executives too much and tax collectors too little.
The core weakness of Pillar Two is rooted in basic tenets of political economy. National legislatures, curiously enough, think that it is their task to juggle the conflicting demands of raising public revenue with opposing calls to create well-paying jobs through tax relief and subsidies. If OECD governments manage to agree on the concept of a minimum tax rate (12.5%? 20%? – the figure remains to be settled), we may be sure that legislators who feel thwarted will create new deductions and credits in their systems. The OECD minimum[2] will be a floor in name only. Worse, some countries will escape the confines of a minimum tax through new subsidies to favored firms. The result will be more jagged, and thus more distortive, national systems of taxation and subsidization.
The OECD BEPS project has gone too far down the track to hope for a major course change. Very likely, a compromise version of the two pillars will be agreed in 2021. If the world of taxation is lucky, the components of the pillars will be unbundled, with some adopted and the rest left to the dustbin of history.

* The Columbia FDI Perspectives are a forum for public debate. The views expressed by the author(s) do not reflect the opinions of CCSI or Columbia University or our partners and supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed series.
** Gary Clyde Hufbauer ([log in to unmask]) is a non-resident Senior Fellow at the Peterson Institute for International Economics who served in the US Treasury as Director of the International Tax Staff. The author wishes to thank Lorraine Eden, Dennis Weber, Juan Manuel Vasquez, and an anonymous peer reviewer for their helpful peer reviews.
The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “Gary Clyde Hufbauer, ‘Dangers lurking in the OECD tax proposals,’ Columbia FDI Perspectives No. 303, April 19, 2021. Reprinted with permission from the Columbia Center on Sustainable Investment (” A copy should kindly be sent to the Columbia Center on Sustainable Investment at [log in to unmask].
For further information, including information regarding submission to the Perspectives, please contact: Columbia Center on Sustainable Investment, Riccardo Loschi, [log in to unmask].
Most recent Columbia FDI Perspectives   
  • No. 302, Pierce O’Reilly, “International tax reform and FDI,” Columbia FDI Perspectives, April 19, 2021
  • No. 301, Manu Misra, “Investment facilitation and India: A closer look,” Columbia FDI Perspectives, April 5, 2021
  • No. 300, Daniel Naujoks, “Engaging diaspora direct investors: The four elements of successful policy regimes,” Columbia FDI Perspectives, March 22, 2021
All previous FDI Perspectives are available at

Other relevant CCSI news and announcements
  • On May 26, 11am-12pm ET, CCSI will host Investment Treaties and a New Legal Imagination. In the recently published book, Investment Treaties and the Legal Imagination, Nicolás M. Perrone excavates the origins and evolution of the legal thinking underpinning the investment treaty regime and ISDS practice. Three distinguished speakers will discuss with the author the implications of these findings for the future of international investment law. Please see our website for more details and to register for this online event.
  • On April 15, CSI hosted a discussion, moderated by Lise Johnson, on "Crippling Compensation in ISDS: Current Practices and New Approaches," which drew from and built on Martins Paparinskis's paper, A Case Against Crippling Compensation in International Law of State Responsibility. Speakers included Christina Beharry (Foley Hoag LLP), Jonathan Bonnitcha (University of New South Wales), John Daley (US Department of State), Viren Mascarenhas (King & Spalding), Rodrigo Monardes (Ministry of Foreign Affairs, Chile), Martins Paparinskis (University College London). View webinar video here.
  • New volume published! The Yearbook on International Investment Law and Policy (edited by CCSI's Lisa Sachs, Lise Johnson, and Jesse Coleman) monitors current developments in international investment law and policy. Part One focuses on trends in foreign direct investment, international investment agreements and investment disputes, and Part Two looks at central issues in the contemporary discussions on international investment law and policy. This volume includes a chapter by CCSI's Jesse Coleman, Lise Johnson, Ella Merrill, and Lisa Sachs. Please visit our website for more information and to automatically receive a 20% discount!
Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
(212) 854-0689
Fax: (212) 854-7946
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Karl P. Sauvant, PhD

Resident Senior Fellow

Columbia Center on Sustainable Investment
Columbia Law School - The Earth Institute, Columbia University
435 West 116th St., Rm. JGH 825, New York, NY 10027
p(212) 854 0689 | cell: (646) 724 5600 e: [log in to unmask] | t: @CCSI_Columbia

"More Attention to Policies! Improving the Distribution of FDI Benefits. The Need for Policy-oriented Research, Advice and Advocacy", "More and Better Investment Now!", "Facilitating Sustainable FDI in a WTO Investment Facilitation Framework: Four Concrete Proposals", "Multinational Enterprises and the Global Investment Regime: Toward Balancing Rights and Responsibilities”, “The WIR at 30: Contributions to National and International Policymaking", "An Inventory of Concrete Measures to Facilitate the Flow of Sustainable FDI: What? Why? How?", "Insulating a WTO Investment Facilitation Framework from ISDS", "The Case for an Advisory Centre on International Investment Law", "The Potential Value-added of a Multilateral Framework on Investment Facilitation for Development" are available at .

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