CPA submits opinion to OECD Tax Committee

November 13, 2019

The Organization for Economic Cooperation and Development (OECD) has proposed significant changes to the global tax system to combat profit shifting. The Coalition for a Prosperous America supports a much simpler, better, and fairer solution: Sales Factor Apportionment. The following submission was sent to the OECD on November 11th, 2019 to express our support and concerns for the OECD's first proposal on this issue. Multinational tax advantages must end to protect American domestic businesses.

The Coalition for a Prosperous America Comment on Pillar one of the OECD

The Coalition for a Prosperous America (CPA) appreciates this public comment period to provide input to the Organization for Economic Cooperation and Development (OECD).

About the CPA

CPA is the USA’s premier nonprofit organization working at the intersection of trade, jobs, tax and economic growth. We are a bipartisan coalition of manufacturers, labor unions, and farmers and ranchers working for a national strategy to eliminate the US trade deficit, create good paying jobs, and deliver broadly shared prosperity to America.

An Unprecedented Opportunity to Address the Corporate Tax Rate Disparity Issue

The US corporate taxation system creates huge inequities and distortions within the US. Small and medium-sized domestic US companies pay near full tax rates while their Multi-National Enterprise (MNEs) competitors have been able to reduce their effective tax rates significantly through abuse of the Arm’s Length Standard and other intricate details of US and international tax laws enabling them to offshore hundreds of billions of dollars of profit, to the detriment of the Treasuries of the US and governments of other large OECD nations. This tax disparity increases the profitability of the global multinational giants and accelerates increasing industrial concentration, contributing to the monopolization of the economy, declining labor share of income, and increased political influence of the multinationals.

We welcome the OECD’s proposed Pillar One reforms as a step in the right direction. The proposals create mechanisms to levy corporate taxes on multinationals in better proportion to their profitability in the large markets where they are selling products and generating revenue. The proposals recognize that taxation ought to correspond to sales. However, they create several new parameters (such as a stipulated rate of return), which by their nature will be somewhat arbitrary, complex to calculate, and subject to dispute and disagreement between MNEs and national taxation authorities. Inevitably, political influence will affect the determination of these parameters.

Further, the OECD’s proposals, even if enacted in their entirety, would not eliminate large-scale corporate tax avoidance, including double non-taxation. Tax avoidance has grown in recent years with the rise of MNEs and growing focus in the corporate world on tax minimization strategies. The size requirements and other limits on the application of the Pillar One proposals mean that tax avoidance would continue. As MNEs become more global, and as business becomes more digital (involving greater use of intellectual property assets), opportunities for tax avoidance, and double non-taxation increase.

Sales Factor Apportionment

CPA has long favored a much simpler, better, and fairer solution. Corporate taxation should be based on a division of a corporation’s worldwide income before taxation in proportion to their sales (revenue) in each national market. Each national tax authority would have the right to tax that proportion of income before taxation at its national rate. The system of apportionment is used by the majority of the 50 American states. In some states, taxation is based on three factors (revenue, property, employees in the state), but states have been moving to focus more on revenue and less on the other two factors. This system produces greater fairness as between small and large corporations and different industries.

By contrast, the current system of corporate taxation relies on the source of profit rather than the destination of sales. It allows corporations, in particular MNEs, to transfer intellectual property and other assets to jurisdictions with a low or zero percent rate of corporate taxation. The Arms Length Standard (ALS) has proven inadequate in determining fair rates of taxation. There can be no truly objective determination of the arms length value of services or assets derived from intellectual property (IP) since the IP is so often unique, and there can be no “market price” for it. Further, it defies economic logic for MNEs to claim that there is any reason to transfer IP to locations like Ireland, Luxembourg, or the Cayman Islands other than to minimize taxation.

Economists have estimated that up to $600 billion of corporate profits are escaping taxation due to profit-shifting to low-tax locales. In 2017, CPA estimated the cost to the US Treasury of tax avoidance by MNEs at around $100 billion, or 34% of total corporate tax revenue. We believe that the current cost to the Treasury continues at around one third of corporate tax revenue. A fair system of corporate taxation based on sales factor apportionment would allow corporate tax rates to fall by one third, or government revenue to rise by a corresponding amount. Equally important, it would provide for a fairer distribution of the tax burden across companies of all sizes and companies of different industries. Our 2017 study documented that the technology and pharmaceutical industries pay lower US tax rates than other US industries such as manufacturing, utilities, or domestic retailers. This puts an added burden on industries that employ millions of Americans, particularly in middle-income and lower-middle-income jobs, sections of the labor market that are most in need of increased demand today.

Double Taxation

The three principles proposed in the OECD’s Pillar One approach raise the issue of double taxation, which the MNEs can be expected to exploit to the maximum. The combination of taxation based on revenue in a market (Amount A in the OECD proposal), when combined with taxation based on the source of profit stemming from ownership of assets will inevitably lead to claims of double taxation. Similarly, Amount B, which is a calculated fixed rate of return on distribution activities, can also be expected to overlap with profits attributed in the traditional way to assets scattered around the world as part of MNEs’ tax minimization strategies.

The use of sales factor apportionment (SFA) eliminates the problem of double taxation. Each nation would have the right to tax profits associated with revenue generated in that nation. No nation could tax profits generated in other jurisdictions. This system would lead to greater cooperation and agreement between nations on corporate taxation. The US is not the only nation to be considering the SFA system. Such a system has been proposed in France’s National Assembly. In the United Kingdom, the Labour Party has advocated such a system, including last month when it praised a report, Taxing Multinationals, A New Approach, published by Public Service International. That report estimates that the UK government could raise corporation tax revenue by between 6 billion and 14 billion pounds annually.


The OECD Secretariat is suggesting the scope on any real reform be limited to consumer-facing businesses. Some business to business engagement may be included in the future, but the principle focuses on consumers.  CPA views this limitation as too short-sighted. Profit-shifting occurs in business to business transactions as well as consumer-facing transactions. Both types of transactions have abused transfer pricing and ALS rules. The proposed changes must include all transactions to protect domestic businesses.


CPA considers the new nexus rules proposed by the OECD to be essential but insufficient. The current system of nexus created by the Permanent Establishment rule should gain an addition rather than a replacement using an Economic Presence test. Permanent Establishment still bears weight for establishing domestic taxing rights. But an additional Economics Presence test would serve to create nexus for any corporation looking to abuse the technology of the 21st century to evade the tax system set up in the 20th century.

However, the OECD Secretariat proposal limits the threshold at too high a rate. While the country by country reporting relies on the 750 Million Euro threshold, we believe that the number is too high to prevent continued profit shifting abuse. Some smaller corporations set up facilities in one nation for the sole purpose of avoiding taxes in another country. This mechanism automatically disadvantages competing domestic companies who pay closer to statutory rates. The threshold must be lowered to be a viable solution.


Comment by Coalition for Prosperous America (CPA)

Jeff Ferry, Chief Economist

David Morse, Tax Policy Director

Nov. 11, 2019

Tax Strategy

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