Taxing the Residual Profit of Multinational Enterprises: A Critique of Formulaic Apportionment and a Proposal

In the context of a changed digital economy, the OECD has put forward a proposal that requires large multinational companies to pay some of their income taxes where revenue is generated, i.e. in countries where the consumers or users are located. It is suggested that taxing rights should be allocated using a revenue-based formula. This policy brief argues against the use of such a rule that requires the multilateral assessment of MNEs’ worldwide profit. The need to define a common consolidated tax base would disproportionately complicate the search for po-litical agreement within the Inclusive Framework. Instead, the OECD should apply more practical rules that rely on unilateral profit splitting and do not require uniform international rules on ac-counting. Countries could be granted the right to impose a withholding tax on outbound pay-ments, such as payments for digital services. To the extent that there are allocable costs, as for example with pharmaceuticals and vaccines, these should be tax-deductible on the condition that the country receiving the payments adopt the new tax regime.