Updated March 10, 2022
International Tax Proposals Addressing Profit Shifting: Pillars 1
and 2
On June 5, 2021, finance ministers of the G7 countries,
services, or sales of data), while proposed changes in the
including the United States, agreed in a communiqué to two
taxation of profits are being discussed. The United
proposals addressing global profit shifting. They agreed to
Kingdom (UK) enacted a diverted profits tax with a similar
Pillar 1, allocating rights of taxation of residual profits to
objective. The United States has decided to impose tariffs
market countries of at least 20% for certain digital services
against seven countries that imposed digital excise taxes:
for large profitable multinationals while eliminating digital
France, Austria, India, Italy, Spain, Turkey, and the UK,
services taxes. They also agreed to Pillar 2, imposing a
although these tariffs were temporarily suspended until
global minimum tax of at least 15%.
November 29, 2021, to allow time for further negotiations.
These proposals were developed in OECD/G20 blueprints
Pillar 1 would allocate some rights to market countries to
for addressing profit shifting and base erosion, which
tax profits of digitalized firms (and countries would
involved participation by 139 countries. The G7 agreement
eliminate their digital services taxes). In 2020, then-
is a general agreement and does not address the detail in
Secretary of the Treasury Steven Mnuchin signaled the U.S.
these blueprints. This G7 communiqué is a first step in the
position that negotiations over Pillar 1 were at an impasse.
process of reaching a multilateral agreement and is not
The G7 agreement reversed that position.
binding. On July 10, the G20 endorsed the plan. Some
aspects might require legislative changes. The OECD
The Pillar 1 blueprint would allow market countries a share
reported on October 8 that 136 out of 140 countries
of 25% of the residual profits (defined as profits after a
participating have joined the framework.
10% margin for marketing and distribution services) of
large multinational companies. It would apply to companies
The agreement does not mention a specific revenue
with global revenue turnover of more than $20 billion and
threshold, but the OECD in another initiative had proposed
apply to market countries that provide at least $1 million in
a threshold for country-by-country reporting of €750
revenue. As noted earlier, this agreement does not have
million. The next two sections discuss the two pillars as
force of law and is viewed as a first step. The proposal
outlined in the OECD/G20 blueprints.
would allocate the residual share based on revenues (such
as sales of advertising) and the location of the user or
Pillar 1
viewer for an array of digital services and split the residual
The standard international agreements historically have
share 50:50 between the location of the purchaser and seller
allocated the first right of taxation of profits to the country
for online markets. The OECD/G20 blueprint provides a
where the asset is located. This location may be where the
positive list of the businesses covered: “sale or other
asset is created (e.g., from investment in buildings,
alienation of user data; online search engines; social media
equipment, or research) or where the rights to the asset have
platforms; online intermediation platforms; digital content
been purchased, which may happen easily with intangible
services; online gaming; standardized online teaching
assets, such as drug formulas or search algorithms. Many
services; and cloud computing services,” as well as online
U.S. multinationals have sold the rights to intangible assets
market places.
to affiliates in other countries to serve the foreign market.
This system allocates profits between related parties on the
This agreement is viewed as a fundamental departure from
basis of arm’s-length prices (i.e., the price upon which a
the traditional allocation of the first right of taxation to the
willing buyer and a willing unrelated seller would agree to
owner of the asset, which is consistent with the economic
transact), although true arms-length prices often are
concept of profits as a return to the investor and not to the
difficult to determine.
consumer.
With the advent of companies providing digital services
Although the Pillar 1 proposal does not conform to the
that are often free services to consumers (such as search
traditional framework, it could serve the purpose—if
engines, online market places, and sites for social
agreement is reached—of heading off unilateral action, as
networking), an argument has been made that the country
has developed with the digital services taxes. From the
where the users reside should have a right to tax some of
viewpoint of the United States, which has large
the profits of these companies because the users create
multinational digital firms (e.g., Google and Facebook), the
value. Advocates also argue that these companies escape
arrangement could be costly. The excise taxes that would be
taxes on some of their profits by locating assets in tax
eliminated are borne largely by the customers; that is, an
havens. Several countries have imposed digital services
advertising tax decreases the net price from sales and would
taxes, although generally in the form of excise taxes (such
lead to higher prices to advertisers, which would in turn be
as taxes on advertising revenues, digital sales of goods and
reflected in higher product prices to customers who are
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International Tax Proposals Addressing Profit Shifting: Pillars 1 and 2
largely in the country imposing the excise tax. Were
tax at a lower rate (currently half the U.S. rate, or 10.5 %)
countries unilaterally to impose taxes that are tied to profits
to income in excess of a deemed return of 10% of tangible
without an agreement, under proposed regulations, U.S.
assets. The rate is scheduled to rise to 13.125% after 2025.
multinationals would not receive a U.S. foreign tax credit,
In addition to the lower rate, three other features of GILTI
and the burden would fall largely on the profits of these
differ from the IIR. First, GLoBE would allow an exclusion
firms. With a multinational agreement such as in Pillar 1,
for a broader range of spending that includes payroll as well
the U.S. foreign tax credit presumably would be allowed for
as tangible assets, although at a lower rate of 5%. (During a
these taxes (unless Congress intervenes), which would
transition period the percentage would be 8% for tangible
reduce revenues for the U.S. government, and the burden
assets and 10% of payroll, phased out over 10 years.)
would fall on U.S. persons in general.
Second, GILTI achieves the “top-up” tax by imposing the
full tax and then allowing credits against the GILTI tax for
U.S. companies may prefer this substitution of Pillar 1 for
80% of foreign taxes paid, up to the amount of U.S. tax due.
the digital services taxes, as they likely would not see a tax
This limit is imposed on a global basis so that unused
effect (since the taxes collected by the market countries
credits in high-tax countries can offset U.S. tax due in low-
would be largely offset by foreign tax credits), and they
tax countries; the IIR would apply on a country-by-country
would be freed from the uncertainty and complexity of
basis. Finally, the IIR would allow carryforwards of losses
digital services taxes.
and excess taxes, which is not allowed under GILTI.
In addition, the United States may have an interest in
The proposal also calls for a revision to allow source
maintaining harmonious relationships with the rest of the
companies to tax items such as royalties and interests when
world, which may justify the loss of revenues. The
the recipient countries have low tax rates, the “subject to
acceptance of Pillar 1 also has been tied to establishing a
tax rule” (STTR).
global minimum tax under Pillar 2, which would discourage
the so-called “race-to-the-bottom” as countries lower tax
The Administration budget proposals and several
rates to attract capital.
congressional proposals, including the Build Back Better
Act (H.R. 5376), would raise the GILTI rate, eliminate or
Pillar 1 would likely require changes in tax law and treaties
reduce the deduction for tangible assets, limit the credit on
or other forms of congressional-executive agreements.
a country-by-country basis, and increase the share of taxes
credited in some cases. (See CRS In Focus IF11809, Trends
Pillar 2
and Proposals for Corporate Tax Revenue, by Donald J.
Pillar 2 would impose a global minimum income tax to
Marples and Jane G. Gravelle for a summary.)
address base erosion, or GLoBE. It includes an income
inclusion rule (IIR) to raise the effective tax rate on a
The OECD blueprint recognizes the coexistence of GILTI,
country-by-country basis to 15% on profits in excess of a
but it is not clear whether GILTI could be considered a
fixed return for substantive activities (including tangible
substitute for GLoBE. Revisions in the Build Back Better
assets and payroll). This rule is termed a top-up tax. The
Act (H.R. 5376) would make GILTI more similar to
income base is financial profits. These taxes would be
GLoBE by raising the rate and imposing a per-country
imposed by the parent company. In cases where the IIR
treatment of income and foreign tax credits.
does not apply, there is a subsidiary rule to tax payments to
low-tax countries (the undertaxed payment rule, or UTPR)
An advantage of a global minimum tax is that it could
at 9%.
reduce the race-to-the bottom as countries lower their taxes
to attract capital investment. A global minimum tax would
Most countries do not tax profits earned by their firms’
allow countries with higher tax rates to attract more capital.
foreign subsidiaries in other countries (or tax them in a
limited way under anti-abuse rules). The United States
Adopting the GLoBE provisions to replace GILTI, or
currently has a minimum tax on foreign source income of
modifying GILTI to be more consistent with GLoBE,
subsidiaries of U.S. multinationals, the tax on global
would require legislative action to change the tax code.
intangible low-taxed income, or GILTI. (See CRS Report
Adopting GLoBE would require revising tax treaties to
R45186, Issues in International Corporate Taxation: The
address STTR.
2017 Revision (P.L. 115-97), by Jane G. Gravelle and
Donald J. Marples for a discussion of GILTI and other tax
Jane G. Gravelle, Senior Specialist in Economic Policy
provisions enacted in 2017.)
IF11874
GILTI is similar in some ways to the minimum tax that
would be imposed by GLoBE under the IIR. It imposes a


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International Tax Proposals Addressing Profit Shifting: Pillars 1 and 2


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https://crsreports.congress.gov | IF11874 · VERSION 3 · UPDATED

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