By Julie Martin, MNE Tax
In an effort to expedite agreement between nations on an update to the international tax rules to account for new digital business models, the OECD secretariat on October 9 proposed a compromise plan for allocating multinational group profit and related taxing rights among countries.
Under the OECD’s new “unified approach to pillar one,” countries where a multinational’s customers or users reside would have new rights to tax a portion of a multinational group’s residual profits if the MNE has significant of sales or users there, irrespective of whether the multinational has physical presence in the country or not.
Following a US proposal, this new taxing right would be limited, though, to profits that are derived from sales of consumer products or from providing digital services that are consumer-facing.
The OECD would further limit this new taxing right, which it calls “Amount A,” to the profits of large multinationals, suggesting that countries consider adopting the €750 million revenue threshold used for country-by-country reporting.
The proposal uses a formula to allocate the portion of residual profit that will be taxed by market or user jurisdictions rather than using the arm’s length principle.
“[G]iven that the new taxing right would create a nexus for an MNE group even in the absence of a physical presence, it would be impossible to use the existing rules to allocate profit to this new nexus in cases where no functions are performed, no assets are used, and no risks are assumed in the market jurisdictions,” the OECD explains in its proposal.
A second element of the compromise proposal, called “Amount B” in the OECD plan, would adopt a fixed percentage return for certain “baseline” marketing and distribution functions that take place in market jurisdictions. The percentages could vary by region or industry. This provision aims to reduce transfer pricing disputes and double taxation, the OECD said in its report. It could also curtail opportunities for MNEs to avoid taxes in market countries.
For those cases where the marketing and distribution functions activities in a country are greater than routine functions compensated by Amount B, both taxpayers and tax jurisdictions could argue that additional tax should be attributed to those extra functions in accordance with existing transfer pricing principles. The additional taxable profit is called “Amount C” in the OECD plan.
All of these new taxing rights would be subject to binding tax dispute prevention and resolution mechanisms available to countries and multinationals.
Speaking yesterday during an OECD webinar, Pascal Saint-Amans, Director of the OECD’s Centre for Tax Policy and Administration, said that the OECD’s aim in crafting the unified approach is to identify the aspects of the three “pillar one” proposals that all countries can agree upon.
The three pillar one proposals, namely, the “user participation”, “marketing intangibles”, and “significant economic presence” proposals, were first described a January 2019 OECD policy note along with a pillar two proposal for a global minimum tax. The pillars were later included in a Programme of Work which was approved in May by the “Inclusive Framework on BEPS.”
Speaking during the same webinar, Richard Collier, a Senior Tax Adviser at the OECD, said that there is “no appetite” among countries to “sweep away” the arm’s length principle. As such, the OECD’s proposed unified approach to pillar one does not reflect the significant economic presence proposal, advanced by India, Columbia, and on behalf of G24 counties, which calls for market jurisdictions to receive a portion of all MNE profits (both routine and non-routine).
“We are not writing books for the shelves,” Saint-Amans said, rebutting charges made earlier by Professor Joseph E. Stiglitz of Columbia University, who said that, by proposing only modest changes to the international tax system, the OECD is “canonizing gradualism.”
It is useless for the OECD to try to design a system that would be perfect in an ideal world that some countries would “walk away from,” Saint-Amans said.
To calculate Amount A, the OECD plan starts with a multinational’s total profit (based on financial statements and on a consolidated, business line, regional, or market basis) and subtracts out deemed routine profit based on agreed-to profitability percentages.
A portion of the excess (the residual profit) would be split among the countries where the MNE is deemed to have nexus under new rules, namely, where the MNE has a sufficient level of revenue from sales or sufficient nonpaying users. The allocation of taxable profit among the market or user countries would be based upon a previously agreed-to allocation key, using a variable such as sales.
Important aspects of the international tax bargain that still need to be determined, Saint-Amans said, include the level of profit that is deemed to be residual profit subject to reallocation and the portion of that residual that would be reallocated.
Moreover, if countries agree that the proposal’s scope should be limited to consumer-facing businesses, it remains to be determined how that scope should be delineated, Saint-Amans said.
The OECD recommends excluding extractive industries and commodities from paying the Amount A tax and suggests that countries also consider a carve out for financial services. Further work must be done to address the supply of goods and services through intermediaries, the supply of component products, and the use of franchise arrangements, the OECD paper states.
The first signs of whether the OECD’s unified approach will gain any traction may come at the G20 Finance Minister meeting, to be held in New York on October 17–18. Saint Amans said that although a communique would not typically be released after this meeting, he was hoping for some sign of encouragement from the G20 ministers.
The OECD is seeking feedback on its new proposal by November 12. A public consultation on the unified approach will be held November 21–22 in Paris. The OECD hopes that a unified approach to pillar one can be agreed by January 2020.
New developments relating to the Pillar two proposals were also announced yesterday. A separate public consultation meeting on pillar two issues will be organized in December 2019, and the related public consultation document is expected to be released in early November 2019.
Julie Martin
Julie Martin is the founder of MNE Tax. She edits the publication and regularly contributes articles on new developments in cross-border business taxation.
Julie has worked as a tax journalist and editor for more than 13 years. Prior to that, she worked as an in-house tax attorney in New York. She also holds an LLM in taxation from New York University School of Law.
Julie can be reached at [email protected].
Latest posts by Julie Martin (see all)
- UN committee considers updates to model tax treaty, developing nation tax guidance - April 21, 2021
- UN Committee of Experts approves new digital tax article for model treaty - April 20, 2021
- Leaked copy of US proposal for Pillar One and Two multinational group tax reforms available - April 12, 2021
- US offers new “Pillar One” compromise plan for taxing large multinationals - April 8, 2021
- UN tax committee releases updated model treaty language on automated digital services - April 7, 2021
Be the first to comment