By Doug Connolly, MNE Tax
The reallocation of a portion of profits of the largest multinationals under the OECD’s international tax reform framework will move away from the transfer pricing rules traditionally used for allocating profits but “is in effect an overlay on” those rules, according to Grace Perez-Navarro, Deputy Director of the OECD’s Centre for Tax Policy and Administration.
Speaking virtually at a July 13 Tax Policy Center event, Perez-Navarro explained that the new allocation rules recently endorsed by 130+ countries partially set aside the arm’s length principle but do not abandon transfer pricing rules completely. She noted that the new system builds on transfer pricing rules, with “Amount A” – the portion of in-scope businesses’ profits to be reallocated to market jurisdictions – applying to a percent of residual profits.
In this sense, Perez-Navarro stressed the importance of the tax certainty process, with respect both to Amount A and related transfer pricing disputes. Under the statement endorsing the new rules, dispute prevention and resolution mechanisms would be available for in-scope companies to avoid double taxation.
Perez-Navarro described these mechanisms as “very innovative.” She added that they will allow tax certainty for in-scope multinationals for issues related to Amount A and related issues, such as transfer pricing and business profit disputes. The mechanisms will be mandatory and binding.
Asked about whether the new rules would be just a first step towards more formulary apportionment of profits, Perez-Navarro replied, “I sort of doubt it at this point.” However, she added that “this will obviously be a test of whether a formulary approach can be used more widely … starting with a limited number of very large companies.”
Only about 80 of the largest multinationals are expected to be in-scope and subject to the new allocation rules.
Regarding timing for implementing the new allocation rules, Perez-Navarro stated that the OECD plans to have an implementation plan – complete with model legislation and application guidance – finalized by October. A multilateral treaty to implement the allocation rules will not be ready until 2022. Implementation is planned to start in 2023.
Doug Connolly
Doug Connolly is Editor-in-Chief of MNE Tax. He has more than 10 years of experience covering tax legal developments, previously working with both a Big Four firm and a leading legal publisher. He holds a law degree from American University Washington College of Law.
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