Paris consultation reveals little unity on OECD’s “unified approach” for taxing multinational groups

By Julie Martin, MNE Tax

More than 100 speakers lined up at a November 21–22 Paris consultation to share their views on the OECD Secretariat’s compromise proposal to update to the rules for allocating multinational group profits and related taxing rights among countries, known as the “unified approach to pillar one.”

The OECD’s October 9 proposal seeks to merge into one unified proposal aspects of three competing proposals advanced by countries — the “user participation” proposal, supported by France; the “marketing intangibles” proposal, advanced by the US; and the “significant economic presence” proposal, favored by India and other G24 nations.

Each of the three proposals would give a greater share of taxing rights over multinational group profits to countries where the multinational’s customers or users reside.

The aim of the Secretariat’s proposal is to spur compromise among a coalition of 135 countries that make up the “Inclusive Framework on BEPS” by the end of 2020. It is expected that, as part of the agreement, countries will repeal or will halt plans to enact unilateral taxes on multinational digital firms, such as digital services taxes on revenue. The repeal of these unilateral measures is sought because they can create double taxation of multinational group profits and, due to their lack of coordination, they make the international tax system overly complex.

The Secretariat’s unified approach is made up of what it calls Amounts A, B, and C. Amount A gives a new taxing right to market or user countries over a portion of an MNE’s residual profits based on the MNE group’s financial accounts; Amount B introduces a fixed return to countries for baseline marketing and distribution activities; and Amount C permits additional taxation under the arm’s length principle for activities in market countries that go beyond what is compensated in Amount B. Amount C also introduces the idea of an upgraded cross-border tax dispute resolution process. A separate proposal for a “pillar 2” minimum tax will be the subject of a December 9 OECD public consultation.

Speakers represented large multinationals; trade associations; law, accounting, and advisory firms; academics; intergovernmental organizations; and civil society groups. While unity is the goal of the OECD proposal, this was not reflected in the speakers’ comments. OECD officials also provided a brief update of the state of country negotiations.

OECD update

Richard Collier, OECD’s Tax Treaty, Transfer Pricing, and Financial Transactions Division, said that countries are currently negotiating core issues such as the Amount A scope and nexus rules, including the implications of Amount A’s consumer-facing limitation and its suitability.

Collier also reported that some countries will not relinquish taxing rights to market countries unless a strong cross border tax dispute resolution process is put in place both for Amount A and for disputes arising under the existing system.

He said that Amount A must be calculated, agreed to, and distributed to market or user countries in an efficient manner. “It simply is not going to be a viable approach if 130-odd countries can challenge the arrangement after the allocation,” Collier said. He added that more needs to be done to address the overlap of Amount A with existing taxing rights, including eliminating double taxation, and on the interaction of Amount A and Amount C.

Pascal Saint-Amans, Director of the OECD’s Centre for Tax Policy and Administration, said that the consultation discussions would inform Inclusive Framework steering group, which will make a proposal to the Inclusive Framework for approval at their January meeting. Saint-Amans said the aim of the Secretariat’s proposal is not to impose its views on others but to “unlock” stalled negotiations among countries.

Grace Perez-Navarro, Deputy Director of the OECD’s Centre for Tax Policy and Administration, said that while the timetable to reach consensus is ambitious, speed is essential. Otherwise, unilateral measures will take over the landscape that will be difficult to reverse. She said that Inclusive Framework countries seem to be trying to solve different problems. There needs to be agreement on what the goals are. She also said that some countries continue to reject proposals to adopt mandatory binding arbitration; however, the OECD is working on a proposal that will have an equivalent effect.

Alternative approaches

Unlike the March 13 consultation on pillar one, multinational group taxpayers and their representatives seemed mostly resigned to the fact that some formulary elements will be part of the final proposal. Only a few continued to argue that a solution could be found by tweaking existing transfer pricing rules. Donata Koren, representing the German online fashion platform Zalando, was among those that argued that the focus should be on closing the gaps in the system, not creating a new complex system. “We are trying to kill a fly with a cannon,” said Koren. Sung-Soo Han of Yang Jae law firm said that the OECD is taking theoretical rather than practical approaches. Rather than develop the unified approach, loopholes should be eliminated, including rules that provide that the location of a server creates a permanent establishment, he said.

Supporters of formulary apportionment, on the other hand, continued to press their case, arguing that the allocation method is superior to the OECD’s unified approach because it is fairer and less complex. Professor Gerald Echterhoff of the Universität Münster called the OECD proposal is a “disaster” and said the Inclusive Framework should “do the right thing” by rejecting it. Echterhoff said that global formula apportionment is a better starting point and that it can be improved in an OECD process.

Tove Maria Ryding of the European Network on Debt and Development (Eurodad) said that formulary apportionment should replace the entire existing transfer pricing system, not be used as an additional complex layer which will cause more confusion and disputes. The solution is not to create unclear rules coupled with strong dispute resolution mechanisms but to develop clear rules from the outset, Ryding said.

Also advocating for formulary apportionment were Jeffy Ferry, of the Coalition for a Prosperous America, Sol Picciotto of the BEPS Monitoring Group, Séverine Picard of TUAC, and Susana Ruiz, Oxfam.

Carveouts

Will Morris of Business at the OECD (BIAC) acknowledged that it is unlikely that his membership will reach consensus on a response to the unified approach given diverse views on elements such as scope, calculations, and carveouts. The lack of consensus among businesses was evident at the consultation.

Speakers disagreed on whether there should be carveouts from the application of Amount A for businesses that are not consumer-facing or for specific industries. Alan Lee of Facebook said that countries should not limit the applicability of Amount A to specific business models or taxpayers because a subjective approach will lead to disputes and multiple levels of taxation. Similarly, Giammarco Cottani of Netflix argued that both B2B and B2C transactions should be covered and that all carveouts should be avoided because this would create “reverse ring-fencing.”

Tommaso Faccio of the Independent Commission for the Reform of International Corporate Taxation (ICRICT) agreed with the two tech giant representatives, stating that there is no good reason to narrow comprehensive reform to consumer-facing businesses or provide carveouts.

In contrast, others expressed support for carveouts. Roger Kaiser of the International Banking Federation said a carveout should be provided to retail banking because the profitability of retail banks is low and because bankers do not sell financial products remotely. Alexander Ciungu, of Insurance Europe, argued for an insurance carveout, noting that insurance is highly regulated and that taxing rights are already largely with the jurisdiction of the consumer. Catherine Harlow, AstraZeneca, said that prescription pharmaceuticals should be carved out as they are not consumer-facing and because of the high level of regulation. Glenn Price, on behalf of ETNO and GSMA, said telecommunication operators should be carved out. Not only is the telco industry heavily regulated, but it is also already subject to heavy sector-specific taxes, Price said.

B2B and B2C transactions

Companies that sell the same product both B2B and B2C discussed the complexity they would face applying Amount A but offered different remedies to address the problem. Colin Garwood of the InterContinental Hotels Group said his company would prefer to be either within the scope of Amount A or outside it, but not in for some sales but out for others. He questioned whether ring-fencing consumer-facing businesses is any more practical than ring-fencing the digital economy. 

In contrast, Karine Suzan-Mercié of Lafarge Holcim said that even though some of her company’s products are sold both B2B and B2C, she could live with the consumer-facing business distinction and the complexity it creates. Companies should be able to rely on customer declarations or some other method to distinguish between sales, she said.

Laurence Jaton of Engie noted that consolidated accounts do not currently segment businesses into consumer-facing and non-consumer-facing business. Using these accounts to allocate tax to different jurisdictions will be difficult, Jaton observed.

One-stop-shop

Business reps did seem to agree that Amount A should be administered by a central, coordinating jurisdiction or some kind of “one-stop-shop.”

Stef Van Weeghel, PwC, argued that the country of the MNE parent’s residence should have responsibility for the Amount A calculation and maybe even for collecting and distributing the tax to market or user jurisdictions. He said that the system must be made workable so that, as mentioned by the OECD’s Collier, 130+ countries do not individually dispute their Amount A allocation.

Alan Lee of Facebook expressed support for a simplified, centralized, administrative approach whereby Amount A would be reported and distributed to countries where the tax is due.

Janine Juggins of Unilever and Abigail Agopian of the Confederation of British Industry noted that, in exchange for a coordinated process, the county-specific sales thresholds for Amount A could be removed and thus all market and user countries could receive a share of the tax.

Giammarco Cottani of Netflix supported the idea of a one-stop-shop and said that one could expect increased use of joint audits as well as multilateral agreements among countries setting the Amount A allocation.

Ed McNally, Keidanren, said that filing 100+ tax returns and handling audits in market countries would be extremely burdensome. At a minimum, the information should be collected by the parent jurisdiction and then exchanged with other countries using an information exchange procedure.

McNally also said that the parent jurisdiction should have sole authority to conduct tax audits concerning Amount A. 

More Amount A issues

The following additional issues were raised at the consultation concerning Amount A:

• Online business reps said that identifying the location of the user for purposes of nexus will be difficult. Sylvain Montoro of BlaBlaCar noted that, for example, a person located in Belgium could go on a French BlaBlaCar platform and hire a car in Italy. Similar comments were made by Elena Vegelyte of Vinted, UAB.
• Some speakers said that unilateral tax measures adopted by other countries, such as digital services taxes, must be removed as part of the compromise. Among those commenting were Gary Sprague, Digital Economy Group; Elselien Zelle of Booking.com; and Derek Theurer, Business Roundtable.
• Several commentators noted difficulties applying Amount A where multiple MNE group members have residual profits. Barbara Angus, EY said that it is an open issue whether the residual would come from companies that have a connection with the market jurisdiction or from all entities with residual profit. She said that the mechanism for double tax relief should always be 100 percent exemption regardless of what domestic double tax relief mechanism is in place.
• Some commentators argued that Amount A should only apply in scenarios where there are no full risk operating companies in the country. Proponents of this view were Janine Juggins of Unilever and Vanessa de Saint-Blanquat of MEDEF. 

Ismaïla Diallo of CREDAF, whose members are comprised of the tax administrations of 30 french-speaking counties, said that CREDAF supports Amount B because of its simplicity and ability to reduce tax disputes. Diallo said his members want the scope of the rule to be enlarged to cover a wider range of multinational activities.

Barbara Angus of EY said that the work on Amount B provides an opportunity to prevent many common disputes between multinational taxpayers and tax authorities. She said the definition of baseline activities needs to capture the bulk of taxpayer activity to maximize the benefit of the rule. Otherwise, taxpayers will be in both Amounts B and C, which brings the taxpayer back into the transfer pricing system and its uncertainty.

Angus said that the definition of Amount B activities could be industry-specific. She also said that if a business has fewer activities than those specified in Amount B a rebuttable presumption should be available to provide the taxpayer with a “way out” from having too high of a margin. Alternatively, for any business with less than the defined level of activity, the rules should allow the business to go directly to Amount C,  Angus said.

P&G and J&J proposals

Both Tim McDonald of Procter & Gamble and Louise Weingrod of Johnson & Johnson presented detailed formulaic proposals for Amount B. Both plans proposed an overall cap on Amount A plus Amount B under the theory that distributors don’t typically share in the excess returns of very highly profitable enterprises.

Weingrod said that under the Johnson & Johnson proposal, low-risk marketers do not share the enterprise’s losses because losses are typically caused by other parts of the supply chain. The floor could be break-even or low, for example, one half of one percent, Weingrod said.

McDonald said that Amount  B should not be a safe harbor or rebuttable presumption. It is important for governments to collect the tax; if Amount B made a safe harbor, the exercise again becomes one of facts and circumstances.  

Thulani Shongwe, of the African Tax Administration Forum, expressed strong opposition to Amount B being a safe harbor. In contrast, Professor Robert Danon of the University of Lausanne said that making Amount B a safe harbor is more consistent with the arm’s length principle.

Stephen Blough, KPMG, said the Amount B should be implemented as a rebuttable presumption that could be advanced by either the counterparty jurisdiction or by taxpayers. There could be instances where an arm’s length result deviates substantially from the baseline, he noted. Blough added that the standards for the rebuttable presumption could be high.

Blough also said that work on Amount B should be incorporated into the OECD transfer pricing guidelines specifically, the application of TNMM, where an entity performing routine distribution functions is the appropriate, tested party.