Part one: OECD tax consultation on digitalization features 50+ speakers, diverse viewpoints (pillar one)

By Julie Martin, Editor, MNE Tax

Part one of two. This article focuses on the first day of the discussion, which addressed the “pillar one” tax proposals. Part two of this series, which addresses the “pillar two” proposals, is available here.

More than 50 tax experts from business, academia, labor, and non-governmental organizations (NGOs) lined-up to speak at a March 13–14 consultation to offer their views on proposals that could dramatically change the international tax system.

Over 400 attended the meeting, held at the OECD in Paris, revealing the importance of the topic and the dollar amounts involved. The commentators are seeking to influence of a 129-country coalition, called the “Inclusive Framework on BEPS,” which aims to reach consensus on updated international tax and transfer pricing rules by the end of 2020.

The project was prompted by the belief in some countries that large, mostly US, multinational digital firms are undertaxed as they can take advantage of outdated international tax and transfer pricing rules. The discussion has since morphed, though, into a wider discussion about whether countries should change international tax rules applicable to all multinationals.

The Inclusive Framework, in a February 13 paper, presented  policy options as a launching point for the discussion, which were the subject of the two-day Paris consultation. The discussion draft policies fall into two different “pillars.” Pillar one proposals would to change the rules for allocating multinational group profits between countries. The pillar two proposals call for coordinated minimum taxation on multinationals worldwide.

Discussion during the first day concerned the pillar one proposals. Here are some highlights of the first day’s discussion:

Grace Perez-Navarro, Deputy Director of the OECD’s Centre for Tax Policy and Administration, stressed that the work is still in its early stages. The OECD’s task force on the digital economy (TFDE) is currently developing a work program for discussion and approval by the Inclusive Framework by the end of May, she said. That work will be then presented to G20 finance ministers in the beginning of June and to G20 leaders at the end of June, she said. Once the workplan is set, the technical work will be done by the OECD Committee on Fiscal Affairs working parties. For example, WP 1 will address treaty issues, WP 6 will address transfer pricing, WP 11 will work on aggressive tax planning issues. The goal is to achieve consensus by the end of 2020, Perez-Navarro said.

Pascal Saint-Amans, OECD Director, Centre for Tax Policy and Administration said that stakeholders will be asked to comment again in later stages of the work. These later consultations will be more detailed oriented, Saint-Amans said.

David Bradbury, Head of the Tax Policy and Statistics Division at the OECD said that the OECD is working on an impact assessment addressing the economic impacts of the proposals. This work is “particularly challenging,” Bradbury said, because the proposals and options have not yet stabilized, the work is technically difficult, and the OECD lacks access to needed data. Bradbury said that if companies are in a position to share their insights or analysis of the impact of the proposals on their business with the OECD on a confidential basis that would be appreciated.

Will Morris of Business at the OECD (BIAC) kicked off the stakeholder comment portion of the meeting acknowledging that the business community knows that change is coming to the international tax system. The BEPS project has taught us that, for a solution to be stable, it must work also for the people and the media, he said. “In order for this to be stable we have to be realistic,” Morris said. Any new international tax agreement between nations needs to be both “broad and deep,” so it can be stable, he said. Nations should expressly agree to the theoretical underpinnings of any new regime and there must be a clear articulation and acceptance of the principles from a legal, economic, and policy point of view. Morris said that for pillar one, it is not enough to just come up with a pragmatic solution such as “a number,” that is not underpinned by principle. Any such number without a commitment to a deep understanding of the principles behind the number will be unstable. Such principles include what is it about a market that justifies more allocation of tax to it and what is the appropriate balance between the reward to innovation and the reward to destination. Any solution must accommodate future changes rather than just pinning down what is happening now, he said. This is just the beginning: imagine what artificial intelligence will do to the tax conversation, he said. Morris also said that, by definition, when one country wins additional tax revenue then another country loses. The losers must also be on board. A few speakers later challenged Morris on this on this last point.

Pierre Habbard of the Trade Union Advisory Committee to the OECD (TUAC) said that the international tax discussion should not only be between tax regulators, taxpayers, and tax lawyers. Tax matters to other stakeholders, he said. Habbard said that transfer pricing rules based on the arm’s length principle are “a recipe for fragmentation.” The current rules fuel opacity and complex investment schemes. He said the labor movement approves of a shift to formulary apportionment and disputes the notion that nations cannot agree on a formula.  He said that international tax changes should not just be about how to share the pie. “We don’t believe this pie is big enough,” he said. “A move toward complexity is an open gate to regulatory arbitrage,” Habbard said. He cited the Basel 3 banking reregulation as an example where guidance became so complex that even the regulators could not understand the rules, which allowed bankers to control the rules. Habbard said that, based on available indicators, the effective tax rate for digital business last year was only 9.5 percent as compared to 23 percent for traditional business models. The accuracy of the effective rate Habbard cited was later challenged by Gary Sprague of the Digital Economy Group. Manal Corwin, KPMG later commented that it is too early to determine effective tax rates because the BEPS changes have not yet played out.

Professor Robert Danon, University of Lausanne, said that he preferred a solution based on a value creation framework instead of a destination framework. The marketing intangibles proposal is more aligned with the value creation framework than the user participation proposal, he said. He said the significant digital presence proposal needs more work as it was clearly added as a proposal at the last minute. The marketing intangible proposal seems the most neutral, he said. The test of neutrality is how it will be applied across businesses models and industries. Dannon said that if the marketing intangibles proposal is adopted, countries should be realistic and choose rules that are easy to administer and not subjective. “I don’t think it is sustainable in the long run to work on the basis of a system that is complex and inefficient to apply,” Dannon said. A proposal involving predetermined formulas should be the starting point for the discussions, he said. The system should not be simplistic but should be administrable so it can work for the Inclusive Framework. He said the focus should be on enhanced dispute prevention not just dispute resolution.

Elselien Zelle of said that of the three pillar one proposals, her preference is for the marketing intangibles proposal because it does not ring-fence digital companies and it fits with the existing transfer pricing rules. She said the concept of people functions in value creation could be adapted to add the favorable attitude consumers have about products. These people functions would preferably be combined with people functions of employees. Zelle also said that countries will need to decide if they will also reallocate losses. Also, as operates in 200 counties, administrative issues be must be taken into account, she said.

Daniel Bunn of the Tax Foundation said that the international agreement should provide that countries’ tax policies that contradict or differ from the solution agreed to by nations, like the digital services tax, will be subject to a process that requires these laws to be “weeded out of the international tax garden.” Bunn said that it is important for any solution to take into account the cost of capital and how it affects trade and investments. Potential revenue effects of the proposals should be considered as businesses may shift structures or avoid markets. While withholding taxes may be attractive to developing countries, these taxes are difficult to administer given the number of countries that MNEs must deal with, he said.

Prof. Dr. Pasquale Pistone of IBFD said that all nations’ concerns should be taken into account and treated on an equal footing. Any proposal adopted must be simple enough to be enforced throughout the world. The three pillar one proposals should not be viewed as being mutually exclusive, Pistone said. Aspects of each could be bundled together. For example, we should not forget the value that users have and that marketing intangibles have a value that can be allocated to the market country. Pistone said that, of the three options, he favors the economic presence test because it would more comprehensively address the international tax challenges arising from the digitalization of the economy. He said that this does not mean that full formulary apportionment is warranted, though. Pistone also said that the residual allocation of taxing rights may not provide much taxing power to market countries.

Pat Breslin, Breslin Consulting, said that there is no need to depart from traditional concepts of taxing profit where value is created. The key is to measure value correctly. Measurement through simplified methods such as the number of users, user participation, and clicks can be misleading and not relate to value. Breslin said that distinguishing between trade intangible and marketing intangibles is complex. One never knows what carries the most weight in the consumer’s eye, the product or the brand, he said.

Dhruv Sanghavi, Maastricht University, said that significant economic presence could be the threshold for nexus between a taxpayer and a market and then user participation or marketing intangibles could be used as tools to allocate profits once that threshold is established. Sanghavi said that the value of user participation should not be minimized. User participation, such as commenting on an online taxi platform, could, for example, replace the quality control fuction in a business, thus resulting in savings that increase the business’s profits, he said. He also said that user participation may not lead to the same amount of value in different businesses. 

Jan Bart Schober of Loyens & Loeff agreed with Morris that any agreement between countries should be broad and deep. Countries need to agree to principles underlying the new rules for allocating taxing rights, Schober said. To avoid chaos, unilateral tax measures must end while nations are working on the new consensus, he said.

Joachim Englisch, Münster University and SciencesPo, said that the marketing intangibles proposal is the most appealing of the three options because it avoids ring-fencing and addresses the fact that firms now rely on the exploitation of local customer or user data. The problem with marketing intangibles approach is complexity, Englisch said. Therefore, proxies should be used where it is assumed that marketing creates value in a jurisdiction and, rather than using a full-fledged profit split, formulary elements should be introduced. Withholding taxes should be used as a last resort, Englisch said.  

Vikram Chand of the University of Lausanne agreed with Englisch that the marketing intangibles proposal fits best with the international tax system’s existing value creation framework. Countries could agree to a hybrid system using predetermined formulas backed by a transfer pricing analysis, he said. Chand disagreed with aspects of the user participation proposal, stating that users should not be seen as supply factors. The significant economic presence proposal seems to blend both supply and demand factors and thus needs work, he said.

Fernando Juarez Hernandez, Stanford Tax Cub, said there is no mention in the consultation document of entrepreneurs, start-ups, or small business. He said the proposals should take into account the fact that these firms typically initially have losses and should provide that firms can offset these losses against later profits. He also said that small business do not have the resources to comply with tax laws in multiple jurisdictions.

Ignacio Longarte of the Digital Economy Taxation Think Tank, representing multinationals, said that any solution adopted now should be designed to handle the economy 15 years from now when the economy will be fully digitalized. He said that the significant economic presence proposal is the best solution to adopt now as it will enable a transition to a better system. Any such system must be designed carefully, Longarte said. He said the future seems to involve more personalized solutions for customers. He asked whether comparability using traditional transfer pricing tools would work in such a world. Would we need to find the right tax treatment for every party or maybe search for something more practical? he asked.

Gary D. Sprague of the Digital Economy Group, representing US and EU digital multinationals, disputed those that say that digital companies have scale without mass or that imply that they “operate in the ether.” These companies employ tens of thousands of people around the world and invest billions in infrastructure. Do not ignore the value created by engineers, Sprague said. Sprague also said that Habbard’s statement that digital multinationals pay a 9.5 percent effective tax rate is hyperbole as the statement is based on work by Christoph Spengel which does not support this conclusion. Habbard later countered said that Sprague was asking to have it both ways. ”You can’t on the one hand call for evidence-based approach and at the same time use business confidentiality to restrict access to information [or] say how horrific it would be for public country by country by public reporting,” he said. Habbard said OECD is sitting on a “data mine” of anonymized data from the country-by-country reporting system. There could be a political agreement to deanonymize those data so we will have the correct figures on the effective tax rates, Habbard said.  

Jesper Berenfeld of AB Volvo said that, in parallel to exploring the three options already on the table, consideration should be given to adjusting the arm’s length principle to achieve the same objectives. Berenfeld said that reallocating value based on market size would have economic effects that should be considered. Why would a government invest heavily in education and infrastructure if the residual is allocated to another jurisdiction, he asked. He said that the marketing intangibles proposal would be difficult to comply with as it overlays complex rules over already complex rules. He also said the “tricky line” between digitalization and user participation needs to be explored. The paper is premised on digitalization being a new thing that is strongly linked to user participation; however, collecting user data is not new, at least for B2B, he observed. He said Volvo has always collected user data and that he doubts that it is now more heavily reliant on user participation.

Laurence Jaton, Engie, said that some companies prefer a solution that will not be challenged by tax administrations over accuracy and thus safe harbors should be provided. Jaton said that coming up with a profit split can be a “nightmare” because it is so subjective except in sectors where it is more fully developed, such as in banking.

Janine Juggins, Unilever, said that new international scheme must be simple and capable of being explained and understood; otherwise, companies will never regain the public’s trust. Juggins said that double taxation and the inability to take valid business deductions are large problems for business that will only get worse becauase activities wbecome more fragmented as companies ake advantage of technology and automate. She said that her company makes large investments in trademarks and brands. Increasing automation will cause more value to be attributed to a smaller number of entities. Thus, rules that rely wholly on the concept of value creation will not be sustainable into the future as business models evolve, she offered. Juggins also said that it will be difficult to disentangle what is a marketing intangible in some sectors. She said that, for example, she does not know if she uses Google because she is impressed by their advertising or because it works.

Giammarco Cottani of Ludovici Piccone & Partners said that rather than adopting any of the three pillar one proposals, the arm’s length principle should be refined to address market jurisdiction concerns. He said that the international tax effort should focus on what value creation really means regarding the distinction between residence and source. He also said no tax changes should have retroactive effective.

Vanessa de Saint-Blanquat of MEDEF, a French business association, said that it would be helpful if any guidance included examples of practical cases that show how the allocations are made. She also asked the OECD to conduct an impact assessment addressing the effects of the new allocation rules on both companies and countries. The OECD’s David Bradbury responded that work is underway on such an assessment.

Graeme Wood, Procter & Gamble, said that before moving forward with the pillar one options, attempts should be made to determine if the arm’s length standard can instead be improved. Wood said it is difficult to separate marketing versus trade intangibles. He also said that countries have a difficult time agreeing to residual profit splits and it would be even harder with multiple countries involved. Something more formulaic might be more appropriate, he said.

Laurence Delorme, a sole practitioner, said that company business models always evolve and transfer pricing must continually adapt. This has been accelerated with the digitalization of business models, she said. In B2C business models, the question arises as to where consumer demand is generated. It is unclear whether demand is through local marketing efforts creating the demand, or whether the local distribution efforts merely respond to demand created somewhere else.  

Matt Hardy of Diagio said that the TFDE should explore the possibility of splitting residual profit on a pragmatic basis between intangibles to achieve the objective of redistributing taxing rights. If such an approach is adopted, there would need to be consideration of what to do if there is no residual or a negative residual. The TFDE would also need to work out if the rules would differ based on whether a group has physical presence in a country or not, Hardy said. He also said that the interaction of these rules with customs needs to be addressed.

Simone Zucchetti of Studio Tremonti Romagnoli Piccardi e Associati pointed out that Article 5 of the OECD Model Convention provides special permanent establishment rules for mines or oil and gas extraction sites. “We did ring fence in the past,” he observed. Zucchetti also said that the current tax treaty network is not compatible with attribution of profits to source countries in the absence of physical presence. He said that unilateral measures, such as those adopted by Italy, are ineffectie when a tax treaty is involved. This latest initiative must adopt a coherent approach at the treaty level, he said.

Roger Kaiser, European Banking Federation, said the international tax rules should make a distinction between companies that are highly digitalized and those that are engaged in digital transformation but where value creation factors remain traditional, like the banking sector. He said he supported mandatory binding arbitration as a minimum standard.

Caroline Silberztein of Baker McKenzie said it is not correct to say that market jursidictions do not have taxing rights if there is no physical presence because VAT applies. She said the VAT is a more effective tax for markets.

Stefaan De Baets of PwC Belgium said the TFDE should use the arm’s length principle as a starting point because it is based on sound economic principles, though it may need be tweaked to achieve fairness. He said rebuttable presumptions, safe harbors, other devices could be used. De Baets said residual profit splits are complex and subjective. He said that while formulary apportionment may seem attractive to some, the tax paid differs from the underlying activities and thus the method may have distortive effects.

Martin Hearson, London School of Economics, said it is not possible to the reconcile the competing objectives of obtaining a deep and broad consensus, obtaining a universal and binding dispute resolution mechanism, and to do it all in two years, especially since many Inclusive Framework countries never signed on to the original international tax system in the first place. It is going to be a lengthy process, Hearson said.

Catherine Harlow, AstraZeneca, said that she wants the OECD to reflect on how the proposed changes impact businesses that are not heavily digitalized. She said that pharmaceutical companies have lots of research and development value; marketing intangibles are less significant. An impact assessment should address particular industries rather than reviewing all industries with a broad brush, she said.

Ken Chan of TransferWise said any new international tax rules should include sector-specific exclusions. There is precedent for how financial services are taxed, he noted. Chan said that his company’s products are driven by technology built by engineers. Attributing too much value to marketing intangibles will undervalue the technology, Chan said.

Karine Uzan Mercie, of LafargeHolcim, a cement and aggregate company, said that her company figured out how its tax payments would change under different versions of each of the three pillar one options. The results ranged from no change to a transfer of 75 percent of what they are currently paying to mature markets, like the US and Europe, to be paid instead to China, India, and Latin America. “There are going to be losers in pillar one,” she said. She said that details, such as allocation keys for formulary apportionment, need to be understood before her company can even comment.

Marlies de Ruiter of EY said that there needs to be greater clarity about what the pillar one proposals’ objectives are. Is the problem with the separate entity approach? she asked. If you decide on the separate entity approach, the question then becomes what parts of the arm’s length principle for allocating profits to those separate entities does not work. From there, the question then becomes what country can tax that separately allocated profit – what mechanism is used to allocate profits to that nexus, which differs from the arm’s length principle. de Ruiter said that it is important to distinguish between each of these three steps. “If you don’t distinguish, and if you start from the group, it is going to be extremely fundamental what you are going to do, while if you look at how to allocate profits that are allocated to an entity [then] the framework is already in place,” she said. de Ruiter said she believed there are ample opportunities to make the current framework more solid and simple that have not yet been explored.

Edwin Visser of PWC said that this might be the time to consider more fully formed rather than piecemeal reform to allocate more taxing right to market jurisdictions such a global version of the common consolidated corporate income tax or a destination-based cash flow tax. Visser said that any move away from the arm’s length principle should be based on a principled approach. Why should only some types of user participation but not others change the allocation of taxing rights and why would some intangibles lead to income attribution to the market but other intangibles not be counted? he asked.

Maria Volanen, representing Digital Europe and the Finnish tech industry, said that it is clear that small digitalized export-relying countries will lose under the new proposals yet they also have a right to secure their tax base. Volanen argued that if education and innovations are supported in one county but tax is allocated to consuming countries, the incentive to invest will decrease potentially affecting the environment and climate change. She said she hoped that an evaluation will be conducted on the effect of the proposals on small countries and small companies.

Jonathan Leigh Pemberton of the World Bank Group said that the Inclusive Framework should consider intitially narrowing its work to seek consensus only on scenarios involving diverted profit as such an approach would be more feasible for the timeline proposed. In these instances, there would be no losers, or at least fewer losers, he said, and the work would take the interest of capital-importing countries in mind. Pemberton noted that the timeline to achieve consensus was triggered by unilateral measures and that there is a mandate for a quick resolution because countries’ need for revenue is urgent. He also supported formulaic and mechanical approaches and rebuttable presumptions as a way to achieve doable and fair solutions.

Paul Oosterhuis, of Counsel, Skadden, Arps, Slate, Meagher & Flom LLP, said that the marketing intangibles proposal would create new source rule for transfer pricing, namely, the source of value that needs to be recognized for tax purposes is the value of a product in the marketplace to the marketplace. This is not value creation but more like value realization, he said. This is a big change and should be done in small steps. Oosterhuis said that to determine the value in the marketplace, one must separate production or trade intangibles from market-based intangibles. The residual value must then be divided to reflect these intangibles. The residual value profit split method is the baseline on how to do that, but it is very difficult to deal with, he said. Thus, Oosterhuis said that safe harbors should be considered that provide a mechanical way of solving the division. He said the rules could be patterned after a former US safe harbor that allowed division of US possessions income on a 50/50 profit split for production versus marketing intangibles. Governments will need to accept that they will not get as much revenue from such safe harbors but they are essential to make the system work. He said that nexus should be based on the level of sales in a country, not method of distribution. Special rules may be needed for some B2B transactions, he said. If I sell a battery to Japanese automaker and the car is eventually sold to a consumer in the US, do I pay tax in the US? He said that distinctions should be made between distributors versus component manufacturers, raw material manufacturers, or intermediate goods manufactures. In the latter cases there would need to be an exception or a special rules with presumptions with respect to allocating income to marketing intangibles, he said.

Sol Picciotto of the BEPS Monitoring Group and Lancaster University said the existing system is dysfunctional and he hoped that this latest effort will not lead to another 150 pages of transfer pricing guidelines. He disagreed with those that advocate in favor of mandatory binding arbitration, calling this the ultimate fallback for a system where decisions are “basically being taken out of the air.” He said arbitration should be an open system based on principles, not a secret, administrative bargaining process. Picciotto advocated the adoption of a single entity approach, based on three fundamental factors that generate profits, namely, people, capital investment, and sales. He said this is a balanced approach of supply and demand factors. Factors must be quantifiable and thus hard to game, he said. He later said that while these should be the principal drivers, there could be others. Maria Volanen, representing Digital Europe and Finnish tech industry, challenged these allocation factors stating they were based on outdated ideas. The factors are based on the old 2005 EU CCCTB proposal and do not correspond to the idea that intangible assets create value for the digitalized companies or create incentives for innovation, Volanen said. Picciotto responded that the abstract value of an intangible should not be an apportioned factor. He said that one achievement of BEPS 8-10 was the realization that the location of intangible’s should not be based on ownership but on the work entailed. He said the salaries of software engineers would be taken into account in his formula. Ignacio Longarte of the Digital Economy Taxation Think Tank agreed with Picciotto’s allocation drivers but said he would add data as an additional factor because of its unusual nature. Xiaoshan Sun of Omnicom Group also said data should be a factor.

Katherine Amos, Johnson & Johnson, offered her company’s poposal for new system to allocate more income to market jurisdictions. J&J’s proposal would depart from the arm’s length standard but is also be simple, provides certainty, and is easily auditable, she said. Profit allocated to a market country would be identified by starting out with a base rate, for example, a 3% return on local company sales, and by modifing that base rate with three levers, she said. To give market countries a share of the residual profit, the base rate is levered up or down based on the profitability of the entire group. The next lever moves the rate up or down based on the marketing expenses in the country as compared to a benchmark. The third lever adds a floor and a ceiling. Amos said there needs to be a ceiling so profit can be spread to other supply chain activities. Somewhat controversially, the floor would be zero, Amos said. She said that losses are not usually from the local marketing company and thus they should not share them. Losses are typically from product development or manufacturing failures, she said. Amos said her company would gladly pay more tax in exchange for simplicity and certainty. Samuel M. Maruca, Covington & Burling LLP, later commented that in his view, the Johnson & Johnson proposal seemed “quite compelling.”

Ed McNally, Keidanren (Japan Business Federation), said that he saw no reason to modify the transfer pricing rules applicable to traditional businesses. He suggested that any new rules be limited to groups that shift intangible related income to low tax judications or that heavily rely on marketing intangibles for value creation. McNally said that the introduction of limited risk distributors in a market jurisdiction does not suggest insufficient allocation to the market jurisdictions. He said that traditional one-sided transfer pricing methods such as the TNMM work well when pricing related party transactions involving local limited risk distributors. McNally also said that mandatory binding arbitration should be introduced as a minimum standard and that countries should refrain from adopting unilateral measures until simple, globally consistent rules are agreed to. He said that marketing intangibles would allocate too much profit to market jurisdictions and not account for not the value of research and development.

Jari-Pekka Kaleva, European Games Developer Federation, said that data protection-ready solutions are needed for global taxation. Tax laws need to meet the EU General Data Protection Regulations (GDPR) namely, privacy by default, he said. Pekka Kaleva said that solutions based on using consumer IP addresses require the collection of personal data and could be problematic. Pekka Kaleva said his members, small and medium enterprises, operate on the global level from the outset. These businesses must allowed to enter the digital market without hiring expensive tax consultants; otherwise, tax will create barriers to the market. Any new process should be designed from the beginning so that it is automated as far as possible, he said.

Sylvain Montoro of BlaBlaCar said that while we need simplicity, that does not mean we should do things that are not intelligent. Montoro said he objected to any mechanical allocation of profits to market countries that does not take into account different business models. Companies make profits in different ways, he said. Each company should provide a functional analysis to demonstrate the correct allocation to the local market. Moreover, he said this allocation should be transparent and public, like country-by-country reporting. Public disclosure will help companies compare their allocation method with others and also help tax administrations determine if a company is aggressive or is in line with other companies, he said.

Xiaoshan Sun of Omnicom Group, a marketing company, said a clearer definition of value creation is needed. She said that for the significant economic presence proposal, data should be added as a factor in addition to labor, capital, and sales. Sun said that while she did not want ring-fenced businesses, to be fair to all companies it should be recognized there should not be a one-size-fits-all tax solution. Instead, the tax solution should be tailored to different companies. A traditional company uses and collects data differently and should be treated differently, Sun said.

Raffaele Petruzzi of the WU Transfer Pricing Center at the Institute for Austrian and International Tax Law said that any proposal adopted should not ring-fence. In 10 years everything will be digital, he observed. He said that solutions should be principle-based and supported by the arms-length principle. Corporate income tax should apply where value is created not where it is consumed. Other taxes do that, he said. Petruzzi also said the role of users is being overestimated. They are valuable in some situations depending on the specific business model and company but are not the only value driver and not always the main value driver. Investment and engineers are important, too he said. The same is true for data. Data is worth nothing if it is not exploited, he said. Petruzzi said he prefers a solution based on the arm’s length principle as modified by the BEPS project. He said DEMPE has brought more taxing rights to market jurisdictions. He said he approved of the significant economic presence within the context of the arm’s length principle to confer taxing rights in the absence of physical presence. Market countries would only receive a routine return from users because risks and intangibls assets are not with the users, he said  He did not approve of formula apportionment mechanism because it has too many issues.

Stephan Rasch, Federal Chamber of Tax Advisers, said that it is important to identify whether a business that has users creates marketing intangibles. It is not the same for all businesses, he said. From there, we must determine the value, which is not easy. Rasch likes the idea of safe harbors, though he said it would be hard to reflect the correct value in a safe harbor. The marketing intangibles approach should take into consideration that there are situations where one-sided transfer pricing approaches are best, he said.

Francis Weyzig of Oxfam asked McNally what he would propose as a solution to problems identified by other countries that seem to be manifested prominently in the digital economy but that are also present throughout the entire economy.

Guillaume Madelpuech, NERA Economic Consulting, said that he approves of thorough use of the arm’s length principle and wants to “give BEPS a chance.” It is extraordinarily difficult to value marketing intangibles because of the principle that intangibles are relational objects, namely, they fuel each other. A technology intangible will fuel the value of a brand intangible and vice versa, he said, and thus the intangibles are deeply entangled. Madelpuech said that the DEMPE framework should be praised because it takes the arm’s length principle to it’s full extent. The DEMPE framework allows you to move away from the entanglement of intangibles, making them an intermediate step in the analysis. He said the marketing intangibles proposal moves away from this DEMPE framework achievement.

Andrea Prieto, a Colombia tax lawyer, asked what would be a more efficient and simple way to collect the tax if not withholding tax. She suggested the task force consider a withholding tax at a low rate as a local sales proxy.

Samuel M. Maruca, Covington & Burling LLP, said that in terms of design, the Johnson & Johnson proposal was “quite compelling.” He said that the politics of the situation seems to require allocation of more income to market jurisdictions in a way that is acceptable to 129 jurisdictions. He said the Johnson & Johnson proposal seems administrable, fair, and not discriminatory and does not disrupt the existing architecture.

Jason Piper of the ACCA said that one consequence of adopting these tax proposals is that they could undermine the ability of potential creditors to assess a company’s solvency risk. He said an entity’s legal liability for a tax payment won’t be predictable based on local activity and or financial results.

Catherine Schultz of the National Foreign Trade Council said that move to an economic permanent establishment will require tax treaty changes. Some countries, such as the US, have difficulty ratifying treaties, she noted.

Francois Chadwick of Uber acknowledged that change is needed. He said supported a system that does not ring fence, that will result in minimal disruption to the arm’s length principle, that is administrable and simple, that minimizes double taxation, and that can stand the test of time. Chadwick noted that artificial intelligence creates value which any tax system adopted will need to capture. Uber is interested in the idea of global notional pooling of losses, he said. He also said he expected a hard commitment to repeal any unilateral measures and said he wanted mandatory arbitration. The user participation model creates winners and losers and will lead to economic distortions, Chadwick said. He also said there is no real difference between a marketplace intermediary and a financial intermediary. Chadwick said the significant economic presence proposal won’t achieve consensus because it creates two tax systems. He supports the marketing intangible approach. He said the notion of value creation is nebulous and Uber “pivots to” value realization or profit realization in a country. He said that Uber is a B2B provider and is not highly digitalized as it has “boots on the ground,” so exceptions along those lines would not create a tax system that has an impact on his company.

Manal Corwin, KPMG, agreed that a solution that provides stability is needed. We should not choose an approach that we will need to refresh again, she said. Any solution should not “throw the baby out with the bathwater” by discarding long-standing agreed-to principles, Corwin said. She said that all unilateral measures, including the DPT,  DST, and US BEAT, should be removed as a part of the transition to the new rules. She also said that, as a part of any new agreement, we should agree to not prematurely evaluate whether the plan is succeeding or not.

Tommaso Faccio, Independent Commission for the Reform of International Corporate Taxation (ICRICT), said he prefers the simplicity of the significant economic presence test and the fact that it uses objective factors. If we merely tinker with the system by adopting the marketing intangibles approach we will be back in five years debating things such as profit shifting in the manufacturer location through limited risk agreements, he said. Another problem with the marketing intangibles approach is valuation – you will have four different intangibles valuations from four different advisors, he said. Faccio said a formula approach would be needed for marketing intangibles. He said it would be better, though, to split total profits, adding that this has the benefit allowing of loss sharing. Faccio said the user participation proposal is too narrow and no one really understands how much value is created by users.

Alison Lobb, Deloitte, said that any proposal should include mandatory binding arbitration to prevent double taxation. Lobb said there might not be enough profit in a business to reward either the marketing intangibles or user participation after the routine returns are assessed. Lobb also argued that losses should be allocated along the same lines as profits.

You can read a report on the “pillar two” proposals at this link.

Julie Martin

Julie Martin

Founder & Editor at MNE Tax

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

Julie Martin
Julie can be reached at

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