On November 21 and 22, 2019, the OECD hosted a public consultation meeting in Paris on the Pillar One “Unified Approach” (with a further public consultation scheduled for December 9, 2019 to discuss the Pillar Two global anti-base erosion (or “GloBE”) proposal).
The Inclusive Framework on BEPS agreed in May 2019 on a program of work to develop a consensus solution to the tax challenges arising from the digitalization of the economy, comprising a “two-pillar” approach, involving revised nexus and profit allocation rules (“Pillar One”) and the GloBE proposal (“Pillar Two”).
In anticipation of what has now become known as Pillar One, the UK put forward what the OECD terms the “user participation” proposal, narrowly targeted at highly digitalized businesses; the U.S. submitted the so-called “marketing intangibles” proposal, which widened the focus to the broader economy; and India proposed a solution based on “significant economic presence”.
As none of these proposals on its own offered the opportunity for gaining consensus from the 135 member states of the Inclusive Framework, the Secretariat attempted a synthesis that would bring together the common elements of these proposals, labelled the “Unified Approach” published on October 9, 2019.
This attracted over 300 written submissions from the public, including Duff & Phelps’ comments on the public consultation document, comprising more than 3,000 pages of commentary, and these were followed by the public consultation meeting that focused on some of the issues raised by them.
Sessions were devoted to the three tiers of profit allocation under the proposed approach: Amount A (a formulaic attribution to market jurisdictions of the deemed residual profit of the group), Amount B (a fixed remuneration for baseline marketing and distribution functions in the market jurisdiction) and Amount C (profit for market functions in excess of the baseline B, established through the arm’s length principle, plus binding and effective dispute prevention and resolution mechanisms), attracting over 100 interventions from the audience.
A spectrum of views was expressed in discussion of Amount A. Liz Chien, head of tax at Ripple Labs, articulated the views of many, when she questioned whether the OECD Secretariat’s proposal lost sight of the original problem of the issues associated with digitalization by taking in market intangibles. Others, representing civil society, such as Sol Picciotto, of the BEPS Monitoring Group, felt that the proposals do not go far enough and proposed full adoption of formulary apportionment.
To those who favoured continued adherence to the arm’s length principle, Grace Perez-Navarro, Deputy Director of the OECD's Centre for Tax Policy and Administration, stated that, of the three solutions proposed to the OECD, all rejected the arm’s length principle and that “we can’t go there” (back to the arm’s length principle), asserting that “we have moved beyond that” to look at the whole enterprise and to apply a more formulaic approach.
Perez-Navarro acknowledged that there was still much work to be done around definitional issues, e.g. what is meant by “consumer-facing”, and the basis on which profits will be allocated. A number of industry commentators cautioned against the complexity of administration of the proposal. Janine Juggins, head of tax at Unilever, made a plea not to apply complexity where there is no or little tax at stake. Considerable support was expressed for the use of group financial accounts as the starting point for any calculations of Amount A and many speakers favored use of a “one-stop shop” to minimise the administrative burden. Industry observers stressed the importance of mandatory binding arbitration, if double taxation is to be avoided, but Thulani Shongwe, the representative for the African Tax Administration Forum, made clear that its member countries would not accept such a measure on grounds of sovereignty.
Summing up after the second day of discussions, Perez-Navarro explained that the Secretariat’s aim was to keep Amounts B and C within the arm’s length principle, but she acknowledged the need for more detailed guidance and recognized in the case of Amount B that one size is unlikely to fit all cases. She also noted suggestions to set a cap to Amounts A, B and C. Acknowledging many commentators’ concerns of the risks of double taxation from overlapping Amounts A, B and C through the interaction of the formulaic elements with the arm’s length principle, Perez-Navarro recognized the need to clarify the interaction between the three tiers, while noting the concern expressed by Susanna Ruiz from Oxfam that the application of the arm’s length principle under Amount C may undermine the intended certainty of Amount B.
Returning to the theme of the desire among industry commentators for mandatory binding arbitration (MBA) if double tax is to be avoided, Perez-Navarro recognized a need to do better, both with the unified approach and more generally, but noted the concerns of developing nations over MBA. She acknowledged commentators’ stress on dispute prevention and stated that the OECD was working towards “something other than MBA that would have an equivalent effect”, some form of binding dispute resolution for establishing certainty of tax treatment.
Pascal Saint-Amans, Director of the OECD's Centre for Tax Policy and Administration, confirmed that, in terms of next steps, there will be sessions of the Inclusive Framework at the end of January 2020 and at the end of June/July 2020. At the first of these meetings, the Secretariat hopes to gain the agreement of the 135 Inclusive Framework member states in principle to the two-pillar approach, at which stage the OECD would like to publish an outline of the solution, with the intention of working out the technical details by the time of the June 2020 meeting, in pursuit of the goal of delivering a solution by the end of 2020.
In an interesting codicil to the consultation, U.S. Treasury Secretary Steven Mnuchin sent a letter to Angel Gurria, the OECD Secretary General, on December 3, 2019, in which, while voicing support for the OECD discussions, he expresses serious concerns regarding potential mandatory departures from arm’s length transfer pricing and taxable nexus standards, instead proposing that Pillar 1 be made a safe-harbour regime.
Gurria’s response, on December 4, 2019 notes with a certain irony that it was U.S. and Mnuchin’s personal interventions that steered the international community away from seeking a narrow digital solution and moved the discussions to a broader scope using a more formulaic approach and a new nexus concept. Gurria raises the concern that attempts to work in the novel notion of a safe-harbor regime may impact the ability of the Inclusive Framework to meet its tight deadlines.