OECD Secretariat Proposals for a 'New Taxing Right'

We have submitted our comments on the OECD Secretariat’s Proposals for a unified approach under Pillar 1 of the ‘new taxing right’.

Summary

We welcome the attempt in these proposals to address the mandate of the G20 leaders for the BEPS project, to devise rules that can ensure that multinational enterprises (MNEs) pay tax in line with their activities in each country. We strongly support the proposal to begin from the global profits of each multinational enterprise (MNE), using a definition suitable for tax purposes. It is also commendable to aim to devise simple formulaic methods, and to ensure a more appropriate allocation of profits to source countries.

However, it should be made clearer that the justification for this is that MNEs now have increasingly close and continuing relationships with their customers and users, so that source countries are those where their activities in a significant sense take place, and are not merely markets. This has become much more evident with digitalisation of the economy, but is a longer-term trend that began with the shift to services and the post-industrial economy. Hence, in our view a comprehensive solution is needed, that applies to all MNEs without a size threshold, and not limited to consumer-facing businesses. Such distinctions would just add further complexity, by requiring segmentation of MNE accounts by business lines, and retaining current transfer pricing rules for large parts of the global economy.

The current proposals would also be undesirably and unnecessarily complex, because they are based on the residual profit split method. This would need a split of the supposed ‘routine’ from ‘non-routine’ profits, and a further division of the non-routine profits to decide the amount to be apportioned to ‘market’ countries, both determined by fixed percentage(s). Hence, the allocation not only of the routine profits but also the portion of the non-routine not apportioned by sales would continue to depend on the present unsuitable transfer pricing rules. The problems of supposedly ‘stripped risk’ structures being used for BEPS purposes is not confined to distribution, but is also used by MNEs to minimise tax payable by affiliates engaged in manufacturing, R&D and even some services activities.

A far simpler approach would be to develop the profit split method to apportion the global profits by factors reflecting the contributions made by affiliates of the MNE in each country. International agreement is needed on the general principles of allocation, which in our view should reflect the basic drivers of profit: labour, users, physical capital and sales, which are location-specific and can be quantified relatively easily. Further technical work could develop standardised allocation keys and weightings for common business models, to be applied presumptively and subject to open and transparent procedures for resolving divergences. This would finally establish international tax rules for the 21st century that would be simple to apply, predictable, sustainable and accepted as fair. (See Appendix 1.)

November 2019

Please read here our COMMENTS ON THE OECD SECRETARIAT PROPOSAL FOR A ‘UNIFIED APPROACH’ UNDER PILLAR 1.