BMG Comments on OECD Report on Blueprints

Today the OECD has published two reports on the draft Blueprints for the proposed measures to resolve the tax challenges of the digitalisation of the economy. This release was approved by the Inclusive Framework for BEPS, and is accompanied by a public consultation document, as well as a report to the G20 Finance Ministers.

This seems another false summit in the long climb to international tax reform. Even without the Covid19 crisis, the OECD’s optimism earlier this year seemed misplaced, and the “unified approach” was clearly leading to a new set of complex rules. The commitment to finding methods that can be easily administered has now become “as simple as the tax policy context permits”. Trying to reach consensus by combining incompatible approaches will clearly satisfy no-one.  While the focus on global consolidated accounts and formulaic allocation methods is a step forward, complexity results from the continued reliance on arm’s length methods to attribute the bulk of MNE profits. The administration of both Pillar 1 and Pillar 2 would be left in the hands of the home countries of MNEs, and claims of others would be subject to mandatory binding dispute resolution.

Furthermore, implementation of this complex construct would require a multilateral tax convention that, unlike the multilateral instrument to implement BEPS measures (MLI), would have to be a package deal with no opt-outs. Yet it would apply only to the few thousand MNEs with global turnover higher than 750m euros. This would do little or nothing for the majority of small and poor countries, which would be left struggling to apply current international tax rules to the large majority of their corporate taxpayers. Even the modest attempt to try to improve on the one-sided transfer pricing methods in Amount B seems likely to stick closely to the TNMM, due to the OECD’s reluctance to rethink its misconceived and ineffective Transfer Pricing Guidelines.

Perhaps this interregnum will allow for a rethink and renewed pressure for a new approach, which should build on the growing support for formulary methods.