The OECD held a public consultation at its Paris headquarters this week, where companies, organisations, and academics came together to discuss the consultation document that proposes two pillars aimed at dealing with the tax challenges of digitalisation.
Before the public meeting, responses to the consultation paper were released, including the opinions of numerous multinational corporations.
“We support the arm’s-length principle, and would strongly oppose measures that undermine it,” said Louise Weingrod, vice president of global taxation at Johnson & Johnson, who criticised the OECD’s suggestion of using transfer pricing tools to enhance market taxing rights under pillar one.
The first pillar proposals focus on the allocation of taxing rights, which concerns nexus and profit-allocation rules, including the so-called ‘significant economic presence’ nexus discussed in the BEPS Action 1 report. The three proposals that make up pillar one move away from the arm’s length principle (ALP) and lean towards formulary apportionment. The second pillar addresses global anti-base erosion, in particular the right of jurisdictions to tax profits held in a low-tax country.
Glenn price, head of international tax at Vodafone, said that the ALP needs to be modernised to cope with the digital economy, but said that Vodafone cannot support any one of the proposals presented in the consultation and instead suggested picking out “aspects” that could be supported.
However, Naspers, a multinational internet and media group headquartered in South Africa, believes reconsidering the ALP may be necessary to tackle tax-base erosion.
Nevertheless, many multinationals support keeping the ALP, but are open to changes that would make taxing the digital economy simpler, recognising the need for change to address the digital economy.
The Carrefour Group, which is breaking into the digital space, believes existing rules are inadequate and impact existing brand businesses with brick-and-motor operations.
“Carrefour hopes that a fair-trade solution will be found at the international level so that the profits realised by the same customer are subject to a minimum tax, wherever the location of the seller,” Eric Anthoine, group tax director of the Carrefour Group, wrote in his response to the consultation.
The French multinational retailer said its digital competitors are companies with strong digital components, on which taxes are weakly imposed in states where customers exist, many of who are the same as those that shop at Carrefour. Thus, a sale to the same customer of an identical product for the same price gives Carrefour a tax burden that is greater than that of a digital competitor.
The first pillar has sparked the most debate because it suggests three rival proposals:
The first is to create a regime of robust marketing intangibles rules;
The second is to apportion residual profits according to number of users; and
The third, which would focus on the concept of a ‘significant economic presence’, could perhaps open the door to formulary apportionment.
Tax professionals see the clarity of proposals in isolation, but criticise implementing them together when each presents a different and competing rational that threatens existing transfer pricing principles, especially the application of the ALP.
One approach suggested by Johnson & Johnson is to combine the proposals to find a more defined nexus and enhance the ALP for profit allocation.
Weingrod and her colleague Katherine Amos, vice president of global transfer pricing and tax disputes at Johnson & Johnson, suggested a multi-part solution in their comments to the OECD. “We take a broader consideration of market value that can be used across countries that disagree over intangibles too,” they said.
The Johnson & Johnson solution uses a formulaic method that starts with setting a base rate and using three levers: assessing group profitability and profit allocation in local markets, analysing business marketing expenditure on a country-by-country basis, and setting profitability targets for local market activities to limit the impact from other areas of the supply chain.
The solution aims to adjust profit targets for particular business targets and achieve a simple approach to taxing digital activities.
But Vodafone’s Glenn Price argued that any of the pillar one proposals that are applied to MNE groups for methodologies that are not completely relevant will lead to “immense problems”, including the government not collecting planned corporate tax revenue, significantly more inefficient tax disputes and double taxation. “This would impact established brands who were never previously the target of the OECD’s work on the digital economy,” he said.
However, Carrefour’s Eric Anthoine thinks the OECD’s first pillar proposal on marketing intangibles is satisfactory to the extent that it relates to all sectors, refers to existing concepts of intangible assets, and simple profit allocation guidelines are retained, such as a system based on objective application thresholds and base allocation ratios, like turnover.
Vodafone, however, suggested combining all of the pillar one proposals to better define nexus and enhance the ALP for profit allocation.
“If nexus and profit allocation can be adequately addressed in one complete package, the global anti-base erosion proposals within pillar two will be unnecessary,” Price said. His consultation response stated that the telecommunications company doesn’t believe the proposals in pillar two are appropriate, nor that another “radical and complex overhaul of the international tax framework” is necessary.
Multinationals agree that improvement to nexus rules is necessary, but more time is needed to evaluate the OECD’S proposals and how users and market intangibles contribute to the value chain. There is still widespread disagreement on the proposals, but they have led to businesses to consider a solution that either enhances or works parallel to the existing ALP.
