As part of the complex two-pillar approach agreed by the OECD/G20 Inclusive Framework on BEPS (the Inclusive Framework) to address tax challenges in the digital economy, pillar one aims to ensure that the allocation of taxing rights on a part of the business profits of large multinational enterprises no longer requires physical presence in a jurisdiction.
Pillar one is based on three components:
Amount A, introducing a new nexus on market jurisdictions, where customers are located;
Amount B, identifying a fixed return for certain marketing and distribution activities; and
Tax certainty, to be enhanced through effective dispute prevention and resolution mechanisms.
As we await the full agreement by all members of the Inclusive Framework on the contents of a Multilateral Convention to Implement Amount A of Pillar One, progress on amount B is nearing completion. The Inclusive Framework released the Pillar One – Amount B report (the Report) on February 19 2024, which will be finalised once additional guidance, including qualitative scoping criteria to identify distributors performing non-core activities (‘baseline activities’), is published.
The Report will be incorporated into the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the OECD TPG) and jurisdictions shall decide whether to introduce the simplified approach in their tax systems starting from fiscal years commencing on or after January 1 2025.
The Commentary on Article 25 of the OECD Model Tax Convention will then be changed accordingly.
The amount B purposes are as follows:
To simplify the application of transfer pricing for baseline marketing and distribution activities. In this regard, the Report recommends a streamlined approach for applying the most appropriate transfer pricing method to remunerate in-scope transactions involving baseline marketing distributors, such as wholesalers, sales agents, and commissionaires.
To provide greater tax certainty for all involved parties, especially addressing the needs of jurisdictions that often lack local market comparables or access to commercial databases for transfer pricing analysis.
To prevent certain transfer pricing disputes.
Amount B can be implemented by jurisdictions under two options: they can allow taxpayers to voluntarily adopt the simplified and streamlined approach (i.e., a safe harbour) or they can mandate its use for in-scope transactions.
The search for tax certainty and elimination of double taxation
Although the simplification rationale behind amount B seems an interesting opportunity that tax administrations and taxpayers should evaluate, particularly regarding its potential as a reference for risk assessment purposes, the interplay of the simplified approach with tax certainty seems to be an issue not easily solved.
Indeed, as a general principle, the simplified and streamlined approach is elective for jurisdictions: its outcome applies only if both countries have opted for it (or have signed a competent authorities agreement). In other words, the effects determined under the simplified and streamlined approach by a jurisdiction are not binding upon the counterparty jurisdictions if the same election has not been made. In this scenario, the tax administrations must substantiate their positions in a relevant mutual agreement procedure (MAP) leveraging only on the other sections of the OECD TPG (the same principle applies in the arbitration procedure).
As a consequence, any outcome deriving from the application of the simplified and streamlined approach is not (always) certain and cannot (always) be considered reliable for the purposes of a MAP; in other words, amount B works on a level playing field only when all jurisdictions have applied the approach.
This adds another layer of complexity to an environment where positions are sometimes fixed. Some jurisdictions currently applying unilateral safe harbours are unwilling to change the transfer prices compliant with them in the context of a MAP, defending their stance and requesting the other competent authority to make a corresponding adjustment. This occurs despite the OECD TPG recommending to jurisdictions adopting safe harbours to be open to adjust their outcomes in MAP cases.
And it is also for this reason that members of the Inclusive Framework commit to respect the outcome based on the simplified and streamlined approach where adopted by developing countries (the list of countries included is yet to be released).
The introduction of a standardised regime for baseline transactions is valuable, both in terms of simplification and compliance costs. However, the choice made by the Inclusive Framework in favour of a unilateral and elective approach seems to limit the effectiveness in the elimination of double taxation. Notwithstanding the Inclusive Framework commitment, it is likely that the implementation of the new approach will require an additional effort and the development of a network of competent authorities agreements.
In conclusion, given the current status, amount B seems to be half effective and the only tool at the taxpayer’s disposal to achieve tax certainty remains the bilateral advance pricing agreement, which allows – only for ongoing procedures and for new applications – the prevention of double taxation even with reference to the application of the simplified approach.
