Katherine Amos, Johnson & Johnson’s (J&J’s) VP for global transfer pricing and tax disputes, is clear about what she wants: a simple, applicable set of rules that address companies’ concerns. Unusually for a head of tax, she makes no case that corporate tax rates should be lower; in fact, she’s comfortable with the idea they might be higher.
“We would really like whatever method ends up getting put in to be simple and certain. As I said at the [OECD] conference [in Paris]: for simplicity and certainty, we’ll pay more tax.”
Where other tax directors used the consultation to highlight the perceived problems with the OECD’s proposals, or to reiterate calls for transparency, mandatory binding arbitration, loss deductibility and more, Amos and her colleague Louise Weingrod, J&J’s company’s VP for global taxation, concisely set out a concrete and positive alternative.
Under Amos and Weingrod’s plan, analysed by TP Week in March, a formula would be used to calculate “local market profits” that would then be allocated to the market jurisdiction for taxing.
The formula begins with a base rate of 3% return on sales for a local market distributor, then applies three statistical ‘levers’ to adjust the amount based on the group profitability and the level of local marketing expenses, and to limit the profitability targets of local distributor activity by recognising that other parts of the business bear greater risks.
The arm’s-length principle could be salvaged
For someone who has come up with a proposal to apportion corporate profits between jurisdictions, however, Amos is unenthusiastic about departing from the arm’s-length principle (ALP).
“I think we need to keep the arm’s-length standard in place for more complex issues,” she says, “and the rest of the supply chain.” It’s only in the distribution return that “there’s an opportunity here [for a formulary method], and I hope that the OECD will grasp it.”
There is talk from various countries and the OECD’s tax department about ‘going beyond’ the ALP. Amos feels it is important to try to ensure that any departure from the ALP is limited in scope – better one clean break in a clearly delineated area than a messy one that leads to more departures from transfer pricing in the future.
So what is it that the arm’s-length principle actually can’t do? Where is it letting us down? Amos thinks those engaged in the conversation need to give the question more thought.
“One of the key questions is: what is it that we are trying to achieve? It was clear about the digital economies and the companies that don’t have the physical presence but have the benefit; it’s not so clear, really, what is the problem that we’re trying to fix around limited-risk distributor models.”
“I do think that needs to be better fleshed out before you can come to the final method to make sure that we’re all trying to achieve the same thing.”
When the conversation around how to cope with tax challenges arising from the digitalised economy sprung up initially, the main talking point was highly digitalised companies ‘reaching in’ to jurisdictions with an oversized economic presence with little or no physical presence. But that isn’t where the conversation has ended up, Amos says. Being a tax professional at an extremely ‘brick-and-mortar’ business, she’s unsure how people want or expect the tax structure of a group like J&J to be affected.
“What is it that we’re trying to solve here? It’s a little bit unclear that there is alignment on: how does it hit a brick-and-mortar company like J&J? Because we have physical presence in the vast majority of the countries that we have any material revenue in, and we have an arm’s-length price, we do TP documentation, so what is it that we’re missing?”
The proposal Amos wrote sets out from the assumption that what people really want is to apportion a bit more taxable income to market jurisdictions and to base this apportionment on the value of marketing. But she is guarded when asked whether she actually shares that analysis of what needs to be done – and sceptical of the idea that marketing should receive such heavy emphasis.
Are marketing intangibles really the answer?
“I’m not crazy, honestly, about the whole idea of marketing intangibles being reassigned, so my method is not necessarily right on the point there,” she says.
“I think it [marketing spend] is not a great measure,” she tells me. “I put the marketing spend in because what I’m commenting on is the ‘marketing intangibles proposal’.”
Amos says there is an appetite among other tax heads she has spoken to remove the ‘marketing’ component from the OECD proposal. “We’ve heard that a number of times – that it’s not the right way to go, and I agree. I don’t think it is the right way to go. I’ve also expressed that to the OECD.”
Amos’s paper uses three ‘levers’ to reassign taxable income to market jurisdictions. She envisages marketing expenses as the second lever, has crafted the proposal in such a way that this category of expenditure could be replaced with something else.
“If I could do it from scratch, without having the constraints of marketing intangibles, I would probably make my lever two… something more targeted towards the level of activities in a country.”
That would turn the proposal into an all-purpose reassignment of some taxing rights toward market jurisdictions.
The difficulty of residual returns
One area in which Amos’s practical experience as a tax head has informed her theoretic approach is on the question of calculating residual returns.
Her proposal’s main departure from the marketing intangibles proposal from the OECD consultation document – apart from its ambivalence towards marketing – is the fact that it eschews a residual returns calculation.
When asked if calculating residual returns so fraught and prone to disputes that it will tank any proposal that relies on it, Amos refers to her own job. “I will tell you that most of our TP disputes around the world are on: What is the level of return for a local sales, marketing, distribution company? And it is almost always around the return, and whether we have the right comparables.
“It’s not a productive conversation.”
Lightning rod proposal
But while that conversation may not be productive, the one sparked by the five-page J&J response to the OECD certainly has been.
Being ‘the only game in town’ has made Amos a lightning rod for other in-house tax heads who were initially nervous to put their heads above the parapet.
“We’ve had the opportunity to speak to other companies who are now emboldened to start thinking about methods that they think are good ideas, which I think is great,” she tells me.
She sees this as part of a wider policy debate and hopes that others will jump in with their own plans. “We would love to engage in a debate with our method or somebody else’s method and see whether or not we could reach consensus.”
This interview, which has been edited for length and clarity, is the first of a two-part series. This part focuses on the details of Amos’s proposals and the second part, which will be published tomorrow in at internationaltaxreview.com, focuses on the role tax directors can play in shaping public policy conversations.