In October 2019, the Organisation of Economic Cooperation and Development ("OECD") published a public consultation document on the so-called "Unified Approach" under Pillar I.
Pillar I is concerned with the allocation of taxing rights between countries and seeks to undertake a review of the profit allocation rules as provided under current principles of international taxation. The Unified Approach aims to cover highly digital models but also consumer-facing businesses more broadly, defined as "businesses that generate revenue from supplying consumer products or providing digital services that have a consumer-facing element".
The Unified Approach puts forward a new nexus rule which would be applicable in all cases where a business has a sustained and significant involvement in the economy of a market jurisdiction and irrespective of the level of physical presence in that jurisdiction. Once this new nexus is met, the OECD Secretariat suggests introducing new profit allocation rules which go beyond the arm’s length principle. These rules consist of a three-tier profit allocation mechanism, as follows:
(i) the residual profit of the Multinational Enterprise ("MNE") would be reallocated to market jurisdictions according to the new nexus test; (Amount A)
(ii) marketing and distribution activities taking place in market jurisdiction would be allocated a fixed return; (Amount B) and
(iii) any disputes arising about amount (ii) would be submitted to a binding and effective dispute resolution system (Amount C).
The proposal asked for comments on a number of points including how to differentiate between different business models, the elimination of double taxation and administration or compliance issues. Stakeholders were invited to submit comments on this point and a public consultation took place on 21 and 22 November 2019 in Paris. It is worth keeping in mind that the Unified Approach is a Secretariat proposal which means that it has not been endorsed by the members of the OECD or of the Inclusive Framework. In this respect, the US Treasury Secretary already expressed concerns regarding "potential mandatory departures from arm's-length transfer pricing and taxable nexus standards". Further details are expected to be published in the coming months.
OECD Releases its "Unified Approach" Proposal (Pillar I)
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ARTICLE24 January 2020