Readers who follow the evolution of international taxation are familiar with the political dynamics that led last year to the unprecedented agreement between 137 countries on the so-called two-pillar solution for the taxation of the profits of multinational companies ( EMN). The piecemeal adoption by many countries of digital services taxes and other unilateral tax measures targeting nonresident multinationals has prompted retaliatory action from the United States in the form of tariffs, or threats of tariffs, on a wide range of exports to the United States from these countries.
There was also a growing belief – encouraged by public comments from some government officials and OECD tax policy officials – that the transfer pricing guidelines followed in most countries were ineffective in preventing multinationals to shift their profits to low-tax jurisdictions, and were unable to produce clear results. results, leading to disputes over the distribution of MNE profits between different jurisdictions.
The proliferation of inconsistent unilateral measures leading to commercial retaliation, on the one hand, and the perceived problem of the allocation of profits of multinational enterprises under existing transfer pricing rules, on the other, seemed to constitute a threat of chaos in international taxation that could not be ignored. To address this perceived threat, the 140-member Inclusive Framework on BEPS, led by the OECD and heavily influenced by the Biden administration’s Treasury Department, adopted the two-pillar solution in October 2021. Central to the plan was a global agreement on a formula whereby the “excess profits” of very large and profitable multinationals (known as covered groups) would be distributed among the various countries where the multinationals’ customers were located. The amount allocated to a country according to the formula was called Amount A.
It was recognized that the use of the Amount A formula for a given covered group would involve a massive effort to harmonize certain income tax rules to be applied in many different countries and could lead to headaches important for taxpayers and tax authorities in the form of new compliance rules administrative charges and costs. It would also create the risk of multiple taxation of the same formula-allocated “excess profits” if different countries interpreted the new rules differently.
Therefore, the Inclusive Framework included in the plan a commitment to create “dispute prevention and resolution mechanisms” to provide tax certainty regarding Amount A allowances “in a mandatory and binding manner”. Assuming it can become a reality, this tax security benefit is one of two “carrots” offered to the multinational community in the two-pillar plan. The other is the elimination of all relevant unilateral measures such as digital service taxes.
On May 27, 2022, the OECD published two public consultation documents. One had proposals regarding multilateral tax certainty in determining Amount A allocations. The other had proposals regarding bilateral dispute resolution involving “Amount A issues,” which would include pricing disputes transfer and disputes regarding the attribution of business profits to a permanent establishment, and possibly other unspecified types of disputes.
The proposals for a globally consistent application of the Amount A formula involve three different types of review groups: one for certainty as to whether a multinational enterprise falls within the scope of the Amount A rules; another to gain prior certainty as to the correct approach to applying the rules for one or more future tax years; and a third for complete certainty of Amount A allocations for a tax year that has already ended. If a review committee fails to reach an agreement, the MNE’s case is referred to a determination committee which has the power to make a decision binding on all countries concerned. Proposals on transfer pricing dispute resolution, attribution of profits to the PE and (possibly) other Amount A related issues also include determination panels that can impose a binding decision on the countries involved .
Who will sit on these panels? The consultation documents indicate that this is still under discussion among members of the Inclusive Framework. Perhaps independent international tax experts will be used; maybe not. How will panel decisions be enforced? This is also unclear, which is not surprising since the Inclusive Framework is made up of sovereign nations who reserve the right to apply their national tax laws as they see fit.
There is very little history of compulsory and binding tax dispute resolution between countries. There is no history of settling competing tax claims of three or more countries regarding the taxation of business profits of a multinational enterprise. In another area of law related to cross-border activities, namely trade regulation, one can consider the experience of the World Trade Organization, which established a dispute settlement process when it was created in 1994, with review boards and an appeal body. body empowered to take binding decisions in the event of disagreement.
According to a recent article by the International Institute for Sustainable Development, the WTO appeal mechanism “isn’t working because the United States has blocked Appellate Body nominations, which has led to calling most panel reports “in a vacuum” and leaving the dispute unresolved.” Even before the Trump administration halted the process, the Obama administration indicated its dissatisfaction with the process.
The WTO, which has 164 members, held its first global meeting since 2017 from June 12-15 in Geneva. Unsurprisingly, member countries were unable to agree on how to reform the dispute settlement system. They did, however, agree to talk more about it.
It may simply not be realistic to think that independent nation states will ever cede any degree of sovereign power over their ability to regulate trade with other nations – or their power to tax non-resident businesses. having customers in their country as they see fit. The Inclusive Framework on BEPS will need to further develop its tax certainty proposals regarding Amount A, bearing in mind the experience of the WTO.
This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Jeff Vander Wolk is a partner at Squire Patton Boggs (US) LLP.
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