Pillar One Amount B: Simplifying the Arm's Length Principle for Baseline Distribution Activities (Submission to the OECD/Inclusive Framework on 1 September 2023 in Response to the 12 July 2023 Public Consultation Document on Pillar One Amount B)
11 Pages Posted: 3 Oct 2023 Last revised: 12 Dec 2023
Date Written: September 1, 2023
Abstract
Pillar One Amount B has the potential to improve tax certainty and reduce administrative costs of implementing the arm’s length principle as outlined in the OECD Transfer Pricing Guidelines (TPG). The key to achieving this result is to recognize that Amount B is an example of a group of economic policies known as “rate-of-return regulation”, a literature that has been well studied by economists. To increase the likelihood of success while minimizing the unintended negative consequences that often accompany rate-of-return regulations, I recommend the following. The best way forward is for the OECD Secretariat to shoulder the task of creating and publishing benchmark rate-of-return reference prices that can be used by taxpayers and tax administrations as safe harbors coupled with the multilateral Memoranda of Understanding (MOUs) already included in the TPG. The scoping criteria and rate-of-return metrics would need to be carefully designed, with the criteria publicly available so that others can replicate the findings, and the OECD Secretariat would need to bear the annual cost of creating and publishing the index. In effect, Amount B could become an international public good provided by the Secretariat to the global tax community, by recommending appropriate ranges of rates of return for baseline distribution activities but also allowing the tax community to adjust those prices for local circumstances. Over time, public trust in the published index would grow as taxpayers and tax administrations grow more comfortable with the methodology and the results. The Secretariat could then extend this process to other baseline activities, with the added benefit of enhancing the arm’s length principle.
NOTE: An article that draws on this OECD submission was published in Tax Notes International (October 9, 2023) and is available for download, with permission of Tax Analysts, at:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4628960.
Keywords: transfer pricing, international tax, BEPS, Amount B, Pillar One, rate-of-return pricing, reference pricing, distribution
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