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

See all articles by Lorraine Eden

Lorraine Eden

Dept of Management, Mays Business School, Texas A&M University ; School of Law, Texas A&M University

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

Suggested Citation

Eden, Lorraine, 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) (September 1, 2023). Available at SSRN: https://ssrn.com/abstract=4560131 or http://dx.doi.org/10.2139/ssrn.4560131

Lorraine Eden (Contact Author)

Dept of Management, Mays Business School, Texas A&M University ( email )

Dept of MGMT, TAMU 4221
College Station, TX 77843-4221
United States
979-777-3489 (Phone)

HOME PAGE: http://mays.tamu.edu/mgmt/

School of Law, Texas A&M University ( email )

1515 Commerce St.
Fort Worth, TX Tarrant County 76102
United States
9797773489 (Phone)

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