Pillar One Amount B

We have submitted our comments to the public consultation on the discussion draft on a simplified method of allocating rights to tax MNE profits referred to as Amount B.

We strongly support the need for simplicity and certainty in allocating the rights to tax MNE profits, but this can only be achieved through formulaic methods. Complexity results from attempting to attribute profits by examining affiliates of MNEs in isolation and through one-sided transfer pricing methods. This is beyond any tax administration’s capacity in practice, because it requires a time-consuming examination of the facts and circumstances of each individual entity to determine the functions it performs, followed by an illusory search for independent firms performing comparable functions. It is also mistaken in principle, because it disregards the reality that an MNE’s affiliates are integral parts of a unitary corporate group, all contributing to its global profits. Hence, one-sided methods result in a systemic under-allocation of profits for functions deemed to be ‘routine’, while the ‘residual’ super-profits can be attributed to low-taxed affiliates.

The current proposal attempts simplification by focusing on a specific type of function, ‘baseline’ marketing and distribution, to establish benchmark profit level indicators through data-mining techniques to identify comparable entities. It proposes a relatively narrow functional scope, wholesale distribution, but would use standard industrial classifications that cover distribution in a very wide potential range of industries, as diverse as commodities, construction, food, electrical products, household goods and intangible products. The benchmarks would also encompass all global markets, although data on comparables is often unavailable particularly for small economies, and the economics of distribution greatly depend on geography and local market characteristics. Term-search filters would screen out firms performing other functions, but scrutiny of individual accounts would also be needed to eliminate material differences in accounting treatment. Published studies have focused more narrowly on distribution in specific industry sectors, but even these result in a range of possible profit levels too wide to act as an effective check, and the discussion draft does not resolve the difficulty of specifying the appropriate point or spread on the range.

In our view, the approach now suggested would be both ineffective and inappropriate. An MNE’s profits from sales result from a range of activities such as product development, inventory and cost/quality controls, logistics, advertising, sales, marketing and customer support, which can only fictitiously be attributed to different entities. In practice wholesale distributors will have valuable information and data on local markets and customers. Limiting Amount B to supposedly ‘baseline’ stripped-risk functions will result in a systemic under-allocation of profit to sales jurisdictions.

Simplification should be done in line with the general approach in Pillar 1, of a formulaic allocation from the total global profits of the MNE. The original Amount B concept that came from MNEs in the consumer products sector proposed explicitly formulaic methods, and this would be a fairer and more effective approach. We suggest that the present proposal should be revised to present a formulaic method based on group-wide profitability.