B Positive

The Organization for Economic Cooperation and Development released on Monday a seemingly definitive report on “Amount B,” a crucial part of the Two-Pillar Project which aims to simplify the transfer pricing of routine baseline and distribution transactions to free up resources for both taxpayers and tax administrations.

As is often the case, what’s most interesting about the report is what isn’t in it. Specifically, it contains virtually nothing about how this mechanism will fit within the proposed multilateral convention to implement Amount A, the new tax regime that will capture online-only transactions as well as sales of all types in the jurisdictions where the consumers are located. Amount A and Amount B were initially supposed to be part of the same policy–with Amount B as an incentive for developing countries to join in–but now that seems to be up in the air, with the OECD’s announcement promising “further work” on the “interdependence” of the two Amounts by the end of March.

That is, incidentally, when the OECD has said they’ll release finalized language for the Amount A MLC.

Most of the Amount B report reads like it could be something that countries apply on their own, whether or not it’s part of a bilateral tax treaty. The formulaic system for apportioning income for some routine functions, mainly wholesale distribution arrangements and marketing, will be added to the OECD’s transfer pricing guidelines, which countries usually use as the basis for their own transfer pricing regulations. It will be one of the few areas in the OECD system where formulaic determinations can take the place of the use of arm's-length comparables to determine pricing.

Although the guidance also concedes that it could get messy if this conflicts with a bilateral treaty that has a mutual agreement procedure in place to resolve disputes and prevent double taxation–which would take precedence over Amount B. According to the report, however, all of the Inclusive Framework members agree to respect the Amount B results when “low-capacity jurisdictions” (soon to be listed) apply it.

Without quite saying it, it sure looks like the OECD and the Inclusive Framework, the 140-country coalition that is also part of the Two-Pillar process, are positioning Amount B to survive on its own, if Amount A should fail to get off the ground. Which many are predicting.

The devil is in the details–but with Amount B it’s all details.

Despite the lack of clarity about how exactly it will be carried out, the OECD’s latest report does answer many of the outstanding questions about Amount B. It resolves the dispute about whether it will be a voluntary or mandatory system by giving countries the option to do either. It can either be a safe harbor which corporations could opt into for certainty, or a requirement that both taxpayers and tax administrations must follow. 

This could be a key decision, because this early it’s not clear that Amount B is going to produce results that either party always likes.

It also took another move towards the side of developing countries by agreeing to keep digital transactions out of the scope–which means they can still be subject to more aggressive auditing. Many trade organizations and taxpayers pushed for digital goods and services to be included under Amount B.

On the other hand, the OECD included formulaic, quantitative criteria for determining Amount B’s scope, which was a key request from business groups. This is a key issue, because one of the major fears with the policy is that it will shift disputes from pricing to questions about whether or not transactions are truly routine. A formulaic determination could decrease disputes but perhaps also let some important non-routine functions slip by.

While the groups were apparently able to find consensus on many of these issues, India posted a series of reservations that were noted in the report. Their objections were not about insignificant details–they included the lack of a definition for “low-capacity jurisdiction” (not clear if the soon-to-be-published list will satisfy this) as well as the scoping criteria and many of the factors used in the Amount B formula. India isn’t a member of the OECD, but it is one of the largest emerging markets and part of the G-20–if it ultimately opts out of Amount B, who knows what it could mean for the project.

At least that I can tell, the report never states that Amount B needs to be carried out with the support of a bilateral treaty–how transfer pricing adjustments are often made. But under some scenarios, without a treaty it likely wouldn’t work. The OECD makes clear that a country using Amount B cannot bind its treaty partner to the result, and should they enter into dispute-resolution mechanisms, those take precedence. 

One way that Amount B could live on, even as Amount A flounders, is if countries push for it to be included in future treaties. That means it could take a while for it to work into the global tax system–but once it does, it will have a force of law beyond countries’ own discretion. Or, countries could use it as a new, OECD-sanctioned transfer pricing method, and hope that treaty partners will begin to do the same.

Amount B persevering on its own–possibly with another name, to prevent confusion if Amount A is consigned to the history books–is starting to look inevitable. And it could help the OECD make the case to the developing world that they’re taking their interests seriously, especially as the United Nations continues to form its proposed alternatives.

But while simplifying routine transactions could be a major step forward for cash-strapped tax administrations, it’s not a cure-all. And it doesn’t address many of the fundamental issues that poorer countries are concerned about–lack of expertise for the trickier cases, tax competition still enabled by the global minimum tax, stronger taxing rights for destination and workforce-based taxation, just to name a few.

Amount B, in a sense, is the low-hanging fruit. The OECD will likely have to work harder to remain the sole arbiter of global tax issues.

DISCLAIMER: These views are the author's own, and do not reflect those of his current employer or any of its clients. Alex Parker is not an attorney or accountant, and none of this should be construed as tax advice.

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LITTLE CAESARS: NEWS BITES FROM THE PAST WEEK

• The United Nations' ad-hoc committee on taxes (technically the committee to "Draft Terms of Reference for a United Nations Framework Convention on International Tax Cooperation" held its first three-day meeting on Tuesday. The body elected Egyptian Assistant Minister of Finance for Tax Policy and Reform Ramy Youssef as chair. Really, though, the important news is that these meetings are happening, continuing a process that began when the UN General Assembly voted in November to investigate creating a tax forum to rival the OECD's. As noted above, the OECD is looking to reaffirm its commitment to the interests of developing countries to fend off this encroachment onto its turf--it will be interesting to see how this plays out in the months and years ahead.
• The Senate Finance Committee released a report Wednesday on "private placement life insurance," a niche insurance product which Committee Chairman Ron Wyden, D-Ore., said is being used by the ultra-wealthy to shield investments from taxation. It's all part of the "Buy, Borrow, Die" tax avoidance scheme, he claims, in which the owners of wealth allow it to accumulate while borrowing against their assets to enjoy their lifestyles while avoiding realization and taxation. This includes money that is held offshore–the report claims that PPLI may be used to shield assets from the Foreign Account Tax Compliance Act, which requires foreign property and cash held by Americans to be reported to the IRS. Expect to see continued focus and legislation in this area.
• The European Council removed four jurisdictions–Bahamas, Belize, Seychelles and Turks and Caicos Islands–from the European Union's controversial blacklist of "non-cooperative" tax havens. The Council said that the countries met their criteria for removal, including having their tax regimes approved by the OECD's Forum on Harmful Tax Practices. The blacklist allows EU members to take protective measures against taxpayers and transactions in those jurisdictions. This update is another reminder of the pressure that nations once branded as tax havens now face to change their rules in the new global environment.

PUBLIC DOMAIN SUPERHERO OF THE WEEK

Every week, a new character from the Golden Age of Superheroes who's fallen out of use.

Captain 3-D, first appearing in Captain 3-D #1 in 1953. Confusingly, Captain 3-D's superpowers--like flight--come from the fourth dimension, apparently. But he was preserved only in 2-D, trapped in a book in a used bookstore after his people, who were just called D, were destroyed 50,000 years ago by the "Cat People."

NOTE: This newsletter will be off next week for vacation.

Contact the author at amparkerdc@gmail.com.