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Significant progress on countering harmful tax practices with almost 50,000 exchanges of information on tax rulings undertaken to date under the BEPS Action 5 standard

Excerpts from OECD Website, 14 December 2022

The OECD/G20 Inclusive Framework on BEPS released the latest peer review assessments for 131 jurisdictions in relation to the compulsory spontaneous exchange of information on tax rulings. This is the 6th annual peer review of the implementation of the BEPS Action 5 minimum standard on tax rulings, which aims to provide tax administrations with the necessary information concerning their taxpayers to tackle tax avoidance and other BEPS risks efficiently.

The 2021 Peer Review Reports on the Exchange of Information on Tax Rulings indicate that significant progress continues in countering harmful tax practices. Almost 50,000 exchanges of information have taken place to date in respect of the 23,000 tax rulings that have been identified.

The new peer review results also show that 73 jurisdictions are fully in line with the BEPS Action 5 minimum standard, with the remaining 58 jurisdictions receiving a total of 61 recommendations to improve their legal or operational framework to identify the relevant tax rulings and exchange information. The feedback given by Inclusive Framework members under this peer review process and in earlier years has allowed many jurisdictions to revise their processes and improve the clarity and quality of the information exchanged.

The Inclusive Framework will continue to pursue progress in this area, with the next annual peer review of the year 2022, to continue to track the progress of jurisdictions and actions taken to respond to any remaining recommendations.

Tax challenges of digitalization: OECD invites public input on the draft MLC provisions on digital services taxes and other relevant similar measures under Amount A of Pillar One

Excerpts from OECD Website, 20 December 2022

As part of the ongoing work of the OECD/G20 Inclusive Framework on BEPS to implement the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy, the OECD is seeking public comments on the draft MLC Provisions on DSTs and other Relevant Similar Measures of Amount A of Pillar One.

The draft MLC provisions reflect the commitments with respect to the removal of all existing DSTs and other relevant similar measures and the standstill of such future measures. These commitments are integral to achieve Pillar One’s goal of stabilizing the international tax architecture.

The Inclusive Framework on BEPS has agreed to release this public consultation document (également disponible en français) in order to obtain public comments, but the draft provisions do not reflect consensus regarding the substance of the document. The stakeholder input received on the draft MLC Provisions on DSTs and other relevant similar measures will assist members of the Inclusive Framework on BEPS in further refining and finalizing the relevant provisions.

Interested parties are invited to send their written comments* no later than 20 January 2023. Instructions for submitting comments can be found in the consultation document.

Transfer Pricing

An overview of Pillar One – Amount B public consultation document

The OECD/G20 has been relentlessly working to address tax issues arising from the digital economy’s challenges since the OECD’s initial recommendations of BEPS Action Plans. In 2019, a two-pillar approach was suggested by the OECD Secretariat. While Amount A under Pillar One provides new taxing right for market jurisdictions (where consumers and users are located), with a share of the MNEs residual profit being reallocated. On the other hand, Amount B talks about remuneration for certain baseline marketing and distribution activities having regard to ALP to enhance tax certainty and reduce tax litigations.

On 8 December 2022, the OECD released a document for public consultation to invite comments on design elements of Amount B with an intent to simplify and streamline the application of ALP to in-country baseline marketing and distribution activities.

The public consultation document lays emphasis on four different aspects:

Scope of Amount B

This section defines the scope of controlled transactions viz. distributors wherein Amount B would apply basis certain qualitative criteria (shall not undertake significant regulatory activities, shall not perform high value adding or specialized services or shall not generate unique intangible assets) and quantitative criteria (annual thresholds on marketing and advertising expenses, expenses incurred for aftersales support, packaging and assembly, etc.). Furthermore, the document states that accurate delineation of distribution function vis-à-vis sales agents or commissionaires is crucial while determining whether the latter should be considered within the scope of Amount B or not. The document seeks consultation on potential exemptions from the application of Amount B pricing methodology on account of the difference in the selection of MAM and/or availability of local market comparables.

Pricing methodology of Amount B

The proposed pricing methodology is aligned with the present practice wherein benchmarking analysis would be conducted basis data available in the public domain to ensure consistency and mitigate the risk of tax disputes. The following methodologies are being considered:

• Pricing matrix approach: The said approach would determine a range of variables basis output from the common benchmarking search criteria and a taxpayer would be responsible for establishing where they fall compared to subsets of the comparables grouped according to their economic characteristics.
• Mechanical pricing tool: An econometric model shall be used to translate the underlying data derived under the common benchmarking search criteria into mechanical pricing tools, such as a formula or quantitative adjustments, to reliably derive arm’s length profitability returns based on the weighting of economic characteristics of the tested party.

The consultation document recommends return on sales (net profit/ sales), return on assets (cases wherein entities do not own unique or valuable intangibles), berry ratio (gross profit/ operating expenses), or a combination of net profit indicators (profit level indicators) to be considered while calculating return for Amount B.

Documentation requirements

The documentation requirement is pivotal to ensure that tax administrations have sufficient and relevant information for the risk assessment of whether taxpayer’s control transactions are in-scope and that the pricing mechanism of the controlled transaction is in accordance with the Amount B pricing methodology.

The proposed documentation requirement aligns with the threetiered transfer pricing documentation approach. The section also lays emphasis on the disclosure of relevant information on business restructurings in the Master File and Local File that could result in the entity meeting the criteria for the application of Amount B.

Tax certainty

Application of Amount B to a controlled transaction requires the exercise of judgment by both tax administrations and taxpayers. There could be potential situations with respect to Amount B, which may lead to disagreements between the taxpayers and tax administrations. The document addresses issues that could surface on the application or operation of Amount B. The document draws reference to the Mutual Agreement Procedure and existing treaty arbitration provisions for resolving disputes, thereby eliminating any double taxation arising from the application of Amount B.

Our Comments

Amount B aims to address the challenges faced by the low-capacity jurisdictions that apply transfer pricing rules and helps them to re-stabilize the international tax system and minimize heavy costs incurred by businesses on account of transfer pricing disputes. It would be worthwhile to look at the responses received by the members of the Inclusive Framework that addresses the improvement areas and envisage how Amount B would operate.