Comments to the OECD on the Pillar One Bleuprint

On October 12, 2020, the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (the “IF”) issued Tax Challenges Arising from Digitalisation – Report on Pillar One Blueprint (the “Pillar One Blueprint” or the “Blueprint”),1 Tax Challenges Arising from Digitalisation – Report on Pillar Two Blueprint, and a related Public Consultation Document on the Reports on the Pillar One and Pillar Two Blueprints (the “Consultation Document”). Among other things, the Consultation Document seeks public comment on 12 specific questions related to the Pillar One Blueprint. The IF issued the Pillar One Blueprint to address the tax challenges arising from today’s digitalizing economy. The Pillar One Blueprint focuses on nexus and profit allocation and sets forth a new framework by which a portion of the residual profits of a multinational enterprise (“MNE”) having active and sustained participation in the economic life of market/user jurisdictions, with or without the benefit of local physical presence, could be allocated to those jurisdictions (“Amount A”). The Pillar One Blueprint further sets forth the technical framework to determine Amount A and thresholds to minimize compliance costs for taxpayers and to enhance the administrability of the new system by tax administrations. The Pillar One Blueprint also provides a framework for determining a fixed rate of return on baseline marketing and distribution activities (“Amount B”), which is intended to approximate results determined under the arm’s length principle and to provide certainty for taxpayers. In this document we provide comments to the 12 questions in the Consultation Document drawing from our experiences in advising our clients on U.S. transfer pricing laws and related tax issues, as well as unilateral, bilateral, and multilateral Advanced Pricing Agreements (“APAs”). We commend the IF on the Pillar One Blueprint’s detailed technical framework and its focus on the need for tax certainty and avoiding double taxation. We offer suggestions on how to refine that framework in order to maximize tax certainty around Amount A, including in respect of scope issues, the proposed nexus and sourcing rules, and methods for determining the tax base and eliminating double taxations, as well as comments on Amount B and tax certainty processes. 1