When it comes to multilateral tax policy negotiations, taxpayers and their advisers have been justifiably distracted by the OECD’s agreement this month on a “side-by-side” framework for the vision of a 15% global minimum tax.
But as if one uphill multinational tax battle weren’t enough, a parallel process continues apace at the United Nations, whose Framework Convention on International Tax Cooperation is due to reconvene in February.
These two consultations present a dilemma for international tax and transfer pricing practitioners in that they overlap in scope, albeit incompletely, and so far have reached divergent conclusions on objectives and prioritization.
In response, taxpayers and tax advisers should deepen the purview of their international tax and transfer pricing planning projects to include scenario analyses cross-referencing their geographic footprint with potential unilateral or multilateral policy changes.
The UN framework is particularly vexing in that fundamental questions of purpose remain unsettled, creating a bizarre range of proposed outcomes after more than a year of deliberation by the Intergovernmental Negotiating Committee, or INC, and its various subcommittees.
For example, a coalition of 24 developing nations proclaims to aim for an overhaul of the global taxation system, featuring a “formulary apportionment” approach that echoes the Organization for Economic Cooperation and Development’s own Pillar One initiative in its administrative and political infeasibility (though without following its mechanics).
Apportionment involves dividing a multinational company’s total worldwide or national profit among different tax jurisdictions using a pre-determined formula based on measures of its real economic activity in each location. This, in theory, addresses many developing countries’ allegation that multinational enterprises routinely use transfer pricing to understate profits in their jurisdictions.
Meanwhile, delegates from developed countries politely ignore appeals for apportionment and instead push the more limited ambition of promoting and expanding access to transfer pricing databases and controversy-resolution mechanisms.
Left in the lurch are tax practitioners, who must plan real-world tax strategies and manage compliance while the UN forums and committees convene and reconvene.
I’ve previously highlighted some of the practical hurdles faced by even the most well-defined and limited of the INC’s transfer pricing aspirations. Now 20 months ahead of the deadline for the UN framework’s deliverables, the prospects for alignment and consensus have only dimmed.
Some tax practitioners might be tempted to ignore the conversations at the UN altogether. This would be unwise, because the grievances raised and alliances formed during the negotiations raise the specter of unilateral or regional action if the talks fail.
For example, developing countries may pursue or revive gross receipts, digital services, or border adjustment taxes outside the confines of the UN or OECD forums—raising the risks of retaliation from countries such as the US and double taxation for multinationals.
For transfer pricing specifically, taxpayers and their advisers can address those challenges through:
- Planning. Consider corroborative “holistic” analyses such as the profit split, which allocates income to affiliated entities proportional to their contribution to overall group profit, rather than relying exclusively on the more common, one-sided “tested party” analyses. Plan globally, with each relevant jurisdiction’s existing and prospective rules in mind.
- Implementation. Optimize enterprise resource planning and financial systems to ensure that intercompany margins can be tracked throughout the supply chain, and that operational and management financials can be reconciled with year-end tax filings.
- Compliance. Monitor transfer pricing filing requirements and documentation standards for each jurisdiction. Where applicable, consider safe harbor or margin guidance, such as those accepted in the US (via the OECD’s Pillar One, Amount B), India, Australia, and others.
- Controversy. Consider advance pricing agreements for significant transactions between countries with robust APA procedures but expect a lengthy and costly process. Short of APAs, prepare preemptive “controversy manuals” proactively defending the allocation of income between jurisdictions, especially as related to complex transactions or countries adopting or considering aggressive tax enforcement policies.
Do this in close coordination with international tax and legal stakeholders who, for their part, should contingency-plan for gross receipts tax exposure. Stakeholders, meanwhile, should expand the scope of permanent establishment risk analyses to consider the possibility that jurisdictions use this concept to expand their taxation rights over multinational operations.
Daunting though this sounds, tax professionals have unprecedented access to powerful analytical tools, including fast-improving artificial intelligence solutions, which make such multi-dimensional planning (relatively) more manageable.
This brings us to a final recommendation: Deploy personnel and budget resources thoughtfully and intentionally. Time and monetary constraints require constant prioritization and triage, and the growing complexity of multinational tax and transfer pricing requires a broad-based reshuffling.
Multinational tax and finance teams, as well as CPA and advisory firms, should hire multidisciplinary talent—such as professionals with a background in customs, law, or even software engineering. Transfer pricing budgets should evolve to focus less on compliance for compliance’s sake, but rather on a risk-weighted, strategy-focused approach that prospectively identifies jurisdictional, regional, and global policy trends that are likely to affect their specific business models.
The UN’s floundering tax talks show that multinational tax cooperation may still be a distant dream, but for taxpayers and advisers, it’s time to wake up.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.
Author Information
Chad Martin is a principal of transfer pricing services at Eide Bailly.
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