#OECD#Pillar1: are we looking at this through the right lens?

There might be no such thing as the “right” lens, and all stakeholders have vested interests in the latest developments on Pillar 1. MNEs have each their own situation and exposure, and Tax Administrations might have converging and diverging interests. This post will attempt to focus on what the author believes could be converging points.

this post is based on the article Beyond and Beneath the ALP, that can be found below.

the most frequently advocated alternative (to the ALP) is some kind of formulary apportionment […], proponents of such alternatives not only have to show that their proposals are theoretically “better” but that they are capable of winning international agreement.”

John Neighbour, OECD Observer January 2002

This statement, in the current context, gives rise to the following remarks

  1. It can be sincerely aknowledged that most amendments to the Guidelines since Chapter IX in 2010 have contributed to craft a “technically better” ALP
  2. Tax administrations and MNEs might not be better off, as the whole arsenal of new measures spreads to the analysis of relatively “simpler” transactions in the global value chains and generates an increased uncertainty on the allocation of profits, with increased pressure on fiscal policies and on ETR. MAPs statistics do confirm.
  3. Unlike in 2002, there is momentum for a formulaic approach to win international acceptance, and MNEs have contributed to bring the debate to center stage, they shall not be the only ones.


Momentum can be defined by a mass and velocity, two features we have all witnessed since BEPS was launched. When applied to the adoption of a formulaic approach to profit allocation within MNEs and between countries, two main intertwined observations can be made:

  • although economists would have the natural tendency to advocate for a comprehensive economic model, a complex model will just fail to gain rapid acceptance. If a relatively simple model should be retained, then it can only be applicable to the less idiosyncratic function of MNEs so as to avoid generating major distortion: Distribution and Promotion in the markets. That might be the condition to maintain Velocity.
  • so as to achieve Mass, then such simplified economic model (sounds better than formula) should have the highest possible reach, and tackle the functions that have the highest geographical dispersion. Yes, right, Distribution and Promotion. A quick glance at MAP statistics should be enough to validate the point.

Now is not the time to drop another formula in the landscape, 2020 might be the moment where we get into the inextricable details of simplification. One can nevertheless say that there could soft consensus on the potential approach:

However, it might be necessary to try to resist to the temptation of customization (for example by industry, or by level of market to try to capture more activities than Distribution & Promotion), for at least two reasons:

  1. once a review by industry is engaged, there will probably be a push for increased customization based on value drivers of each industry, affecting potentially the formula structure itself by Industry?
  2. designing a system with metrics by industry has not always been the most effective approach (even if it will evolve, the Brazilian TP regs with fixed margins by industry have proven this), and clearcut definitions of “industry” (and sub-segments) might generate additional debate.


Addressing the technicalities beyond this formula will without a doubt require the input of the global tax and transfer pricing community, and the details to be solved are numerous.

Put aside the crucial definitional aspects (financial referential, ratios for operating the comparisons, delineation of system profits), general concern exists regarding the articulation with other regulations affecting intercompany transactions within MNEs such as for instance customs and indirect taxes. Additional questions are related to the treatment of losses, the need to qualify or not for the simplied approach (and the relevant criteria), and the extension to such approach to other “simpler” functions such as manufacturing and services.

There is no doubt that providing sound and common answers to these questions will require a high investment from Tax Administrations, multilateral bodies such as the OECD but not only, and of course MNEs. Now as an in-house professional, you might wonder what would make such investment worth. In other terms, what’s in there for tax and transfer pricing professionals of MNEs?

Surveys point out that risk management and ETR predictability, upskilling/reskilling of workforce and data/digital mastery are of paramount importance for Global Tax departments in their current transformation. Pillar 1 morphing into a formulaic approach for the allocation of profits to Distribution and promotion should allow the first two, and requires the third one, which is anyway an established (though seldom achieved) requirement.

Achieving an unprecedented level of certainty and simplification for such a large number of intercompany transactions should allow in-house tax and TP professionals to focus the most significant and technical transactions, planning and business partnering and deliver more value. This is a condition for upskilling to unfold.

Will this come with an ETR cost associated to higher profits to the markets? For groups sourcing countries from low tax countries, there might be little doubt. For the others, the relative global equalization of tax rates (that could be even fostered by pillar 2) should reduce the cost. Nevertheless, such primary ETR costs need to be put into perspective.

Costs might be partially mitigated by a decrease of i) interests on tax basis movements (because of the avoidance/reduction of assessments and resulting MAPs), i) penalties and i) reserves for double taxation for a significant amount of transactions. To these benefits, one should add an expected reduction of compliance costs (TP documentations should evolve, at the very least), probably leaner teams (either centrally or locally) and, not a negligible factor, a significant reduction of consultancy fees in countries.

Finally, this could also limit the exposure on reputational risks by an increased transparency and limit the number (and costs) of sometimes painful and long inquiries by tax administrations and other bodies (Senate, foreign exchange control agencies, etc.)

It will not come easy for sure, and the stakes are high. It is the moment when the transformation of the tax landscapte goes hand in hand with the transformation of tax departments within MNEs and the reshaping of the transfer pricing landscape.

Has the ALP been disavowed? A certain vision of the ALP is certainly in question, and it will be necessary to go beyond functional fixedness. If there is a possibility to design a system where resources are allocated to solve the main transfer pricing challenges in the tax arena while the rest is solved through an imperfect though efficient model, then it should be seriously considered and/or supported.

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