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INSIGHT: Are You on the OECD Pillar One Black List? The Winding Road Ahead

March 3, 2020, 8:01 AM

Following the conclusion of a two-day meeting on Jan. 29-30, the OECD issued a package of documents that update the state-of-play regarding Pillar One. The G20 meetings currently held in Riyadh endorsed the OECD initiative backing the need to pay tax where business is conducted and the need for a minimum rate. The OECD warned that leading world economies must show unity in dealing with aggressive tax optimization.

The call for unity was aimed directly at the U.S. Referring to the presumption that the Trump administration is holding off because of the U.S. elections, German finance minister Olaf Scholz warned that “There is no time to wait for elections.” Also in a rare example of Japan criticizing the U.S., Japanese finance minister Taro Aso stated “I told my counterparts that Japan is very concerned about the ‘safe harbor’ proposal.”

Progress to Date

Pillar One would require that companies in certain industries would need to completely revamp their transfer pricing policies. They would on balance be paying more tax especially in countries which represent their major sources of revenue. The Oct. 9, 2019, release by the OECD laid out the Unified Framework (which the U.S. had agreed to) received over 300 comments at the meetings held by the OECD on Nov. 21-22. Then, on Dec. 4, Treasury Secretary Steve Mnuchin stated that the rules should be regarded only as an optional safe harbor. On Jan. 31, the OECD came out with a more specific set of guidelines that reflected the comments received.

The OECD ‘Black List’

On Jan. 31 the OECD release identified with somewhat more specificity, what will we call a “black list” of industries that would be subject to Amount A—which is a share of the global profit due to market intangibles.

Pillar One was originally intended to deal with digital industry but then morphed into including consumer-facing industries.

The Jan. 31 release includes these consumer-facing businesses, which the OECD notes is not an exhaustive list:

  • personal computing products (e.g. software, home appliances, mobile phones);
  • clothes, toiletries, cosmetics, and luxury goods;
  • branded foods and refreshments;
  • franchise models, such as licensing arrangements involving the restaurant and hotel sector; and
  • automobiles.

Recap of the Three-Tier OECD Model

Companies on the Black List would be subject to three-tiers of profits (code-named Amounts A, B, and C).

By contrast, other companies would be subject to just Amounts B and C.

As will be recalled, (1) Amount A is a share of the global profit due to market intangibles, (2) Amount B is a normal baseline profit, and (3) Amount C is an additional profit if the market entity does more than baseline activities.

Handling the USA—Possible Make or Break Issue

To the surprise of the OECD, in December 2019, the U.S. Treasury Secretary threw a grenade into the process by stating that Pillar One should be only optional—a hard-line reaction that accords with the Trump administration withdrawal from international entanglements and refusal to accept rules formulated by international bodies like the WTO.

The U.S.-recommended voluntary or safe-harbor approach is unpopular among the other members of the Inclusive Framework (IF). The OECD points out that “Many IF Members express concerns ‘safe harbor’ basis could raise major difficulties, increase uncertainty and fail to meet all of the policy objectives of the overall process” and goes on to add that “although the final decision on the matter will be taken only after the other elements of the consensus-based solution have been agreed upon resolution of this issue is crucial to reaching consensus.”

Black List Strategies

The three-tier model is a radical and in many ways poorly-crafted re-write of decades-long, transfer pricing rules and a departure from the arm’s-length principle (ALP) to create what the OECD terms a more fair system. It shifts profits from the home country of the multinational (e.g., the U.S.) to the major markets (e.g., China) through allocating a portion of the global profits (Amount A) to the market country on the premise that the market country has contributed to global intangibles.

Of course, the current transfer pricing policy of multinationals (Status quo) does not have three-tiers and so there could likely be a big gap between the actual profit allocated by a U.S. multinational to China compared to the profit under the three-tier model.

Our main prediction is that the application of the three-tier model will incline to assigning equal profit rates across major markets. So, for example, the application of the model may result in China and Japan both receiving a total three-tier profit at rate of 12%, but the reality may be that current profit in Japan is 3% and in China it is 14% because of market conditions.

Should the gap be closed? Or should U.S. multinationals take the position that the three-tier model is a safe harbor and that they would remain with the Status quo? And, how would other countries which have adopted the OECD Pillar One react to the U.S. multinational position?

Opportunity for Companies on White List

The Jan. 31 release will bring a sigh of relief to industrial companies—such as semiconductors—in that the release states that “Businesses selling intermediate products and components that are incorporated into a finished product sold to consumers would be out of scope.”

But this does not mean no action is necessary: (1) Amounts B and C—normal baseline and super-baseline—still apply. And of profound concern is that China, Korea, India, and other countries have taken the position in audits that “market intangibles” can be created by all companies including those in sectors such as software and semiconductors.

Pillar One represents a fine opportunity for industrial companies to update their transfer pricing model. The position to take is that OECD Pillar One has exempted them from Amount A—global profit allocation due to market intangibles—and so they need only report Amounts B and C.

The Chinese have not codified their position on market intangibles—and under President Xi are ever-more committed to respecting global norms—and thus an industrial company is now in a much stronger position to argue that their China profits should be limited to Amounts B and C.

The 11 Work Streams

There are 11 controversial areas and each has a working party (such as transfer pricing or tax treaty). The 11 specific work streams are summarized below:

1. Scope of Amount A: This remains the most critical area. This work stream will address the definitions of “consumer-facing businesses,” “automated digital services,” and other key terms. It will also develop appropriate revenue and profit thresholds, and consider and define carve-outs.

2. New nexus rules and related treaty considerations for Amount A: This work stream will work on the new nexus rule and will be carried out by the OECD working party responsible for tax treaties.

3. Tax base determinations: This work steam will examine a host of technical issues, for the purposes of computing tax base for Amount A and will be carried out by the OECD working party responsible for transfer pricing.

4. Quantum of Amount A: This empirically-focused work stream will identify thresholds for the percentage(s) of profit that represents the deemed residual return and work on the applicable formula for determining the portion of residual profit allocable to market jurisdictions, and will be carried out by the OECD working party responsible for transfer pricing.

5. Revenue sourcing under Amount A: This work stream will design the rules that allocate revenues to specific market/user jurisdictions.

6. Elimination of double taxation under Amount A.

7. Interactions between Amounts A, B and C and potential risks of double counting.

8. Features of Amount B: This work stream will address definition of baseline distribution activities, the use of fixed percentage(s), appropriate profit level indicators, the impact of differences in profit margins across regions and industries.

9. Dispute prevention and resolution for Amount A.

10. Dispute prevention and resolution for Amounts B and C.

11. Implementation and administration.

Target End of 2020

The ambitious schedule targets Pillar One to be finalized by the end of 2020.

Black Swans—Incorporating Them into Pillar One

The black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise. The term is based on an ancient saying that presumed black swans did not exist—a saying that became reinterpreted to teach a different lesson after black swans were discovered in the wild.

The Coronavirus is an example of a black swan event that has disrupted supply chains and impacted markets. For example, Burberry fell victim to its exposure to Hong Kong and mainland China. Chinese spending globally accounts for 40% of Burberry’s retail sales, a company spokeswoman said, in line with the average for the luxury sector as a whole. The label said 24 of its 64 stores in mainland China were closed and there was a significant decline in the number of shoppers visiting its remaining outlets, which were also opening for shorter periods each day. The Burberry stock lost 11.4 percent of its value in January.

The question becomes in such a case should the Burberry retail entities still be entitled to their normal allotment of Amount A, or should that be adjusted downward to reflect the fact that they may be actually in a loss position on strictly economic grounds?


Pillar One will provide a globally-agreed framework to deal with issues that countries have already been addressing in a unilateral and uncoordinated manner. It promises a fairer and more certain way forward. There are many uncertainties, and it is hoped that the 11 work streams will hopefully clarify and codify the manner in which Pillar One is to be implemented. In meantime, we suggest that U.S. multinationals act proactively to address the challenges and possible opportunities of Pillar One. To quote OECD head Angel Gurria, “A coordinated answer is not the better way forward, but given the alternatives, the only way forward.”

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Glenn DeSouza is a national transfer pricing leader at Dentons China based in the firm’s Shanghai office. Glenn may be reached at