INSIGHT: Considering Some of the Issues and Proposals in the Digitalizing Economy Tax Debate

The debate in the OECD/G20 and Inclusive Framework on Base Erosion and Profit Shifting (BEPS) on the taxation of the digitalizing economy (BEPS Action 1) has always been politicized. The compelling, pervasive, and disruptive march of the fundamental changes that countries and companies are seeing as a result of the digital transformation of the world’s economies makes this an emotive issue for the voting public. It also poses challenges across a number of important public policy areas, not least the sharing of tax revenues that result from the allocation of tax rights provided by the international tax system. There is natural resistance to change because of the enormous effort and difficulty in reaching international consensus to change something that has worked effectively for well-established economies for many decades. Recently, the focus of the debate has been drawn to the taxation of a few, largely U.S., Internet companies. This is polarizing as much as it is short-sighted and unlikely to yield much-needed good tax policy. Clear heads and steady hands are needed.

It is clear to everyone concerned that frustration and impatience over the lack of substantive movement on BEPS Action 1 is very real across many countries—particularly those countries with large groups of digital economy consumers but a far lower taxable digital corporate presence. It is also equally clear that the unchecked adoption of unilateral actions—such as digital sales taxes intentionally placed outside of the current international corporate tax framework—is not conducive to a collaborative international tax policy development.

These measures, while populist, are also often ineffective at taxing some of their intended corporate targets, precisely because their market position allows them to pass on the tax to their users. In an effort to stop the propagation of unilateral measures, agreement to change should be linked to the withdrawal of unilateral measures. Time will tell whether it will be possible to withdraw these taxes where enacted, or whether yet another layer of taxation will take hold. The earlier ring-fencing of the debate to just digital companies is currently opened up to include a debate of the mainstream international tax system for all countries and companies. This significantly broadens the number of countries with economic interest in the outcome but also makes the process of reaching a consensus more difficult. This may lead to a more principled and resilient solution. On the other hand, it also might lead to the wider adoption of less than optimal, simplistic tax policies.

Within this politically charged backdrop, BEPS Action 1 policy-makers, as well as companies and advisors in the international tax community, are now squarely contemplating the future of the international tax system. The recent OECD document from May 2019, “Program of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalization of the Economy,” lists three approaches to revised nexus and profit allocation rules that will be the focus of the Pillar 1 working party: (i) the modified residual profit split approach (RPA), (ii) the fractional apportionment approach; and (iii) distribution methods. The proposals under these approaches are potentially a considerable departure from existing norms, including, ironically, the framework agreed to as a result of the rest of BEPS initiatives. In fact, the BEPS Action 1 proposals being considered are now colloquially dubbed “BEPS 2.0.”

In this article, we take a look at some of the proposals emerging under each of the approaches, contemplate some refinements that should be considered as part of good policy development in the area, and draw attention to an RPA approach that has many desirable attributes. The RPA approach seems to be able to embrace the goals of the initiative, be capable of simplification, smooth a transition, reconcile with the past and address many of the issues that might undermine the longevity of a solution. It is also an approach already in the public domain; specifically, we reference the IRS APMA Functional Cost Diagnostic (FCD) model.

FRACTIONAL APPORTIONMENT APPROACHES

We start with fractional apportionment approaches. These are generally versions of either formulary or “other” negotiated fractional apportionment. Formulary apportionment approaches attribute profits based on agreed measurable metrics, such as attributable revenues, assets, and employees, R&D spend, or marketing spend. These may be weighted or unweighted and/or include other measures, such as numbers of users by location, to address concerns over the appropriate attribution of taxable profits to markets in remotely run businesses or those that monetize large amounts of user data. Formulary apportionment systems exist in the U.S. state tax system and in proposals being considered by the EU under Common Consolidated Corporate Tax Base frameworks.

Negotiated fractional apportionment systems might assign returns to markets, activities, or contributions based on some predetermined ratios negotiated and agreed between a consensus of countries. These ratios will hopefully try to reflect economic contributions at a holistic level, but this would be at much more of a general and indirect level than any of the other methods under consideration. If applied, taxable profits might be fractionally apportioned between all the contributory factors to a business such as sales/marketing, brands, users/data, manufacturing/supply chain, product and technology, networks, business models and strategic management, or focused on just a few. The approach might be applied to global taxable profits, with allocations between countries based on measures of each country’s contribution to those profits (say, revenues, costs, people, etc.).

One idea being floated within this genre involves the attribution of an additional layer of deemed profits to markets, where deemed profits are derived by multiplying local market-attributable revenues by an adjusted market-attributable additional profit margin. The market-attributable additional profit margin would be based on the company’s global profit margin less some base level of exempt returns (say 10% of revenues), with a percentage (say 10%) of the remaining adjusted global profit margin agreed as the additional market profit margin. This deemed market-attributable profit would be taxable in market in addition to the current “transfer pricing” based taxable income earned by the local affiliate. Which market attributable revenues are used is still not clear, and it’s not clear whether this would also replace profits attributable to current definitions of permanent establishments. Deemed market-attributable profits might also be determined by business segment and/or market profitability, or perhaps different factors and ratios will be agreed for different industries or to reflect different local sales channels to try to fit the outcome to economic circumstances a little better. These “tweaks” would, however, increase the data and analysis required, and add a layer of potential conflict, which might detract from its advantage as a simple overlay that more countries can agree with in principle.

Tax authorities have informally referenced and used expectations of fractional outcomes in exam and mutual agreement settlement situations. Notably, in the 1990s Japan developed a view of the share of profits earned for different levels of local contributions from an analysis of deal terms in the pharmaceutical and medical device industries. Therefore, the approach is not completely new, and governments can peer behind the corporate confidentiality veil, anonymize data, and develop ratios that are based on economic evidence and principles. With similar corporate tax rates, effective tax credit systems, or Pillar 2 proposals on the global anti-base erosion (GloBE) that flatten overall tax burdens, companies may be less concerned at leaving the allocation of taxable income to governments to decide.

Fractional apportionment systems might replace almost entirely the current system of international taxation with all the incumbent implementation and transitional issues. The approach has the allure of simplicity and certainty with potentially lower costs of administration and enforcement, but the devil will be in the details, not least in accelerating the pace of adoption of uniform financial reporting and accounting standards. We foresee a long road ahead if this approach is selected, which might not be acceptable to the more impatient countries. The change would only meet goals of efficiencies for governments and double taxation risk mitigation for companies if all factors are agreed between tax authorities and countries.

Agreement would need to include the definition and measurement of taxable profits, the apportionment keys or ratios, and, for formulary approaches, how to treat potential distortions from acquisitions and other financial events that might affect apportionment factors. Issue resolution procedures would need to be robust and timely. Some form of regular review and refinement mechanism that addresses both large and small country concerns would seem to be essential to adjust for changes in business models and avoid potential accusations of manipulation by more influential countries.

Others might try to merge or overlap systems, leaving existing rules as they are and determining an additional layer of taxable income. The danger here is that the approach adds to existing sources of conflict rather than simplifies. Regardless of the fractional apportionment approach taken, the difficulties around it should not be underestimated, especially in a fractured and polarized world such as the one we seem to be in.

DISTRIBUTION METHODS

When considering distribution methods, the OECD discussion notes that these might be considered to determine a possible “minimum” return to markets. Some more substantive and thoughtful proposals in this area, notably by Johnson & Johnson in a letter to the OECD dated March 3, 2019 (the “J&J Proposal”), envisage a more central role for the distribution approach in the name of simplicity and reduced controversy. Specifically, the J&J proposal starts by referencing generally observable or agreed levels of “distribution” returns as a base proxy for all market contributions, say as a percentage of market attributable sales revenues recorded by the taxpayer. It then adjusts this base return, first for the taxpayer’s profitability relative to the overall industry segment profitability and, second, for relative taxpayer to industry segment spend on marketing. Further, the proposals also suggest that around the main proposal a stop loss or minimum market return might be combined with some form of cap to market profitability, perhaps as a percentage of total profitability.

At first glance the distribution proposals have some very attractive features. They seem relatively easy to apply and would not completely change the existing transfer pricing rubric for the rest of the value chain. Rather the J&J Proposal would reweight existing comparable company benchmarks more towards “market” facing contributions and industry profitability. Additional analysis of brand versus demand-generating marketing spend in the calculations might also allow recognition of the contribution from global core brands that are clearly important in many consumer products industries and that are usually centrally controlled and funded even in non-related party settings. This might allow for a reconciliation to BEPS 1.0 ideas around development, enhancement, maintenance, protection, and exploitation of intangibles (DEMPE) and legal ownership and investment. The J&J proposals may well be a good factual fit for established consumer products companies where local contributions are more heavily weighted to localized marketing efforts, and where product technical differentiation and complexity is perhaps lower. They may, however, be less reflective of the interaction of contributions in digital, market place or user data driven businesses, the original focus of BEPS Action 1.

Practically the approach seems to rely heavily on the ability of the international community to agree on the key elements, namely:

• The measurement of industry segment profitability.

• The disclosure of marketing spend—many countries’ financial reporting requirements intentionally allow companies to hide that level of detail in financial reporting.

• The determination of “market” marketing spend across a wide variety of industries and business models—in many businesses, especially in the internet space, local markets may be accessed through powerful local partners or resellers who already take a commensurately large share of revenues and profits, and “marketing” can take different forms from traditional marketing, advertising, and promotion to free or subsidized elements of the service (shipping, rewards, tools, etc.).

If these factors are not clearly defined and agreed or reliably observed or derived, there is going to be a risk of arbitrage and double taxation both between market and non-market contributions, and between markets. Were these risks to be realized, this approach would likely be short-lived.

For the approach to be fair and equitable, we also believe that some recognition and analysis of non-market contributions is needed to ensure all contributions to a business’s success, and changes thereto, over time are fairly considered. Further, if markets are to participate in the residual profits that would otherwise go to the parties and territories that put capital at risk and perform activities to earn them, then it is only right that markets should bear the associated costs, and be at risk of losses while market demand builds or if the business does not succeed.

The J&J proposals are right that if markets are given a loss safeguard, the upside of market returns should also be capped once the business is successful so that the potential returns allocated as market returns reflect appropriate limitations on both downside and upside outcomes. Regardless, this type of symmetry would be necessary in any solution that is going to be sustainable, both for taxpayers and for countries trying to find a path to a fairness and consensus. While acknowledging that the reference to a cap of 40% of system profits attributed to the market in the J&J Proposal might be appropriate in some situations, it seems that there would need to be some very significant local contributions to success for a market to capture such a large share of profits.

MODIFIED RESIDUAL PROFIT SPLIT APPROACHES

As laid out in the OECD paper, an RPA also starts with total profits in a business or business segment. Some profits are then allocated to “routine” activities and the remaining “residual” profit is assumed to reflect non-routine and/or intangible contributions. The amount of residual profit associated with market intangible that is subject to local taxing rights is then determined. Finally, this market attribution of profits is allocated between markets in some agreed equitable manner.

This method is not new. It is accommodated by the existing armory of transfer pricing methods available for use by taxpayers and tax authorities under the residual profit split method. The difference seems to be its application, which is performed at a higher level than a transactional approach, perhaps using simplifying attribution approaches.

As the OECD paper rightly points out, application of RPAs relies on fair and equitable relative identification and remuneration of routine contributions as well as attribution of residual profits to non-routine returns. Application of RPAs may include elements from the distribution methods in determining residuals, but may also take into account other routine contributions, as well as market and other non-routine contributions. In this respect, RPAs seem likely to yield fairer and more equitable results, but may be more complicated to apply, even in more simplified or modified forms.

Examples of RPA that have been proposed by some participants in the debate include those articulated in the paper by Oxford University’s Oxford International Tax Group titled “Residual Profit Allocation by Income,” dated March 2019 (the “Oxford Institute Paper”), and the approach recently proposed by management at Uber, the ride sharing company, titled “Uber Releases Comprehensive Proposal to Update Global Tax Rules,” dated August 2019. The specifics of each proposal and illustrations are provided in the respective papers and are not repeated here.

Oxford Paper

The Oxford Institute Paper seems to propose an RPA that would reflect the application of destination-based taxation, rather than try to adapt source-based taxation approaches for higher levels of market contributions. Specifically, total system profits are first considered and from these profits, all activities, including product development, supply chain, marketing and management, are first provided with a routine return, either benchmarked or assigned, for value added activities. Total residual system profits after these routine returns are accounted for are then attributed to each market based on contribution margins, or other methods such as revenues.

For the contribution margin apportionment approach, the proposals construct a “market contribution” for each market based on directly attributable revenues, costs, and expenses associated with each end market. From these contribution margins, routine returns to the market attributable costs/activities are also deducted, consistent with the derivation of residual profit in the first step, to derive a net contribution margin. The relative share of total net market contributions generated by each market is then used to allocate the residual system profit. Note that the contribution margins less routine returns used for this purpose are greater than total system residual profits by the amount of non-market allocable costs and expenses and associated routine returns, but this does not matter because the method only uses the relative share of contribution margins to attribute total residual profits between markets.

The end result of these calculations is that total market taxable profits comprise a combination of (i) routine returns generated by market attributable and non-market attributable costs and expense generating activity in the market, plus (ii) the market’s share of all system residual profit. While clearly rewarding markets, the Oxford Institute Paper RPA would only appear fair or appropriate if market intangibles were the only key non-routine contributor. While markets are important, this is clearly not the factual case in most industries, certainly not in the case of most technology and internet companies, but also not in many other intangible engineering and research heavy industries.

Alternatively, the method would need adequately to compensate all other non-market contributions, current and historical, before the residual determination to the markets. This perhaps might be achieved in some form of mechanism similar to the J&J proposal where returns to contributory activity are first benchmarked for the industry and then geared for relative profitability and expense levels observed at the taxpayer. In this way other contributions would also benefit from these factors reflecting a belief that “all boats rise in a rising tide,” and, conversely, they fall when the tide ebbs.

The Uber Proposal

The Uber proposals look at the residual profits and contributions to their generation more holistically. As with other RPA methods it starts with group global consolidated operating profit. It then deducts a standardized routine profits charge based on the higher of (i) 4% of revenues, or (ii) 15% of depreciated and amortized assets (other than goodwill) to approximate but simplify the determination of the results under a principled approach. The residual profit is then split between product intangible profits (PIP) or market intangible profits (MIP), with the taxation of PIP subject to the existing international tax rules and MIP subject to new Pillar 1 tax rules. The percentage of total residual profit associated with PIP (and thereby also MIP) is determined based on a table of PIP attribution percentages.

These percentages rise based on an increasing proportion of R&D expense to the aggregate of all operating expenses. R&D expense and total operating expense for this purpose would be based on audited financial statement data but may be adjusted to capture product development type expenses recorded in other areas (R&D Plus). Other operating expenses would be marketing, sales, general, and administrative (less those costs considered R&D). The ratios of expense might also be determined using multiple year averages to reduce distortions from heightened or reduced spending in any one year. Once MIP is determined, the Uber Proposal suggests that it is divided among market countries with sufficient nexus based on each market’s share of total market-sourced net revenues. Market-source would be determined by user location, probably billing address, unless location of use is clearly known to be better measured in some other way.

These proposals arguably attempt a much more even-handed approach than destination- or distribution-based approaches, both consistent with existing transfer pricing norms for a residual profit split, but also with simplifications. They could well be adapted to reflect other intangible contributions and related costs that would better reflect businesses’ operational reality. For example, G&A might be used as a proxy for strategic management contributions. Analysis beyond this (and even at this level) would require increasing the level of expense categorization and disclosure in current audited financial statements in many jurisdictions. The approach also addresses situations where marketing and advertising may be focused in one jurisdiction but give rise to user-related benefits in others.

Unlike the J&J Proposal and the Oxford Institute Paper, the Uber Proposal looks at the generation of non-routine intangible/market profits potentially based on multiple year factors rather than just annual factors. This better reflects potentially continually changing investments and relative importance over time. We note that in many of the digital companies, which are the focus of these debates, there have been many years of investment, contributions, and associated risk in the company’s history before they are successful. Those years often generated significant losses and associated historical tax deductions in certain jurisdictions that should be adequately reflected or compensated.

While the Uber proposal example includes markets served both directly and indirectly, the indirect channels are still internal. The approach does not seem to consider local market distribution models that use third parties that can also have a significant impact on profitability derived from a market. For example, a company selling its products or services through an important intermediary or partner that provides access to local market end users may give up 25% to 75% of revenues to that intermediary or partner in some businesses and industries. The revenue share or profit proportion given up to the intermediary may well adequately capture all or most of the return to market contributions from the system profits, and what remains would seem to be rightly attributable to non-market contributions. Otherwise, market contributions would be remunerated twice—once at the intermediary level, and again at the product/service provider level.

Countries and taxpayers will have to get comfortable that routine returns are adequately reflected by returns to sales revenues or to depreciable and amortizable assets. The latter of these generally come onto the consolidated balance sheets only as a result of merger and acquisition and may not be related to on-going, routine functional contributions, but instead intangible contributions. We also note that the profit split ratios used to derive PIP, and thereby MIP shares, are not complex or time consuming to derive in themselves if the analysis is performed from publicly filed annual reporting data. As such, the sliding scale table would seem to be most useful in situations where there is insufficient data to perform the calculations. We look forward to hearing a full presentation of the proposal by the company, reviewing the company’s supporting analysis, and seeing how it works across a number of industries and local market business models.

CONSISTENCY WITH THE EXISTING BEPS 1.0 FRAMEWORK

The Pillar I proposals all will likely have the effect of allocating some form of intangible profits to the local market, even when businesses have no functions in the market. This demonstrates the fundamental tension of trying to fit any of the Pillar I proposals within a framework that is consistent with the output of BEPS Action Items 8-10, which themselves (and only recently) created a major shift in interpretation of the arm’s-length standard. Specifically, BEPS Actions 8~10 on transfer pricing and intangibles put a premium on control of DEMPE(P) contributions and activities, i.e., those that control the investments and risks around development, enhancement, maintenance, protection, exploitation (and promotion) of intangibles. In extreme cases, where DEMPE functions and legal arrangements are completely misaligned, returns to legal owner of or investors in intangibles might be restricted to a risk-free return.

While these rules were largely intended to close down “cash box” structures, we are already observing distortions in the interpretation and application of these concepts including, ironically, the shifting of intangibles profits using DEMPE functional attributions over legal and economic ownership, where such distortions are not present, for example in acquisition or operational change situations. While there are always going to be refinements needed, the basic conclusions in Actions 8~10 were not wrong and should not be abandoned. Legal form and DEMPE contributions are clearly important for the orderly structure of international trade and business as much for digital and digitalizing companies as any other. In fact, in order for the Pillar 1 to reconcile with the current framework and vice versa, it seems that a more holistic view of value contributions and creation is needed on both sides to avoid unintentional tax cliffs which inevitably also lead to distortive taxpayer and tax authority behavior.

THE IRS APMA FCD MODEL

We now turn our attention to the APMA Functional Cost Diagnostic model. We have examined this more closely in a separate article published in Bloomberg Tax & Accounting titled “Understanding IRS APMA’s New Functional Cost Diagnostic Model” and don’t reproduce that description here. Essentially the model uses a residual profit split approach where residual profits are apportioned based on contributory economic asset balances, which are built from capitalized and amortized costs. While needing some refinement, we believe the techniques in the FCD model may well provide a reasoned and reasonable mechanism for reflecting the important factors that should be considered and reflected in any RPA solution.

Specifically, the FCD model addresses the relationship between current profits and current and historical intangible investments through the relative value of economic assets—a recognized valuation and accounting technique. While most valuers and economists agree that costs are generally not a good reflection of intangible value, in this context, costs are not used as a measure of absolute value but as a measure of relative value. It is these relative values that are used to attribute profits allocated to intangibles between market contributions in total and other non-routine contributions.

From an economic perspective, we note that despite imperfections in management decision-making, the goal is for incurred intangible development expense in different areas of the business to reflect the proportions that management believes are needed currently for the business to be successful in the future. Therefore, while relative cost measures are not perfect, it is reasonable to assume that some form of capitalized intangible development expenditures would accommodate the goals of reflecting differences in the importance of different types of intangibles across companies and differences over time within companies.

Basic microeconomic theory would tell us that a rational actor engaging in capital allocation decisions should make those decisions based on the expected marginal return from an investment, taking the risk of those investments into account. Under this framework incremental capital allocations across the potential opportunities for investments should yield similar marginal returns. Capitalized cost-type approaches to splitting residual profits employ a similar idea.

These considerations govern the reasonableness of the approach taken in the FCD as a baseline for trying to address appropriate and fair allocations of profit across various sources of contribution.

While the FCD offers a good starting baseline, there are many considerations that would govern the appropriate use of this type of tool, and which may require modification of certain aspects of the FCD tool. Many of these considerations are also important for the development of an RPA solutions that will be sustainable. They include:

• The dynamics and key characteristics of the business or industry will need to be understood and agreed to identify the contributory activities and inputs to consider and their appropriate related costs.
  • For example, many network business models are multi-sided and/or involve independent participants where returns to “market” factors are already captured and taxed in the returns earned by local distribution partners or other local network participants. Examples of this are revenue share arrangements common with Internet sales and many financial payment networks that are intermediary in nature.
• The timing and risk associated with various contributions over the business or industrial life cycle also should be taken into account perhaps using cost capitalization adjustments to determine “real” values.
  • This was an issue the U.S. Congress clearly felt was important in the evaluation of income allocations to intangibles in its deliberations of the U.S. tax reform in 1986 as referenced in the “Study of Intercompany Pricing” issued by the U.S. Treasury Department in 1988.
• In order to reflect situations where there might not have been any investments made by economic actors within the market, there may be a need for a two-tier return to non-routine contributions:
  • One associated with bearing the cost of investment, and
  • The other associated with the attribution of profits associated with contributions from the market.
• Agreement around estimates of economic useful life for each contribution type will be needed.
  • We note this type of issue has been addressed and standardized in accounting and tax amortization rules for many years.
• Addressing distortions that could be created by differences in the financial accounting treatment of internally developed versus acquired contributions in standard reporting frameworks.
  • This can significantly affect reported earnings as well as balance sheets. It can also lead to the recognition of gains that inherently include the value of expected future profits which are already taxed in one jurisdiction.
• Solutions looking for greater administrative ease might use standard allocations of costs, lives, and discount rates in a simplified approach by industry and/or by stage of development, perhaps as an administrative safe harbor.
  • However, we caution that the use of different safe harbors from one country to the next will create arbitrage opportunities and/or double taxation.
• Transition rules with the past will be needed that don’t create unnecessary taxable gains.
  • In this respect we have concern with the interaction of any new system with local provisions such as tax code Section 367(d) in the U.S., the German restructuring profit transfer package rules, and the general idea within the 2017 OECD Guidelines that transfers of profit potential are potentially compensable intangibles as goodwill and going concern.

In summary, a cost-based approach to the relative value of intangible contributions, such as the one in the FCD model using economic assets, while imperfect, should be considered by the Pillar 1 working party as a potential approach (with appropriate modifications) to addressing the tax challenges imposed by the digitalization economy. Simplifications, such as those proposed in the Uber method, may be appropriate to ease adoption.

WINNERS AND LOSERS

With any change in the international tax system there will be winners and losers, both at the corporate level and country level. A report by the Copenhagen Institute titled “The Future Taxation of Corporate Taxation: What to do with intangibles,” dated February 2019 looked at the potential impact of residual profit approaches when proposals for destination-based taxation were at their height. This study found, as you would expect, the likely winners from such a change were the larger, end-user market economies with relatively less capital, engineering, or intangible development (which might well explain China’s relative silence in the debate), whereas the losers were those with smaller markets and/or that are net investors and exporters of intangibles through their products and services. It similarly holds that countries with small markets and large amounts of natural resources would also be significant losers in the application of a destination-based tax approach. The study concluded that the likely outcome of the proposals might well be to deter investments in high growth, high risk, R&D, or other asset-intense businesses.

These would not seem to be outcomes in the best interests of future competitiveness. It also concluded that the proposals under Action 1 Pillar 2, a minimum floor on global corporate tax, was probably going to be more effective and less detrimental. What will be interesting is to see the potential impact of each of the proposals on different countries’ tax profiles. Right now, first world economies are likely to be doing this analysis as a matter of course in support of their negotiators, but other smaller countries might not have the resources to do this effectively, and this should not be a cause of disadvantage in the debate.

CONCLUSIONS

Ideally the BEPS Action 1 consensus solution will be fair, reflect sound economic principles, be administrable across multiple countries and contexts, efficient for taxpayers and tax authorities, and provide certainty while avoiding unnecessary controversy. Historically, these objectives have not been mutually compatible. Administrative ease has taken a backseat to fairness and sound economic principles, perhaps for good reason. Sometimes too much simplicity leads to distortions and unfairness and associated resentment that is as destructive as too much complexity. As such, we recommend that the BEPS Action 1 task force focus on a solution that seeks to simplify but also reflect the evolving importance of various contributions as economic circumstances change and taxpayers’ business strategies change in response. It should be flexible enough to accommodate differences across companies with respect to business models and the value of market versus other factors.

If the RPA solution accounts for all major contributions to success or failure and does so in a way that can be adaptable to different strategies and to changes over time while still being relatively easy to implement, corporations and tax authorities will be more likely to reach reasoned, principled conclusions and have sustainable paths to agreement. This should be at the core of tax policy and fairness. Information symmetry and reliability will be crucial to achieving more simplicity and administrability, but this also comes with a lot more work across many countries. While we all have been working at BEPS for many years, there are probably many more years still to go.

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

Simon Webber is a managing director at Duff & Phelps LLC.

The opinions and views expressed in this article are those of the author and not necessarily those of Duff & Phelps or its clients.