Daily Tax Report ®

INSIGHT: Taxation of Global Business Models: Restore Confidence in the System? A More Balanced Approach Please!

Dec. 17, 2018, 2:01 PM

In this article, the author will argue that:

  • The taxation of the digital economy applies to the taxation of global business models, in which digital companies are but a species.
  • These global business models have become too complex, diverse, and fast-changing to design a robust transfer pricing model that would satisfy all governments or can be implemented by multinational enterprises.
  • The OECD’s Base Erosion and Profit Shifting initiative will result in a world where double non-taxation is no longer an intentional feature of MNEs’ tax position.
  • The current proposed measures are more likely to result in double taxation and leave MNEs with an excessive compliance burden.
  • Therefore, one of the primary BEPS goals, “to restore confidence in the system,” is achieved for governments but not yet for MNEs.
  • In order to make that outcome more balanced, additional rules that put restrictions on governments need to be implemented.
  • Further, transfer pricing solutions should be able to rely more on universally agreed safe harbors for the applied methods and mark-ups for defined activities as well as profit splits to allow the recognition of markets, in addition to the value drivers of a business model.


Business has changed to the extent that there is a general belief that the current tax systems are no longer fit to fairly tax the multinational enterprises (MNEs) that operate through global business models (GBMs). This debate has two dimensions.

On the one hand is the fact that the political and economic worlds in the new order are at variance with each other. Whereas, the international economic system has become global, the world’s political structure has remained based on the nation-state principle. (Henry Kissinger, World Order (2014).) These nation-states aim to fit the economic order back into their format. Hence, numerous initiatives can be observed that aim to achieve that goal. Taxation is one of the areas where the battle between nation-states and large corporations takes place.

On the other hand is the shift and struggle for the new world order on a geopolitical level. The allocation of taxing rights between residence and source countries was shaped in the 1920s. The current balance of power between nation-states is different from a century ago, and a new equilibrium is being sought in this area.

The proposed systems to tax the global business models (i) deny the root cause of the problem (i.e., nation-states are irrelevant for global business models), and (ii) are more about the geopolitical balance of power than the economic reality of the global business models. Accordingly, the reshaping of the international tax system has the potential to leave MNEs with double taxation and an excessive compliance burden.

Such outcome is undesirable for all stakeholders—nation-states and MNEs alike. Accordingly, this article will examine the options that are now on the table and explore whether realistic alternatives can be identified that would both contribute to the new geopolitical balance of power and are pro-economic growth in which global businesses are a mainstay and dominant factor.


Preceding the 2015 and 2018 Action 1 “digital” BEPS reports (see VII.A., below), the 2013 BEPS reports recognizes the following definition of a global business model:

In today’s MNEs the individual group companies undertake their activities, within a framework of group policies and strategies that are set by the group as a whole. With reporting lines and decision making processes going beyond the legal structure of the MNE. The separate legal entities forming the group operate as a single integrated enterprise following an overall business strategy. Management personnel may be geographically dispersed rather than being located in a singly central location.

The challenges of GBMs from a transfer pricing perspective are in the elements of integration and geographically dispersed management. Transfer pricing has for the past decades relied on the binary concept of identifying the tested party, i.e., routine versus entrepreneurial activities. The GBMs are so integrated that this distinction has become blurred. Further, transfer pricing relies on the management and control functions to identify value creation. These functions are considered to be the entrepreneurial function that attracts the residual profits. Geographically dispersed—and highly mobile—management teams make it difficult to allocate the residual profit to a defined location. GBMs almost always meet the criteria for the profit split method, i.e., more parties make unique and valuable contributions, operations are highly integrated, and transactions involve the shared assumption of economically significant risks by all parties. This complexity can be captured only by subjective judgment calls on how to allocate the profits over the relevant activities, i.e., countries. The transfer pricing of GBMs is therefore prone to challenges from taxing administrations who seek to maximize their tax revenues.

The complexities of GBMs are compounded by the phenomena of the observed business models in the digitalized economy. These digital businesses may meet some of the criteria of the global business model but are not defined by it. The “digital” reports represent an attempt to understand the new processes of value creation and the salient characteristics of the digitalized businesses: (i) scale without mass, (ii) heavy reliance on intangible assets, and (iii) the importance of data and user participation. The complexities are not limited just to how profits should be allocated; the question on the boundaries of these businesses (the nexus question) introduces an additional challenge. The difficulty of these questions may be illustrated by a quick summary of the digital business models that can be seen today.

  • Online advertising: Placement of targeted advertising on websites that are visited by users. The targeting is done based on user preferences. Examples are Facebook, Twitter, LinkedIn, YouTube, etc. This is the digital equivalent of advertising in places where a lot of customer viewings can be expected: newspapers, magazines, highways, (sports) events, television, etc.
  • On demand: Streaming services such as Apple iTunes, Netflix, Spotify, etc., have changed the buying behavior for certain products (i.e., access to an entire catalogue on a subscription basis instead of ownership).
  • Platform/marketplace: Creates an exchange for supply and demand that is more efficient and against such low transaction costs that it allows buyer-seller transactions that otherwise would not have happened at this scale (e.g., AirBnB) or more efficiently (e.g., Uber).
  • Digital payments: Platforms that facilitate electronic payments between buyers and suppliers, such as ApplePay, Paypal, Adyen, etc.
  • eCommerce: Businesses such as Amazon, Alibaba, eBay, etc., have made possible the remote online sales of goods that are delivered to the customer’s home rather than a physical location where the customer has to go to choose and collect.
  • Cloud: This service allows organizations to, for instance, shift from legacy IT systems to cloud, shifting IT spending from Capex to Opex. Suppliers are Google, Microsoft, IBM, etc.
  • Industry 4.0: Networks of interconnected devices embedded with sensors enable collection and exchange of data in real time, giving rise to smart factories that can be operated remotely, indicating when maintenance is required, data-driven decision-making, etc.

From this brief overview it becomes clear that the manner in which the above-mentioned “salient characteristics” result in value creation will differ per business model and even between competitors in a market sector.

Therefore, the complexity, diversity, and rapid developments in the global business models, global value chains, and digitalized business models make it extremely difficult to identify, define, and get consensus on the profit allocation and the nexus of these GBMs.



The opening statement in the BEPS reports is:

Weaknesses in the current rules create opportunities for base erosion and profit shifting, requiring bold moves by policy makers to restore confidence in the system and ensure that profits are taxed where economic activities take place and value is created.

It is a fact that MNEs have used planning to minimize their tax burdens. The BEPS measures, taken to prevent aggressive tax planning resulting in stateless or low-taxed income, were much needed to restore confidence in the system. Nevertheless, it should also be recognized that nation-states have the sovereign authority to design their tax systems (see VI.B., below). The lack of coherence within the resultant multiplicity of tax systems has enabled this practice of arbitrage between systems. The BEPS measures are therefore unbalanced—as is the public opinion framing of MNEs as perpetrators (“it is legal, but is it moral?”), which pits MNEs and governments against each other like “cop vs. robber” and denies joint responsibility. It has created a sentiment that MNEs are left with measures preventing double non-taxation and increasing their compliance burden, whereas for governments the prevention of double taxation is optional and without sanctions (see VII., below).

The preliminary conclusion on the BEPS actions is that the measures that prevent double non-taxation are already having an impact, as many MNEs have begun making changes to their business structures to improve alignment with their real economic activity. Stateless or low-taxed income will be significantly reduced if not eliminated in the near future. This may be brought about by the legislative measures following BEPS, but also in MNEs’ reduced appetite for aggressive tax minimization planning due to the potential negative publicity.

B. U.S. Tax Reform

Perhaps the best example of BEPS-inspired legislative measures is last year’s U.S. Tax Reform. (Pub. L. No. 115-97 (Dec. 22, 2017).) One of the main (maybe the most) visible forms of tax planning U.S. MNEs have used to reduce their effective tax rate are deferral structures through which business income that, according to the arm’s-length principle (ALP) has to be allocated to the functions, assets, and risks (FARs) in the U.S., would be kept offshore and remain untaxed until final repatriation, at which time it would be recognized and taxed in the U.S. under the credit method. So, in practice there was no double non-taxation, just a deferral of taxation. However, because that repatriation could be postponed as long as their treasury position allowed, U.S. MNEs enjoyed on average lower effective tax rates than their domestic and non-U.S. competitors. (2013 BEPS report, annex comparing the effective tax rates of various MNEs.)

From a geopolitical perspective, this deferred income attracted a lot of political attention, resulting in attempts to allocate the taxing rights away from the U.S. toward other countries (e.g., EU State Aid cases and the European Union’s proposal to tax digital companies—see IV.B., below) or trigger aggressive positions taken under audit by tax authorities from non-U.S. countries.

U.S. Tax Reform completely overturns the planning of U.S. MNEs. Although the system is very complex, in broad strokes the U.S. has implemented the exemption system and a 21 percent corporate income tax rate (down from 35 percent), as well as a transformational regime to repatriate the now-deferred profits at a reduced tax rate. The anticipated effect is that the repatriated cash will boost the domestic economy and remove the incentive for deferral structures. This is expected to level the playing field between U.S. and non-U.S. MNEs, with respect to taxation, as well as further reduce the stateless or low-taxed income structures of U.S. MNEs.

Fair taxation in as far as it relates to MNEs no longer having stateless or low-taxed income appears to be addressed by BEPS and U.S. Tax Reform.


The 2018 (digitalization of the economy) BEPS report includes the statement that the “members agree that they share a common interest in maintaining a relevant and coherent set of international rules … particularly where the alternative is likely to be unilateral approaches with all of their associated adverse impact.” Despite this statement, many of these same OECD member countries nevertheless propose a host of unilateral measures. They are compensatory measures to make up for the perceived loss of tax revenue or statements that serve a political purpose. These originate from the perspective of governments who find the outcome is not (sufficiently) recognizing the value creation in their jurisdictions. So the definition of fair taxation in this respect relates to the allocation of taxing rights between nation-states, rather than MNEs’ payment of sufficient tax on their profits.

From this perspective, the real objective of introducing or proposing the unilateral tax systems (i.e., the allocation of taxing rights between nation-states) can be distinguished from the political rhetoric (i.e., the GBMs—especially digital giants—not contributing their fair share to society). Following is an overview of the various introduced or proposed unilateral tax systems.

A. Global Formulary Apportionment

The proposed EU Common Consolidated Corporate Tax Base (CCCTB) and the implemented Country-by-Country Reporting (CbCR) in 2016 are based on the Global Formulary Apportionment (GFA) method.

The CCCTB remains on the agenda even after the European Union failed to reach consensus in 2011. The system would allocate the profits of large MNEs among the various EU countries according to a key consisting of revenue, assets, and payroll. The idea is this will mitigate harmful tax competition and reduce the compliance burden of MNEs in the European Union. Critics argue it would benefit large countries over smaller countries. Further, in the current proposal, each country can determine its national tax rate, albeit the rate should be a minimum of 25 percent of which 3 percent would go to the European Committee. Accordingly, the agenda is clearly to pave the way for moving taxation rights away from nation-states toward the European Union.

The CbCR initiative is aimed at making transparent in which countries business activities takes place and how this compares to the reported accounting profits and the taxation thereof in those countries. The chosen proxies for economic activity are revenue, number of employees, and assets. The CbCR along with the Master and Local File should enable tax authorities to make a transfer pricing risk assessment. In this context it was clearly stated that “it should not be used by tax administrations to propose transfer pricing adjustments based on a global formulary apportionment of income.”

The CbCR data that will become available in the course of 2017 (over the year 2016) and onward, will provide a treasure of information to test the impact of a GFA method against the accounting profits. For those who favor the use of a GFA method (i.e., the EU), it would strengthen their case if it can be demonstrated that the differences between a formulaic approach and the accounting profits are either minimal or caused by BEPS behavior. In case the data support their view, a strong push for this method can be expected, either by the EU or in a much larger context.

B. Equalization Levies

The EU proposed a(n interim) Digital Services Tax of 3 percent on revenues of MNEs that meet certain criteria for a digital PE. This initiative is so obviously targeted to tax the (U.S.) digital giants in the EU market, that it is nicknamed the “Google” or “GAFA” tax, after Google, Apple, Facebook, and Amazon. Other countries (e.g., Israel, Russia, Saudi Arabia, Italy, India, Slovakia) have introduced or announced similar regimes aimed at imposing solely the digital economy a tax as a percentage of revenue or advertising income.

The assumption and justification is that these taxes aim to tax profits of MNEs that are currently untaxed. As just argued, however, in a post-BEPS world this assumption may be wrong. In that case, these taxes—on top of the tax over the profits these MNEs are already paying post-BEPS—will result in double taxation. The instrument to remedy double taxation is a corresponding adjustment following a MAP or Arbitration procedure (see VII.D.1., below). As these equalization taxes are not considered a corporate or income tax, they are not covered by the double tax treaties and therefore cannot be solved. They remain an additional tax burden for MNEs. Further, even a low tax rate on the revenue can be significantly higher than the profit tax. A tax of 3 percent on revenue for an MNE reporting a 6 percent EBIT margin, equals a 50 percent tax on its profits. The impact can therefore be very high, considering some digital companies are still loss-making.

C. Some Special Anti-Abuse Rules

The United Kingdom and Australia have adopted the Diverted Profits Tax. The stated aim of the diverted profits tax is to “counter the use of aggressive tax planning techniques used by multinational enterprises to divert profits from the UK to low tax jurisdictions.” Simply put, this tax would cover a non-U.K. company selling goods or services to U.K. customers, even if only digital products delivered via the internet. It covers much more situations but was initially presented as the U.K. version of the “Google tax.”

The U.S. in its Tax Reform has adopted BEAT (Base Erosion Anti-Abuse Tax) and GILTI (Global Intangible Low Taxed Income) provisions. BEAT disallows or caps certain fees charged to U.S. subsidiaries, and GILTI aims to repatriates passive income associated with intangibles.

Just as for the equalization levies, all these anti-abuse taxes fall outside the current framework of the international tax system and will result in additional tax that is not covered under the tax double treaties and thus distort the system.


A. Different Views

It may not be surprising that there are different views between nation-states on how to tax these business models. These views are driven by maximizing the tax revenues to their countries. In the 2018 interim “digital” report identified three different views held between the more than 110 members of the inclusive framework (i.e., nation-states), on whether changes to the international tax rules should be made. The views can be summarized as follows:

  • Group 1: System is fine, BEPS measures will have desired impact. No further actions required.
  • Group 2: System is fine but targeted changes are needed, to solve the misalignment between the location in which profits are taxed and the location where value is created. The action is to study the features of the digitalized business models and determine whether any value can be attributed under the current rules to the source (market) countries.
  • Group 3: System is broken, globalization in general requires that the basic principles of the tax system are defined again. Their main concern is that more and more profit is dependent on non-physical and mobile value drivers, which cannot be captured adequately by the current ALP and nexus principles.

It is not mentioned which nation-states belong to each group. But we can assume that the winners of the existing rules fall in group 1 (residence states) and that those who feel they are shorted by the current system fall in group 2 (a mix between residence and source states) and 3 (predominantly source states). Alternative explanations are offered such that group 1 contains smaller economies often attracting regional headquarters, group 2 are importers of digital services but exporters of broader goods and services, and group 3 are exporters of digital services and importers for broader goods and services. The dividing lines are not entirely clear, and sometimes it seems that countries have different perspectives, but this provides enough to speculate where each nation-state stands in this debate.

Following these positions on whether or not the current framework for international taxation requires changes, let’s first review what the principles of the current framework are and see whether that offers some insights to the options.

B. The Framework of the International Tax System

The principles of the current international tax system for MNEs relies on:

1. The allocation of profits according to the arm’s-length principle (ALP) to proxies of economic activity defined as functions, assets, and risks (FAR) according to the functionally separate legal entity approach to legal entities and permanent establishments (nexus).

2. That taxation takes place at the level of nation-states that have the sovereign authority to define their tax system.

3. Disputes arising from differences between the resulting multiplicity of tax systems are solved between the nation-states directly.

In VI. the first pillar of the international framework is covered, whereas in VII. the second and third pillars will be addressed.


A. Review of the Profit Allocation and Nexus Rules

BEPS Action 1 started off on the notion that a better understanding of value creation in the digital business models would allow application of the existing rules in new situations. In 2015, the OECD released the Action 1 report titled “Addressing the Tax Challenges From the Digital Economy.” In 2018, this was followed by an interim report titled “Tax Challenges Arising From Digitalization.” A consensus-based report is planned for 2020. Based on the concept of value creation, the challenge is to provide a convincing framework for allocating profits—and moreover define the boundaries of these business models. We concluded in II., above, that the current business models are very complex and diverse, and new business models are introduced rapidly. So this is not an easy task. It is highly probable that, even after the 2020 consensus-based report, due to the subjective nature of a transfer pricing study under any circumstances, there will be uncertainty whether the TP model design is accepted by all countries in which an MNE is active. It is therefore highly uncertain whether this BEPS direction is able to achieve its objective of “reducing complexity, minimizing double taxation, supporting innovation and achieving a fairer, more efficient and simpler tax system for firms operating across the globe.”

B. Current Transfer Pricing Principles

At the time of shaping the system that allocated the taxing rights to countries, firms looked different from what they are today. The residence state would have the original firm that has all the functions of management, R&D, production and sales. In order to operate outside of its domestic market it would as a foreign direct investment, duplicate the required functions such as production and/or sales including local management, that would—in the source state—act as agents of the owners. Under these circumstances, it made sense to recognize that the residence country would get the taxing rights over the residual profit, whereas the source state would be allowed to tax the business profits that would be obtained as if it was an unrelated party (i.e., the ALP). As we have seen in II., above, business models no longer look like that.

An important reason for businesses to operate in the format of a firm is to obtain benefits that cannot be achieved by cooperation between unrelated parties. These efficiencies do not occur between unrelated parties. The main criticism of the ALP is that it does not allocate the group synergies to the source countries. This is because the ALP dictates that the profits be benchmarked as if the two group companies that enter into a transaction are unrelated parties. Accordingly, the tested party will not be allocated any of the benefits that are derived from the group relation. In addition, we have come to determine the arm’s-length profit by means of TNMM benchmark studies. These studies rely on databases that are currently more appreciated for providing a common platform (i.e., a safe harbor in itself) rather than a reliable source for arm’s-length profit levels for the benchmarked functions. Further, although the use of databases is accepted the disputes over the outcome of these studies suggest it is an exact science.

The profit split method would be able to deal with the inherent flaw of the ALP as well as with the new business models that rely on global integrated value chains. The profit split method is however, not able to solve the nexus debate regarding the boundaries of the MNE, that mainly relate to the market countries.

This raises the question whether the ALP is able to address the challenges of the remuneration of the demand side of the market. As in some of the new digital business models there are no longer any FAR in the market country, under the ALP, it would be difficult to attribute profits to those market countries. It would require them to recognize an item of value creation by the MNE, the customers, or the state (infrastructure), that is distinct from other sales and services. Customer data and/or contracts as raw materials or intangible property are believed to have that potential. It would be worth researching whether under the ALP as we know it, for some business models value creation can be concluded that warrants the allocation of profits to markets. The next step would be to find the appropriate PE (nexus) to which to allocate that profit. Absent stateless or low-taxed income (see III.A. and III.B., above), the current international tax framework will allocate the majority of the profits of these business models to the residence states. Nevertheless, in the current system, from a geopolitical perspective, the source (market) countries are not left empty-handed, as VAT and GST provide an increasing and steady tax revenue flow from these transactions.

The view of group 1 is that, if countries want to enjoy the taxation of the revenues of these companies, the most constructive manner is to create an investment climate by providing an infrastructure (not including tax incentives!) that facilitates the start-up and growth of such companies in their own jurisdiction and become a residence state themselves.

In addition to the new business models making some of the sales functions obsolete, there is also the notion that the (size or characteristics of the) market should attract a higher level of profit. This has been addressed in the new OECD transfer pricing guidelines, by stating that the so-called location-specific benefits are a comparability rather than an allocation issue. This means that in case local comparables indeed show higher margins than in other markets, this has to be recognized. In such a manner the geopolitical concerns of some countries seem adequately addressed. However, it is a step in the wrong direction in terms of complexity, as local benchmark studies increase the compliance burden of MNEs.

C. Revision of the ALP and Nexus

As we just saw, a strong case can be made to support the views of group 1 and tell groups 2 and 3 to “get over it.” Under the current TP rules, it will be a stretch to allocate profits to the markets (group 2)—and even harder to design new rules to deal with the concerns of group 3 non-physical and mobile value creation. Therefore, it will be interesting to learn the outcome of the 2020 report and how the three views can be brought to a consensus that is also attractive for MNEs.

Over the past decade, the principle “tax follows business” has made transfer pricing the prime focus of any MNE in determining its tax position. However, transfer pricing also has its flaws and relies on proxies of economic activity. We may now have come to a point where the business models have become so complex and diverse that transfer pricing experts can no longer design a TP model that will not be disputed under audit. Making it more complex by obtaining an even better understanding of the business may satisfy group 1 and/or 2, but not group 3 and the MNEs as they face an even higher compliance burden. Therefore, revising the ALP by considering its shortcomings, alternative proxies for economic activity and rely on safe harbors, may be a realistic option.

D. A New Transfer Pricing Framework

The (residual) profit split method could provide a platform for applying these changes. The first step in such model would be to identify the activities in the value chain of an MNE and allocate a routine remuneration to these activities with a predefined method and ditto mark-up (e.g., similar to low value-adding services at cost plus 5 percent). The remaining residual is then split according to predefined categories that, in addition to the known value drivers, include markets and corporate synergies. Each category will get a percentage of the residual profit. The allocation keys will differ per category. Markets depend on relative revenue, users and/or data in that market (i.e., country A sales/users/data vs. total sales/users/data). Group synergies depend on the relative FARs per country (i.e., country A payroll and assets / total payroll and assets). Value drivers can be strategic and operational management, DEMPE functions, R&D spend, marketing spend, etc. An example may illustrate of how such analysis is different from the current rules and how such analysis may look like for two different industries.

Let’s first consider an MNE in the digital economy. Under the current ALP and nexus rules, all of the worldwide profits of Facebook would get allocated to its only operations center, in California, USA. The fact that in a pre-BEPS world the taxation of these profits could be deferred is a result of the workings of the U.S. tax system and is assumed not to apply in the post-BEPS/post-U.S.-Tax-Reform world. In short, under the current rules, all of Facebook’s profits would be allocated and taxed in the U.S..

In the proposed system, the value chain activities (i.e., the U.S. operations) would first get allocated a routine remuneration (e.g., C + 5 – 10 percent) as a base fee. The remaining residual profit would be split between markets (data and user participation), group synergies (scale without mass) and value drivers (intangibles). The value drivers would all be allocated to the U.S. operations, for its strategic and operational management, the development of the algorithms, etc. Markets could be recognized by the amount of users (Facebook accounts) or, if feasible, how these are monetized (advertising income per user, as this may differ per market). Business models that are characterized by scale without mass do not really rely on group synergies, so this element can have a relatively low weight, whereas for Facebook the value drivers and markets will carry more weight.

The profit allocation under this model compared to the existing rules would be quite different in a sense that not all profits would go to the U.S. operations, but a significant portion will go to the markets—thus addressing all three salient characteristics of digital businesses.

For the second example, we use the agricultural commodity trading industry, which is a typical GBM that is characterized by highly integrated operations. This business model relies on a worldwide network of origination (for the sourcing) and marketing (for the sales) field offices connected through traders who oversee worldwide supply and demand based on information received from those field offices. Under the current rules, the field offices would get allocated a relatively low routine remuneration, whereas the residual would be allocated to the trader function that performs the risk and margin management.

In the envisaged model, all operations would get allocated a routine C+ remuneration. The residual profit would be split between markets (data regarding crop status and customer demand allowing to predict the supply and demand volume, quality and timing) and value drivers: (1) network design and interoperability and (2) risk and margin management. The group synergies remain an interesting phenomena. Although there is clearly an inherent flaw in the binary ALP relying on the tested party concept, in both business models for different reasons it appears not to need recognition in this formula. Whereas, for the digital business models that are characterized by scale without mass, the lack of tested parties does not require an adjustment for the benchmarked routine profits. For the traditional GBMs, group synergies appear to be sufficiently recognized by the markets component. Based on these examples, that would leave markets and value drivers as the two components for the residual profit split. As the weighing of these factors is arbitrary in any business model, a safe harbor percentage might be an attractive option to prevent disputes.

This safe harbor, although having elements of a GFA, in essence still holds true to transfer pricing principles and allocates profits predominantly to the FARs of the MNE. At the same time, the markets are also recognized and the inherent flaw of the ALP is addressed by taking group synergies into account. Further, in case the routine functions would all be remunerated with a predetermined mark-up, no more TNMM benchmarking studies are required. This method would aim to be a compromise, where the view of each group of countries is taken into account while at the same time reducing the compliance burden and risk of double taxation for MNEs.

There are many questions to consider, such as how to choose the safe harbor percentages for the mark-ups and split of the residual, whether distinctions should be made for industry characteristics, how to allocate residual losses, etc. It goes beyond the scope of this article to examine the possible finer workings of this method but it is worth further consideration.


It is interesting that BEPS and all the proposed tax systems mainly recognizes a responsibility for MNEs. Action 14 does consider the role and responsibility of the nation-states (i.e., the second and third pillars of the framework, see IV.A., above) but leaves the actions for nation-states rather optional. Let’s see what possibilities offer the examination of the role and responsibility of the nation-states.

A. Global Problems Need Global Solutions

The article starts with the notion that the international economic system has become global, whereas the political order has remained at the level of the nation-state. Today there are many issues that go beyond the physical boundaries of nation-states but are a concern to people throughout the entire world regardless in which nation-state they live. A few such issues are the nuclear, ecological, and technological challenges. Similar challenges are also captured in the UN Sustainable Developments Goals, which are the blueprint to achieve a better and more sustainable future for all. They address the global challenges we face, including those related to poverty, inequality, climate, environmental degradation, prosperity, and peace and justice. These are issues that go beyond the capabilities of a single nation-state to deal with. For instance, a reduction in the CO2 exhaust in one country has no effect on the climate change if not all countries do the same. One can argue that the taxation of GBMs also falls in the category of a global problem. Solving it requires a concerted action by all nation-states.

B. A Supra-National Tax System

As the nation-states are irrelevant for GBMs they are in fact the problem of international taxation. One way to solve this dilemma is to consider the second pillar of the international tax system and to take away the taxing rights of nation-states and transfer them to a supra-national organization. MNEs would be taxed on their global consolidated profits without having to bother to answer the question how much should each nation-state get allocated. Subsequently the nation-states would sort out between themselves how the tax revenues should be divided and how much should go directly to supra-national organizations. The compliance burden of MNEs would be reduced dramatically. With the tax revenues of the GBMs, the global problems could be addressed more effectively. As simple and attractive as this sounds, a political consensus to make it happen is unlikely at short notice or at all. The solution therefore serves only as a theoretical model to illustrate the responsibility of nation-states in the taxation of GBMs.

C. Code of Conduct for Governments

To enable a more consistent and predictable approach in their interactions with MNEs, a code of conduct for governments may be considered. The Action 14 BEPS measures that evaluate to what extent governments comply with the minimal standards, are already a step in the right direction. Perhaps this could be taken a step further. A few elements that could be included in such code are the use of unilateral interpretations of the OECD guidelines and foremost giving retroactive effect to the BEPS insights and measures.

As to the latter, the expected effect of the changes in legislation, the anticipated changes in the international tax framework and the public opinion will make stateless or low taxed income redundant or at least no longer an intentional feature of an MNE’s tax position. This means we are now entering into a transitional period of time where the current tax structures need to be converted to the new rules. For instance by on-shoring of (intangible) assets. Accordingly, recognizing a joint responsibility of MNEs and nation-states alike, a grandfathering of the existing structures and give MNEs a grace period for this conversion can be considered. This would be a strong incentive for MNEs to enter into a transparent and pro-active transition to unwind the existing tax planning structures sooner rather than later.

Another element of the code of conduct could be to include critical assumptions or thresholds under which TP models can be challenged. Criteria such as does the MNE rely on stateless or low taxed income, has it performed a robust TP analysis, is this model appropriately documented, have the documented TP policies been implemented accordingly, etc. In case these critical assumptions are met MNEs can obtain a safe harbor against any (unilateral) challenges. If such a guarantee would be available, this would again provide a positive incentive for MNEs to adopt the desired behavior.

D. Improve Dispute Resolution Mechanisms

1. Existing Instruments

The third pillar of the international tax system is that disputes resulting from differences between the multiplicity of tax systems are solved between the nation-states directly.

The common instrument for that is a mutual agreement procedure (MAP). A MAP enables two nation-states that have entered into a Double Tax Treaty (DTT) to endeavor to solve the double taxation arising from, for instance, a transfer pricing adjustment. Endeavor means try to solve, not being obliged to solve. Moreover, it requires that the two nation-states have indeed concluded a DTT including a MAP. Under this instrument it remains uncertain for the MNE whether the double tax problem is indeed solved.

In case the MAP does not solve the double taxation, for transfer pricing cases there is also the instrument of Arbitration. Nation-states that have mutually agreed this instrument to be applicable are obliged to solve the double taxation. Within the European Union, this instrument is mandatory; in addition—following BEPS Action 14—a few other countries have also accepted this instrument. Unfortunately, there was no consensus on mandatory Arbitration between the participating countries, therefore making this optional for nation-states—as mentioned above, a rather unsatisfying and unbalanced outcome of the BEPS initiative.

The outcomes of the MAP and Arbitration procedures are not published, so there is no case law that MNEs and other competent authorities can leverage or rely on. The decision making and its outcomes under the current process are therefore totally un-transparent. As transparency is one of the BEPS goals, we can only speculate as to why this was not made a priority.

2. Alternative Instruments

As the current instruments are flawed, alternatives for solving dispute resolution are worth exploring.

Under the current framework this is a responsibility of nation-states. Moving the dispute resolution away from nation-states would lead to establishing (an) independent international tax court(s) to which MNEs have the right to appeal directly. Those international tax courts will be given the power to decide the outcome of a case that is then binding for both nation-states. In case the court would use baseball arbitration (i.e., the most reasonable position will prevail), this would be an incentive for governments to not take unilateral positions or undertake frivolous challenges.

Naturally, the decisions of the court would be published such that the concept of value creation and how transfer pricing principles should be applied over time takes shape in case law, which would make it transparent.


This article set out to examine the options to tax the GBMs that are now implemented or considered and explore whether realistic alternatives can be identified that would both contribute to the new geopolitical balance of power and facilitate the pro-growth agenda.

When considering the framework of international taxing rights, the taxation of global business models requires a joint responsibility of MNEs and governments alike. The current measures seem to focus on the responsibility of the MNEs, whereas the governments appear to be left out of the equation.

This article argues that a tax code of conduct for nation-states, an international tax court, and a transfer pricing system that in addition to value creation would recognize the markets (nexus) would go a long way toward restoring the envisaged confidence in the system and freeing MNEs of the risk of double taxation and an excessive compliance burden.

A more balanced approach, also recognizing the role and responsibility of governments, would further facilitate confidence in the international tax system.

Eric Vroemen is a transfer pricing partner at PwC Netherlands and lectures on transfer pricing at the University of Amsterdam.

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