Multinationals Can Act on OECD Pillar One, No Matter Its Fate

The OECD continues to work on the first pillar of its two-pillar solution to address tax challenges arising from digitalization of the economy but is facing delays and difficulty in achieving consensus by Inclusive Framework members.

Taxpayers can take several steps to prepare for either an eventual agreement on Pillar One or failure to reach a deal.

Pillar One comprises two separate multilateral taxation approaches: Amount A and Amount B. Amount A aims to expand taxation rights to jurisdictions where multinational enterprises have a “digital” economic nexus that allows them to develop intangibles, sell and deliver products and services, and build customer and user bases in markets where they have no employees, physical facilities, or operations.

Amount B isn’t specific to the digital economy. Instead, it aims to simplify and ease the application of transfer pricing principles to “baseline” marketing and distribution activities.

A core objective of the Amount A negotiations is eliminating unilateral digital services taxes. DSTs are commonly levied on gross revenue sourced from (or formulaically apportioned to) markets where customers and users are located. Analysis has demonstrated that these taxes primarily target large US-based multinational enterprises. The gross revenue approach is distortionary and results in heightened risk of double taxation.

Clearly defining DSTs to ensure their elimination with the adoption of Amount A has been a major hurdle to consensus. Another stumbling block is the question of mandatory Amount B implementation, which the US has made a condition of its signing the Amount A treaty.

If negotiations ultimately fail, the proliferation of DSTs appears all but certain. Canada became the most recent country to implement a DST, retroactive to January 2022, soon after the lapsed June deadline for Amount A adoption. Other countries with proposed DSTs—such as Belgium, Czech Republic, Latvia, Netherlands, Norway, and Slovenia—likely will follow suit.

Taxpayer Considerations

Taxpayers have options to protect themselves against the uncertain tax and transfer pricing landscape that continuous delays to a Pillar One solution present. First, they should ensure their transfer pricing compliance is current and consistent with existing regulations and the arm’s-length principle.

They also should consider what portions of their business may be subject to existing DSTs—and Amount A, if it’s adopted—and conduct a risk assessment to determine those jurisdictions in which they may have a digital nexus. Companies may wish to calculate and set aside reserves where pricing discrepancies exist between transfer pricing regulations based on the arm’s-length principle and treatment under DSTs/Amount A.

A careful accounting of DSTs paid will be important to claiming possible future credits against Amount A. It seems likely that a wave of disputes may follow, increasing demand for resolution through the Organization for Economic Cooperation and Development’s mutual agreement procedure, and that these disputes may prove more difficult to close.

In contrast to Amount A, the Inclusive Framework has already released its final report on Amount B, but uncertainty remains. As of Jan. 1, 2025, countries can incorporate Amount B into their legislation and mandate it, offer it as an elective option, or choose not to adopt it at all.

Further, applying Amount B pricing to a transaction doesn’t bind the counterparty jurisdiction to such treatment. Within the Inclusive Framework, these counterparty countries are expected to accept financial outcomes as a political commitment, but this may only be possible in the context of tax treaties. Other cases are likely to result in disputes.

Whether by election or mandate, taxpayers applying Amount B face several practical and technical challenges. They must carefully evaluate the eligibility for Amount B treatment, and segmentation of financials will be required where only some of an entity’s activities are eligible.

Those preparing to implement an Amount B approach should review and prepare to adapt their enterprise resource planning and accounting systems for this segmented reporting, while understanding that intercompany agreements may need to change to reflect this treatment.

Multinationals also should ensure that the segmented income statement is auditable. Ineligible activities and other transactions in the group will still require contemporaneous transfer pricing documentation under existing regulations based on the arm’s-length principle.

In general, multinationals shouldn’t view Amount B treatment as a safe harbor or tax shelter from potential audits, especially if their activities span jurisdictions with different approaches to Amount B adoption and implementation.

Tax authorities in covered jurisdictions will still need to evaluate the correct application of Amount B. As with Amount A, the only proactive avenue for taxpayers in these circumstances at present appears to be through the International Compliance Assurance Program or a negotiation of a bi- or multi-lateral advance pricing agreement. Taxpayers should continually assess the merits of these audit preventative solutions.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Lola Lu is a transfer pricing manager at Forvis Mazars US.

Brendan Williamson is a senior manager in the transfer pricing and economics group at Forvis Mazars US.

Gokce Gucuyener is a transfer pricing and due diligence partner at Forvis Mazars in Istanbul.

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