The multilateral instrument to implement Pillar One is scheduled to be signed by the day after tomorrow, June 30, 2024. Although officials at the OECD are still making progress on readying a treaty, many commentators, including yours truly, suspect that the June 30th deadline will be met. Earlier this week, I visited the Max Planck Institute  for a conference on the global tax deal and encountered an interesting article, Pillar One and Mobility – A Truly Global Solution?, 51 Intertax 840 (2023), by Svetislav Kostić (University of Belgrade Law School; Google Scholar) and one of the conference co-organizers, Aitor Navarro (Max Planck Institute for Tax Law and Public Finance; Google Scholar). Although the future of Pillar One is not bright, it is worth introducing this paper for this week's review as it highlights many of the concerns that developing countries have about Pillar One.

Amount A attempts to reshare the pie through a new taxing right for market jurisdictions. However, Kostić and Navarro argue that compliance hurdles may refrain MNEs from operating in notably smaller and less financially advantaged developing countries. Pillar One provides no guidance on how the Amount A profits are to be taxed. Instead, the OECD allows each market jurisdiction to tax Amount A in accordance with its domestic tax rules. Additionally, an entity that is liable for tax on Amount A income in a market jurisdiction will be required to register in every market jurisdiction which it has a filing requirement for. Moreover, local tax obligations would be required to be paid in local currency. Hence, MNEs would be compelled to become involved with legal environments and tax cultures with which they had no experience whatsoever and establish a tax presence in various jurisdictions. This requires not only opening a bank account or obtaining a tax registration number but also an obligation to comply with local foreign exchange legislation. Readers in advanced economies may not understand the pressing issue but, alas, in many developing countries suffering from significant inflation, the official central bank exchange rate may significantly differ from the market reference. Furthermore, discharging tax obligations will require the appointment of a local tax representative, adding to the previously non-existent compliance costs. Taking the entire scheme into account, an MNE may simply decide to cease doing business with countries in which it would face significant additional compliance costs and an increased level of legal uncertainty. As a result, smaller and poorer market countries (i.e., the vast majority of developing countries) would be further isolated from mainstream global economic development instead of gaining additional taxing rights. 

Kostić and Navarro contend that a truly global solution is needed to address these concerns and propose a full centralization of tax compliance at the level of one supranational body to whom all reporting should be made. Specifically, a supranational should be formed to determine Amount A's entire tax liability while the MNE's respective national tax authority would be in charge of collecting and transferring it to the supranational body for distribution. The latter would subsequently allocate the apportioned revenues to individual market jurisdictions. Funds would be collected and transferred using only a few agreed-upon global currencies. This proposal is inspired by the approach proposed by the European Commission in its draft Digital Service Tax Directive in 2018. Kostić and Navarro consider that the OECD/G20 Inclusive Framework on BEPS may take this role. 

On the other hand, Amount B has nothing to do with addressing the tax challenges arising from digitalization—the rationale of Pillar One. Rather, Amount B would standardize the remuneration of related party distributions that perform baseline marketing and distribution activities in market jurisdictions. Primarily, distributions that purchase from related parties and resell to those that are unrelated. In doing so, Amount B adopts predetermined fixed margins. This runs contrary to what has been the core of transfer pricing regulations, specifically the comparability analysis. But the predetermined margins would attempt to emulate as much as possible the arm's length outcome using the comparability analysis. Amount B may not increase market taxation, but it would enhance certainty, simplify compliance and assessment, and reduce litigation in this area. Hence, it is strongly favored by many developing countries, like India, that experience many litigations on the arm's length remuneration of distribution activities and the relevance of marketing expenses.

However, whether Amount B would serve its purpose is unclear. First, Amount B's in-scope activities are defined by a set of qualitative and quantitative markers that aim to narrow the covered functional distribution profile. Given such a narrow scope and that it requires conducting a full delineation of the controlled transactions under scrutiny, disputes will likely arise on whether a transaction is within the prescribed range. Also, the use of predetermined margins by some countries vis-a-vis a fully-fledged transfer pricing comparability analysis required by other countries to price routine distribution arrangements may lead to mismatches, resulting in further disputes. The most effective way to minimize friction in this regard would be to reach a compromise to eliminate mismatches between all Inclusive Framework members irrespective of whether they adopt Amount B. For this purpose, the OECD advocated for mandatory binding dispute resolution in the 2020 Blueprint, but, unfortunately, the 2022 draft does not address the matter. 

Second, Amount B requires a fully-fledged analysis of the functions performed, assets used, and risks assumed by the distributor. In this regard, it must be emphasized that the performance of functions depends on the activities of the personnel assigned to the entity. In the globalized and digitalized economy, these individuals may well be in other countries and performing their functions remotely if their assigned tasks allow for it. Therefore, a group could arrange its affairs to be either in-scope or out of scope by reassigning functions among its personnel. The problem caused by the mobility of personnel is not new to Amount B. The same problem persists in the current configuration of transfer pricing. In short, Amount B's requirement to establish distribution profiles not only entails an extra layer of analysis and complexity but also fails to overcome the existing problems of the traditional transfer pricing rules. 

Kostić and Navarro conclude that even if Pillar One seems doomed to fail, lessons learned from its design and impact on mobility matters should inform further developments in reshaping international taxation. Moreover, I would like to commend their efforts to highlight the concerns from developing countries' perspectives and urge policymakers to be more mindful of simplicity when discussing a global solution.