Global agreement on taxing rights: could industry specific, multi-taxpayer, multilateral advance pricing agreements help us walk before we run?

Currently the global tax community is still trying to digest the hundreds of pages of consultation documents related to the Pillar 1 proposals.  The most recent “Progress Report on Administration and Tax Certainty Aspects of Amount A of Pillar One”, quite frankly, was somewhat disappointing.  

The proposals on tax certainty, as my colleagues and I have pointed out in our recent EY submission to the OECD, present a framework that “aspires to be global, innovative and highly centralized”. This seems fitting for what is a bold attempt to introduce what is essentially a new global taxing right. The administration proposals on the other hand were firmly grounded in the existing domestic rules.  In this regard, there appears to be an ideological disconnect, and, more importantly a missed opportunity for the design of a global mechanism for administration that is fit for purpose.

At the time of drafting this blog the outcome of discussions and the proposals / consultation around Amount B are still awaited. Hopefully, what we will see are proposals for innovative global solutions, otherwise I fear that this will be again, a missed opportunity.

Development of a global mechanism for administration of taxation is unquestionably challenging. To date there is very limited experience. Given this, in this blog I propose a form of multilateral coordination and cooperation that could assist the global tax community to build experience in this area.

What is an IMMAPA?

You would not be alone if you don’t know. Until drafting this blog, I didn’t know either - it’s simply the acronym for my idea for industry specific multi-taxpayer multilateral advance pricing agreements (IMMAPA - because international tax needs more acronyms!). 

What I have in mind is a series of multilateral APAs that, as a starting point, countries elect to sign up to. The legal basis for an IMMAPA could be the web of existing MAP articles in bilateral tax treaties, a new multilateral agreement or an addendum to the MLI.

Each IMMAPA would have a defined set of characteristics/ criteria (industry definition, functions, assets and risks, perhaps with some financial indicators) for the entities that could benefit from it (if they choose).  And each IMMAPA would contain an agreed arm’s length operating margin or range of operating margins (or net cost-plus markup or similar, depending on the specific IMMAPA). These margins, or ranges of margins, would be industry specific (as each IMMAPA would be industry specific) and could also differ by geographic region, if that’s what is necessary to reach agreement. 

The various IMMAPAs would then be there for eligible taxpayers to sign up to. An MNE would only get coverage for the legal entities in the group that (a) meet the defined eligibility criteria, (b) elect to accept it, (c) are resident (or have a PE) in a country that has signed up to that particular IMMAPA. 

There would be different IMMAPAs for different industries or industry segments. There is room for flexibility within the framework.

What experience can we draw on?

On the one hand an IMMAPA could be seen as a multilaterally agreed safe harbor. On the other hand it can be seen as an extension of already well-established APA and MAP practices.  In this regard, there is a wealth of experience from around the globe that can be combined and drawn on:

• "traditional" taxpayer specific multilateral and bilateral APAs
• the previous OECD work on memoranda of understanding for Competent Authorities to establish bilateral safe harbors
• industry specific APA type arrangements such as Maquiladoras in Mexico and the hotel sector in the Dominican Republic
• bilateral MOUs and protocols between Competent Authorities that benefit multiple taxpayers, such as the memorandum of understanding between Germany and Pakistan regarding application of the arm’s length principle to pharmaceutical companies

What is the advantage of IMMAPAs?

The advantage of having a series of IMMAPAs, is that you don’t need global consensus to make it happen. Countries that agree can start right away. The countries that want to sign up can. Others can sign up later, or not at all. Some countries can sign up for some IMMAPAs and not to others (depending, for example, on the importance of the respective industries to their economies). Mechanisms can be built in to refresh the benchmarks periodically (i.e., every 5 years, like a typical APA period). Countries that don’t like updates can drop out. 

On the taxpayer side, taxpayers can elect whether to sign up. So, they can get certainty if it fits with the realities of their business operations. But since it’s optional, clearly grounded in the arm’s length principle, and has clearly defined criteria and is industry (or sub industry) specific, a series of IMMAPAs doesn’t undermine the years of experience with the OECD Transfer Pricing Guidelines and the arm’s length principle. Nor would they disturb the level playing field between related parties and independent parties. MNEs with different business models for whom one of the IMMAPAs is not appropriate can seek their own certainty via “traditional “APAs, or can proceed without advance certainty and continue to take filing positions. 

 Best of all, when it comes to global agreement and coordination in relation to taxing rights and tax administration, it allows us to walk before we run, and potentially paves the way for a ‘’fit-for-purpose’’ administrative and certainty framework for Amount A (or an equivalent). And while we learn to walk, it will free up valuable resources of tax authorities and taxpayers alike. 

Note:

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.. The author thanks Mike McDonald and Ronald van den Brekel, and numerous other colleagues, for their helpful comments