Transfer Pricing News Issue 40 - September 2022

BDO submits comments to OECD on Pillar One Progress Report

BDO’s Global Transfer Pricing team on August 19 submitted comments to the OECD on a consultation document regarding the building blocks of Amount A of Pillar One, focusing on three themes: the need to strike the right balance between accuracy and practicality, a call for enhanced clarity and additional examples, and the importance of the tax certainty process.


The Organisation for Economic Cooperation and Development (OECD) on July 11 released a comprehensive draft of the model rules countries would adopt to implement Amount A of Pillar One, a new taxing right that would allow market jurisdictions to tax a portion of residual profits from some of the largest multinational enterprises.

The Progress Report on Amount A of Pillar One, which was attached as an annex to the OECD Secretary-General Tax Report to G20 Finance Ministers and Central Bank Governors, is a consultation document that includes draft rules on most of the building blocks of Amount A; however, the report does not yet include the rules on the administration of the new taxing right, including the tax certainty-related provisions.

Comments on Progress Report

BDO noted that while the revenue sourcing rules in the Progress Report remain relatively unchanged from the draft model rules in the February 2022 consultation document, some welcome changes had been made. However, further changes would help achieve the goal of balancing the need for accuracy with the need to limit compliance costs.

On the topic of the revenue sourcing rules, BDO wrote: “We continue to advocate for a broader adoption of allocation keys, without the administrative burden associated with their use. More specifically, we would encourage the [Task Force on the Digital Economy] to consider adopting the approach to revenue sourcing embodied in the initial transition phase and make that approach a permanent option. A reasonable allocation key should be sufficient and preferable to what may turn out to be a difficult and unsuccessful search for data for many MNEs, especially those outside of the digital economy.”

As a secondary approach, BDO suggested that the revenue sourcing rules proposed for the specific transaction types in the Progress Report could be applied if a multinational entity (MNE) wanted to do so and could demonstrate that the approach would yield a Reliable Indicator, but the primary methodology should be the use of an allocation key. Under this approach, an MNE would not have to search for data within or outside its group in order to allocate revenue, nor would it have to demonstrate that it tried but failed to identify a Reliable Indicator. According to BDO, this approach would greatly simplify the implementation of Pillar One.

The Progress Report included a title on the elimination of double taxation with respect to Amount A. However, the description of the method to allocate the Amount A profit from relieving jurisdictions is complex and open to multiple interpretations in several areas. Comprehension would be significantly aided if the OECD provided examples of how taxpayers should apply the relieving methodology. In addition, the methodology for eliminating double tax in the jurisdiction of the marketing entity was noted as being overly complex.

BDO noted that the proposed scope rules seem generally straightforward, but that a few provisions would benefit from additional clarity, including the definition of the term “Acceptable Financial Accounting Standards.”

The Progress Report includes a title on the determination and allocation of taxable profit, which contains the formulas for the allocation of profit to market jurisdictions and for calculating the marketing and distribution safe harbour (MDSH). The formula for the allocation of profit to market jurisdictions is straightforward, but the MDSH mechanism is overly complex, and in some respects, unclear. BDO suggested that “stakeholders would benefit from specificity and examples. Alternatively, the mechanism could be reconfigured to more clearly reflect its intent as a safe harbour.”

Public consultation

The OECD held a public consultation on 12 September to discuss the comments submitted by stakeholders. For a report on the public consultation, see OECD Holds Public Consultation on Pillar One Progress Report.

Laurie Dicker