NERA Experts Comment on the OECD Proposal on Pillar One Blueprint

15 December 2020
Dr. Harlow Higinbotham, Dr. Vladimir Starkov, Dr. Niraja Srinivasan, Nihan Mert Beydilli, Ralph Meghames, and Dr. Emmanuel Llinares

In a new commentary letter submitted to the OECD, NERA transfer pricing experts Dr. Harlow Higinbotham, Dr. Vladimir Starkov, Dr. Niraja Srinivasan, Nihan Mert Beydilli, Ralph Meghames, and Dr. Emmanuel Llinares offer their analysis of the Pillar One Blueprint.

Overall, they believe that it will not be possible to maintain consistency between the approach that is being laid out in the Pillar One Blueprint and the arm’s length principle, and that at some point in time, it will be necessary for the OECD to make a choice as to whether it maintains the arm’s length principle or whether it basically sets a number of safe harbour rules that will likely conflict with the results obtained by independent entities trading at arm’s length in the open market. The approach currently proposed by the Inclusive Framework is openly inconsistent with the arm’s length principle and with established intercompany pricing processes that achieve results substantially equivalent to those achieved by independent companies trading at arm’s length.

They are also of the opinion that the approach proposed by the Inclusive Framework may not be based on correct premises in terms of the way multinational enterprises create value and how they deploy their employees and assets to conduct business in the “market jurisdictions.” In other words, multinational enterprise’s creation of value is linked to the people they employ and the assets they own and develop. The fact that a multinational enterprise has sales in a country does not in itself means that it should be subject to corporate income tax in such country.

In their opinion, the arm’s length principle is a better way to address the issues that the Pillar One Blueprint is attempting to address. They believe that it is important to give the arm’s length standard a chance, particularly now as the BEPS Action Plan is being implemented. The latest OECD Transfer Pricing Guidelines are just beginning to be relied upon in tax audits and it is not yet possible to assess how effective they are.