Transfer Pricing Takes Center Stage: OECD Expected to Announce Progress on Two-Pillar Solution

Transfer pricing takes center stage in the ongoing negotiations surrounding the two-pillar solution, according to the Organization for Economic Cooperation and Development (OECD).

An announcement regarding the technical work on pillar one and the Multilateral Convention is expected from the OECD next week, either on Monday, July 10, or Wednesday, July 12, at the latest.

While progress has been made on the technical aspects of pillar one, doubts remain about the support from the United States, and time is running out. The Multilateral Convention (MLC) is seen as a means to provide certainty to businesses regarding the future of global tax rules.

To facilitate progress, countries involved in the Inclusive Framework have agreed to refrain from imposing new digital services tax (DST) regimes until 2024. Several EU member states, including France, currently have a DST in place and have committed to abolishing it if the two-pillar solution is successful.

The OECD officials aim to finalize key details of pillar one by the end of July, particularly focusing on "amount A" and "amount B." These components of the profit allocation mechanism are crucial for the success of pillar one.

The MLC may include changes to tax treaties, specifically concerning withholding taxes, before new profit allocation rules can be implemented. The European Commission's progress report confirms that parts of "amount A" have already been incorporated into the provisions of the MLC.

Amount A aims to redistribute residual profits of large multinational companies to relevant jurisdictions, while amount B seeks to simplify transfer pricing rules and establish a fixed rate of remuneration for certain functions in jurisdictions. These changes would redefine international taxing rights and introduce formulaic aspects to transfer pricing rules, potentially altering the role of the arm's-length principle.

Once an agreement is reached, the OECD plans to launch a validation phase for amount B, involving public consultation and the creation of an implementation framework for 2024, with a review of the rules scheduled three years later.

However, the European Commission emphasizes that the technical work is not yet complete, and further meetings are scheduled in the coming weeks to address outstanding issues such as the elimination of double taxation, the treatment of withholding taxes, and other key concerns.

If negotiations prove successful, the MLC could be signed by the end of 2023, with implementation commencing in January 2024. July is expected to be a crucial month for tax policymakers and negotiators involved in shaping the future of international taxation.

By fLEXI tEAM