Episode Transcript
[00:00:00] Speaker A: Foreign.
And welcome to our podcast series where we bring you insights into the latest developments in global tax policy and controversy space.
My name is Bruno Nicet da Silva and I'm a Senior Advisor at A and M Global Tax Policy and Controversy Group and I'm joined by my colleague Kevin Jacobs.
[00:00:23] Speaker B: Thanks Perno. I'm Kevin Jacobs. I'm Managing Director at A and M and head of our National Tax Office where I focus on US and international tax policy, policy restructuring and complex tax controversy matters.
Today we'll look ahead at what is shaping the global tax landscape, focusing on the future of the Pillar 2 side by side arrangement, the implications of Pillar 1 on digital service taxes, and the growing role of courts in transfer pricing disputes.
Turning to Pillar two As we discussed in a prior episode, the side by side arrangement generally excludes the application of Pillar 2 to US parented multinationals on a go forward basis other than through a jurisdiction's qdmtt.
As a result, the focus for US Multinationals has shifted. It's less about substantive exposure under Pillar 2 and more about mandatory reporting obligations that still apply.
From a US Perspective, there's been a strong emphasis on trying to streamline and simplify those requirements while also monitoring whether the side by side arrangement is being adopted and implemented consistently by foreign jurisdictions.
It's also important to note how the US Views the upcoming stock tick. The stocktake is not seen as an opportunity to unwind or abandon the side by side framework. Rather, it is viewed as a checkpoint and an opportunity to make targeted technical adjustments to improve how the system operates in practice.
There have also been reports that as a result of the side by side arrangement, some companies are considering domesticating or redomesticating to the United States.
A couple of observations are worth flagging here.
First, exiting the US Tax net is difficult, so these are not decisions companies should make lightly.
Second, from the Administration's perspective, companies decisions to return to the US Are being driven by broader global policy considerations and the position that the US Is in from a financial markets perspective rather than by the side by side arrangement itself.
Bruno, what insights do you have on the OECD's perspective?
[00:02:38] Speaker A: Thanks Kevin. I think the underlying premise for the side by side package was the perception that the U.S. rules were not necessarily per se advantageous when we look to the broader functioning of the US Tax system.
Still, there were raising concerns by countries which date back to the early stages of the discussions on the side by side package of possible corporate inversions as to take advantage of the US Having the and by now is the only country that has a qualified side by side system.
Therefore, the BAPS inclusive framework is working as to ensure that companies would not relocate to the US just to benefit from the side by side system.
This will come through the form of Integrity rules which are coordinated rules that are expected to be released during this year in the form of administrative guidance to the Globe Model Rules.
The purpose of these integrity rules is among others, prevent the abuse or misuse of the side by side system.
There are also public statements from the OECD Secretariat referring to the combined approach of these rules with domestic anti avoidance rules.
There is also the stock tape that you mentioned. So the future stock tape is to be held in 2029 and it is part of the COVID document to the side by side package.
The stocktake has, at least for now, three goals. One is the effect of the side by side package on the global minimum tax implementation. The Pillar 2 rules, in particular the qualified domestic minimum top up tax a commitment to address any substantial risk which are identified and that may affect competitiveness which include as mentioned in the side by side package itself and I quote, changes in corporate structures and identify opportunities for simplification which is a critical area I think for this and the upcoming coming years of the development groups.
So maybe let's turn to pillar one.
There have been developments recently in the US so maybe I'll just speak first about what is happening a little bit from a global perspective. So we see several countries have introduced digital services tax, the DSTS and more countries have recently announced their intention to introduce DSTs as from 2027, such as Belgium or Norway in case there is no progress in the context of the BEPS inclusive framework.
Now other countries have relied on the significant economic presence threshold mostly in the African continent.
We also see discussions at the UN level in the context of the Framework Convention on International Tax Cooperation. So this cohesion includes a proposal on very controversial Article 5 on fair allocation of taxing rights which provides jurisdictions the right to tax where value is created, markets are located, revenues are generated or economic activities take place. Fundamentally, we see here a division between developing countries which are extremely in favor of this broader source taxation. While developed countries prefer a more balanced solution that relies on existing concepts of nexus and profit allocation.
There are also views that consider that even the existing permanent establishment threshold would be sufficient to capture some of the realities and or concerns of the digital economy.
So Kevin, we don't have yet a multilateral solution. How do you see it from a US perspective, Steve, and how this can evolve?
[00:06:17] Speaker B: Yeah, from a US perspective, the Administration has continued to emphasize the importance of open and candid discussions about what the OECD was ultimately trying to solve through Pillar one.
That said, the US View is that Pillar one is effectively dead. While some have pointed back to the historic BEPS actions as possible alternative frameworks, the Administration has not indicated that it would necessarily agree with that approach.
The US Position on dsts has been consistent and direct. The Administration has continued to push back against their adoption, including through recent treaty and trade related protocols. That position was also reflected in the now defunct proposed section 899, where DSTs were explicitly identified as problematic.
Bruno let's turn quickly to transfer pricing. What should our audience know from a global perspective?
[00:07:17] Speaker A: Thanks, Kevin. So I think from a global perspective we expect to see two major developments in 2026.
So one the expected release of a revised Chapter 7 on Intergroup Services.
So this is an expanded guidance to the existing OECD transfer pricing guidelines and the idea is to clarify certain critical areas such what is the of the benefit test when dealing with the Intergroup services, what is the notion of shareholder activities and also the additional layers of documentation that may support evidence that there is actually a benefit surrounding those Intergroup services.
The second element refers to possible updates to the OECD transfer pricing guidelines as regardless the chapters one to three. So the general sections and refer to practical issues that countries have encountered in the application of these sections.
So I will refer four elements 1. Royalty payments and characterization so whether and how the characterization of an entity as a routine entity may impact appropriateness of that entity paying royalties.
Second, the application of the transactional net margin method or the CPM comparable profits method. If we look from a US perspective and the circumstances in which it may be appropriate to use a transaction by transaction approach rather than a combined approach and which approach is preferred. And this relates with paragraph 3.9 of the guidelines which state that the Amazon principle ideally should be applied on a transaction by transaction basis, then pass through costs. There is very limited guidance on the issue transfer pricing guidelines and there is a growing concern that there is a significant amount of costs that are taxpayers treat as pass through costs. So additional guidance of what should or shouldn't be treated as pass through costs and finally the arm's length price range. So there is existing disputes on the most appropriate arm's length range and the point in the range. So most jurisdictions consider the interquartile range as appropriate, but some jurisdictions apply the full range. So the issue is then whether the treasury pricing guidelines should be updated to clarify that interquartile range should be the default position, while full range only in the cases where it can be demonstrated that all comparables are equally comparable to the tested party.
And Kevin, what do you see from a US perspective as regards transfer pricing?
[00:10:00] Speaker B: From a US perspective, there's broad alignment with the OECD on the arm's length principle in theory.
Now in practice, however, we're seeing increased judicial scrutiny of treasury and IRS interpretations, particularly in the post lope or bright environment.
That scrutiny is most evident in the 3M case, where the 8th Circuit focused on what it viewed as the best reading of the statute rather than deferring to regulations that extended beyond the statutory text.
As a result, we are seeing taxpayers take a closer look at their transfer pricing arrangements and consider whether adjustments can be made and defensibly justified.
A key point here is documentation Companies need to clearly document not only any changes they make, but also the statutory rationale for those changes.
The shift is towards asking what a court is likely to view as the best best reading of the statute, rather than simply what the regulations say, recognizing that this may involve taking positions that differ from existing regulatory text.
Taking a step back Taken together from the US's perspective, these developments suggest a shift from policy design to policy administration.
The frameworks are largely set, but how they are applied, challenged and enforced remains unsettled. For multinationals, that puts a premium on thoughtful governance, clear documentation, and understanding of how legal and policy constraints are evolving alongside global tax coordination.
Bruno, any global thoughts that our audience should know about?
[00:11:46] Speaker A: Thanks Kevin. So I will just pick two key words that you mentioned that I think are quite relevant application and administration. So if we look to Pillar two, we may expect more administrative guidance to be released throughout this year. And also, as mentioned earlier, the expected update to the transfer pricing guidelines. So this suggests that M and E should follow the upcoming developments on internal tax policy, international tax policy, and understand how this will impact their tax position and in particular their compliance requirements.
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Thank you.
