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In 2019, the OECD released a public consultation document and its work program that address the tax challenges raised by the digitalization of the economy. These documents essentially discuss proposals that either address the allocation of taxing rights (Pillar I) or unresolved Base Erosion of Profit Shifting issues (Pillar II). Regarding Pillar I, three solutions were proposed: user participation, significant economic presence, as well as the marketing intangibles approach. The purpose of this contribution is to assess the Pillar I proposals considering their policy rationale and the broadly agreed tax policy principles by tax administrations. In light of the assessment, the author takes the view that the marketing intangible proposal, which seems to apply to consumer (or user) facing businesses, could be the most appropriate solution to address the issue of the allocation of taxing rights. However, that proposal incites several issues concerning its profit allocation mechanism. Thus, in order to achieve tax certainty, the contribution offers a potential solution for implementing the consumer (or user) facing proposal, that is, to resort to a simplified residual profit split method that is based on operating profit margins of a MNE Group . The article provides a high-level overview of the design of the mechanism and briefly addresses issues related to scope and nexus as well as rules that deal with elimination of double taxation.

In recent years, investments in technology have resulted in an exponential growth of AI/robots. It is argued that some of these innovations are able to outperform and replace humans in various types of jobs. Accordingly, concerns regarding government revenues have been raised, as AI/robots could trigger widespread unemployment with the result that less tax revenue will accrue to the government. This contribution, as a start, analyses whether or not this is truly a concern. In order to do so, the authors map the Industrial Revolution(s) that humankind has witnessed and then conduct a literature review of economic and demographic studies relevant to the debate. The economic studies indicate two different directions, that is, some argue that AI/robots (Industry 4.0) will increase human jobs whereas others argue that jobs could disappear. At the same time, the demographic perspective indicates that a purely economic employment-focused view of AI/robots is bound to lead to inconclusive results. Assuming that this is a probable concern, the authors summarize selected measures taken by governments as well as the various options that have been considered in academic literature to introduce taxes on AI/robots. Subsequently, the authors analyse the various “taxing” options from the perspective of commonly accepted tax policy principles applicable to electronic commerce (Ottawa Taxation Framework conditions). This analysis indicates that several proposals (e.g. proposals that treat AI/robots as independently taxable subjects or proposals that attribute income to owners of AI/robots) breach the principles of (i) neutrality; (ii) simplicity and certainty; (iii) efficiency; (iv) effectiveness and fairness; and (v) flexibility. Thus, such measures should not be pursued. The authors also conclude that, at this stage, targeted taxes on AI/robots should not be introduced, as this would also be contrary to the measures taken by governments globally to promote research and development (R&D) (input or output incentives). The present contribution therefore suggests that governments need to be proactive rather than reactive in this area. This could be achieved by monitoring the impact of AI/robots on a regular basis, and if the trend indicates that jobs are disappearing or revenues are declining, then the article suggests that states raise funds from an earmarked education tax. The funds raised from this tax, among other objectives, should be used to finance and foster professional educational programmes to reskill workers, besides assisting and guiding them to transition into new roles. However, a national measure may not be sufficient to tackle the issue (issues) at stake, especially in light of the demographic perspective discussed in the contribution. Thus, considering some jurisdictions may not be in a position to implement or fully benefit from an education tax, the authors also discuss the possibility of implementing a global fiscal redistribution mechanism (multilateral solution) from developed (surrender jurisdictions) to developing countries (recipient jurisdictions). The latter, depending on its scope, could be in the form of a global education tax or more broadly a planetary tax.

The current profit allocation framework, i.e. the arm’s length standard, is mainly based on a facts and circumstances analysis. In particular, depending on the situation, facts and circumstances-related allocation keys are used to allocate profits among various entities within a multinational enterprise (MNE). Nevertheless, there are situations wherein predetermined formulas and/or allocation keys are also used within the standard. The purpose of this article is to show that predetermined approaches will quickly infiltrate the profit allocation framework, although a facts and circumstances analysis and/or allocation keys will continue to be used. The authors support this proposition by analysing the current debate on profit allocation with respect to the digitalization of the economy. They conclude that the use of predetermined approaches is inevitable if the objective is to develop a simplified solution with respect to the profit allocation debate made in the context of Pillar 1 of the digital debate. A simplified solution would be to apply a formulary approach at the MNE group level and an arm’s length principle (ALP) approach at a separate-entity level. More specifically, a predetermined formulary approach in the form of a simplified but modified residual profit split method could be applied at the MNE group level to reallocate residual profits (the so-called Amount A). Simultaneously, a predetermined formula based on the arm’s length approach could be applied at a separate-entity level, that is, to routine distribution and/or marketing activities (the so-called Amount B). This latter approach will be complemented and backed up by a facts and circumstances arm’s length analysis (the so-called Amount C, which, in some respects, would seem to be more of a process, rather than a separate amount). In this context, the authors address their view on a few key questions that arise in the “new” profit allocation context for Amounts A, B and C. For Amount A, the authors express their view on determination of the MNE tax base, determination of losses, revenue sourcing rules, information reporting, collection of taxes as well as stabilization of the MNE group approach. For Amount B, they provide their view on issues such as the determination of the scope of application, the determination of the fixed return, its legal qualification and its possible stabilization. The need to introduce a more robust dispute resolution institutional framework is also addressed with specific regard to Amount C. Finally, they analyse the impact of the new profit allocation mechanisms on selected business models used by MNEs. It should be noted that the present contribution does not address, as far as necessary to provide adequate context, the normative debate on a new scope, new nexus or new relief rules but rather focuses on the challenges arising from profit allocation.

A core objective of the Base Erosion and Profit Shifting (BEPS) Project was to ensure that profits are taxed where activities generating the profits take place. In this regard, international policy making organisations, such as the OECD and EU Commission, have reinforced the application of certain activity-based concepts, such as substantial activities, core commercial activity, controls over risks, economic reality and substantial economic activities, in soft and hard law instruments. If these concepts were to be consolidated it could be argued that, if the taxpayer were to comply with the relevant economic activities test, as developed in this article, then that taxpayer entity should be: 1. allocated the returns (income) from a transfer pricing perspective; 2. given access to tax treaty benefits in relation to the income it derives; 3. given access to benefits offered by EU law, in particular, the non-application of selected national anti-abuse rules (such as Controlled Foreign Company Rules) and anti-avoidance rules found in the corporate tax directives such as the Parent Subsidiary Directive and the Interest and Royalty Directive as well as the European Anti-Tax Avoidance Directive (for instance, the General Anti-Abuse Rule); and 4. the taxpayer entity should obtain access to economic activity-based preferential regimes. This article supports this proposition by taking into consideration the latest versions of the OECD Transfer Pricing Guidelines, the OECD Commentary, the case law of several courts, in particular the Court of Justice of the European Union, state practices as well as scholarly literature. Essentially, multinational enterprises (MNEs) can continue to engage in profit shifting activities post-BEPS. Furthermore, tax competition intensifies between states to attract economic activities, either through tax incentives or corporate tax rate/withholding tax rate reductions. Moreover, given that the activity-based concepts are subjective, both tax uncertainty and tax disputes will be on the rise. Interestingly, the activity-based concepts do not alter the allocation of the taxing rights framework agreed by states. Nevertheless, in light of the digital debate, there is pressure to reconsider the allocation of the taxing rights framework (Pillar I) and to find solutions to counter genuine profit shifting strategies to low tax jurisdictions/tax competition among states (Pillar II). Thus, the movement from BEPS 1.0 to BEPS 2.0 (Base Expansion and Profit Sharing) is already being witnessed.

Although cash pooling arrangements are one of the most important tools to facilitate efficient liquidity management within multinational enterprises (MNEs or group companies), the application of the arm’s length principle to these arrangements has not been sufficiently explored as yet.Against this background, this article critically discusses the transfer pricing aspects of physical cash pooling arrangements, especially in the light of the OECD’s recent Discussion Draft on Financial Transactions. Specifically, the article discusses the application of the arm’s length principle to cash pooling borrowings and deposits, guarantees issued in the context of the pooling arrangement, remuneration of the cash pool leader (CPL) as well as allocation of the cash pool benefit, in particular, the netting benefit and the volume discount. The authors also provide comments on the impact of the negative interest rate environment on cash pooling arrangements.