Establishing a streamlined switch pricing method for baseline distribution — initially seen because the least controversial side of the OECD-brokered two-pillar international tax reform — has hit a roadblock that might be tough to resolve.

First proposed in a 2019 OECD session doc, a undertaking awkwardly dubbed quantity B was introduced as a type of enticement to multinationals cautious of the extra radical reallocation of taxing rights underneath quantity A. Quantity B was meant to simplify pricing of “baseline” wholesale distribution actions carried out by multinational teams, which have traditionally led to extra disputes than the financial stakes usually justify. Because the 2019 session doc put it, “applicable and negotiated mounted returns might present certainty to each taxpayers and tax administrations, and scale back the dissatisfaction with the present switch pricing guidelines.”

The thought is {that a} mechanical system for assigning mounted working margins to comparatively stripped-down wholesale distribution subsidiaries might yield a dependable measure of an arm’s-length return, however with none of the compliance or enforcement prices related to the bespoke transactional web margin technique (or in U.S. parlance, comparable income technique) analyses carried out at present. In that sense, quantity B wouldn’t a lot displace the arm’s-length precept as set up a extra sensible option to apply it.

Regardless of this promise of mutual profit, a new quantity B session doc launched July 17 explains that inclusive framework international locations concerned within the negotiations have cut up into two camps. For the primary group, the eligibility guidelines, or “scoping standards,” for quantity B ought to rely closely on quantitative screening. The group argues {that a} practical depth metric — particularly, working bills as a proportion of gross sales — must be used to display out distribution subsidiaries that do greater than perform fundamental wholesale distribution actions.

For the second group, an working expense depth display isn’t ok. It insists on layering an unbiased, subjective check that will get rid of distributors that carry out something lined by the amorphous idea of “non-baseline contributions.” The group’s members query the empirical and theoretical foundation for an working expense depth display, and so they acquiesce to its use solely to substantiate the qualitative evaluation of the baseline or non-baseline character of a distributor’s actions. In response to the primary faction of nations, this sort of subjective stand-alone display would largely defeat the aim of quantity B, which is to simplify and streamline the method.

In its new session doc, the OECD sadly noticed match to check with these rival approaches to quantity B as “Different A” and “Different B,” which is doubly complicated given the dearth of any inherent hyperlink between the letters and the supporters. Though obscure runic characters that fell into disuse centuries in the past would in all probability be preferable to a different A-or-B naming system, I’ll merely refer to every possibility as what it really is: a qualitative screening method (different B) and a extra goal screening method (different A).

The proposal specified by the brand new session doc represents simple progress on quantity B. Not like its December 2022 predecessor, which was extra like a menu of choices than a concrete proposal, the brand new doc comprises a structured sequence of scoping exams and a pricing matrix that assigns working margins primarily based on business and issue depth. It additionally proposes some sensible options for the issues that come up in jurisdictions the place native comparables are scarce or nonexistent.

What the doc doesn’t do and, no less than at this level, couldn’t do is counsel any foundation for compromise on the elemental quantitative-versus-qualitative screening debate that also divides international locations concerned within the negotiations. Not one of the OECD’s appreciable progress in different areas, together with its refinement of different scoping standards and its versatile however comparatively administrable proposed pricing matrix, will quantity to a lot if international locations can’t attain settlement on the problem.

By all accounts, the U.S. delegation appears resolute in its insistence that goal working expense depth screening can do the job of eliminating non-baseline distributors with out creating the uncertainty and threat of disputes related to a subjective check. If international locations that favor a extra qualitative method weren’t equally steadfast in claiming that solely a qualitative exclusion criterion can make sure that quantity B applies solely to the meant class of distributors, there in all probability would have been an settlement by now.

It’s unlucky that progress on probably the most sensible and, in precept, broadly useful aspect of your complete two-pillar undertaking has stalled due to this dispute. And it’s significantly unlucky that the dispute displays what seems to be an obstinate unwillingness by one aspect to belief quantitative metrics. Not like different areas of tax legislation, which usually use mechanical and prescriptive guidelines, switch pricing is an economics-based area that essentially depends on quantitative variables like costs and profitability metrics to find out whether or not managed transactions are priced at arm’s size.

It’s tough to conceive of a model of quantity B that enables subjective assessments to override working expense depth metrics whereas nonetheless reaching its targets of simplification and dispute prevention. Hopefully, international locations will develop into extra amenable to a quantitative method to quantity B earlier than the undertaking begins to languish, however for now that doesn’t appear significantly seemingly.