OECD publishes proposal to rewrite international profit allocation rules


On 9 October, the Secretariat of the Organisation for Economic Co-operation and Development (OECD) published a Secretariat Proposal for a “Unified Approach” under Pillar One (the “Pillar 1 Unified Approach”).

The proposal seeks to allocate a greater share of taxing rights to the countries where consumers/users are located – regardless of a business’ physical presence there. Should the Inclusive Framework countries agree to the Secretariat’s proposals this would represent a major change of the international tax system.

The proposal supplements the arm’s length principle (ALP) with formulaic measures.


The changes are focused on “large consumer-facing” businesses. While this is not yet a defined term, it is noted to be most applicable to “digital centric businesses which interact remotely with users, who may or may not be their primary customers, and other consumer-facing businesses for which customer engagement and interaction can more easily be carried out from a remote location”. It would also include those selling through unrelated distributors

While extractive industry activities (for example) seem to be out of scope of the described approach, other sector specific carve-outs may apply (e.g., financial services, commodities, and, likely, some B2B situations). Questions remain open on how broad these carve-outs will be, what adjustments will need to be made to global profits, and whether (and how) different business lines within a group will be segmented.

New Nexus rule

Local nexus thresholds would also be determined, which could be adapted to the size of the market and would require a new self-standing treaty provision (and although it is not discussed in the document, changes in domestic legislation would also be required in many countries). A taxable nexus can be created even in the absence of a physical presence. The simplest way to set the nexus threshold is said to be through revenue thresholds, but it would need to take into account scenarios where non-paying users are not located where revenues are booked (e.g., online advertising).

New Profit Allocation rule

For companies in scope of the proposal, the new profit allocation rules supplementing the ALP would be based on three amounts:

  • Amount A is a new formulaic allocation of a portion of deemed global residual profit (in excess of an agreed baseline and potentially based on financial statements and on a group or business line basis) among countries where customers are located, regardless of where the business’ physical activities are located. No percentages are confirmed in the OECD consultation document, but it would apply equally to both profits and losses.
  • Amount B envisages creating a fixed percentage return that would be allocated to some “routine” functions (specifically, marketing and distribution), thus simplifying and standardising a distribution return to market countries.
  • Amount C would apply where the business’ activities in a country are deemed greater than “routine” functions compensated by Amount B. In this case, a country could seek to assess additional amounts if warranted under traditional transfer pricing facts and circumstances tests, much like the existing transfer pricing system works today.

The system should be assorted with strong dispute avoidance and resolution mechanisms.

Next steps

Following a period to 12 November 2019 for stakeholders to provide written comments on the proposals, a public consultation meeting will take place in Paris on 21 and 22 November 2019. The OECD seeks political agreement among the members of the Inclusive Framework on the basic architecture of the proposed changes in January 2020 so that more detailed technical work on the mechanics can take place throughout 2020.

For a deeper discussion of how these issues might affect your business, please call your usual PwC contact or Stefaan De Baets.