OECD extends time frame for completion of Pillar One project, seeks input on new guidance

26 July 2022

The Organisation for Economic Cooperation and Development on July 11 released a comprehensive draft of the model rules countries would adopt to implement Amount A of Pillar One, a new taxing right that would allow market jurisdictions to tax a portion of residual profits from some of the largest multinational enterprises.

The Progress Report on Amount A of Pillar One, which was attached as an annex to the OECD Secretary-General Tax Report to G20 Finance Ministers and Central Bank Governors, is a consultation document that includes draft rules on most of the building blocks of Amount A; however, the report does not yet include the rules on the administration of the new taxing right, including the tax certainty-related provisions. The consultation period will be open until August 19, 2022.

OECD Secretary General Matthias Cormann also confirmed the adoption of a new, “more realistic” time frame for the completion of work on Amount A, which had originally been slated for 2023. Concluding that “better right than rushed,” Cormann said work on the multilateral convention (MLC) for the implementation of Amount A and its Explanatory Statement are expected to be completed in the first half of 2023, with the objective of enabling it to enter into force in 2024 once a critical mass of jurisdictions have ratified it. (For prior coverage, see BDO’s OECD Pillar One Tax Rules Pushed Back to 2024 as Technical Work Continues).

Public input from stakeholders addressed in new draft guidance

In the nine months since the OECD announced on October 8, 2021, that more than 135 members of the Inclusive Framework on BEPS had reached agreement on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy, the OECD had been conducting rolling public consultations on some of the component parts, or building blocks, of the Amount A model rules, including nexus and revenue sourcing; tax base determinations, scope, extractives exclusion, regulated financial services exclusion and tax certainty. The progress report states that more than 250 stakeholders have provided input on the design of those building blocks.

The new draft includes updated guidance on the building blocks that had already been subject to public consultation, as well as guidance on the remaining building blocks for which no previous guidance had been released:

Elimination of double taxation
Marketing and distribution profits safe harbour
Withholding taxes
Segmentation
Unilateral measures

The OECD’s approach to administration is not included in the guidance released. A separate document, with sections on administration and tax certainty, will be released before the next Inclusive Framework meeting in October.

In calling for comments from stakeholders on the newly released guidance, the progress reports states that “the novelty of the concepts relating to this new taxing right and its integration within the existing international tax architecture merit further deliberation with respect to a few of the building blocks.”

Model rules on Amount A

The core elements of the model rules on Amount A, found in Section 2 of the progress report, were developed by the Task Force on the Digital Economy (TFDE), taking into account the stakeholder input received under various public consultations. These core elements include the following:

The scope rules contain thresholds designed to ensure that Amount A applies only to large and highly profitable multinational entities. More specifically, multinational enterprises (MNEs) with global turnover above EUR 20 billion and profitability above 10% would be in scope. The turnover threshold may be reduced to EUR 10 billion seven years after the agreement enters into force. In exceptional cases, a segment of an MNE may be in scope of Amount A, on a standalone basis, while the MNE as a whole is not. Revenues and profits from extractives activities and regulated financial services are excluded from the scope of Amount A.
A special purpose nexus rule identifies market jurisdictions that are eligible to receive Amount A. The nexus rule contains quantitative thresholds based on the amount of revenues an MNE generates in the market jurisdiction. Allocation of Amount A to a market jurisdiction will be allowed when the in-scope MNE derives at least EUR 1 million in revenue from that jurisdiction. A lower nexus threshold – EUR 250,000 -- will apply for smaller market jurisdictions (those with GDP lower than EUR 40 billion) to ensure that they are able to benefit from Amount A as well. The nexus rule is supported by detailed revenue sourcing rules, which provide a methodology for determining where the revenues of an MNE are generated, based on reliable indicators or allocation keys.
The tax base rules provide the steps to calculate an MNE’s profit (or loss) that will be used for Amount A calculation purposes. The MNE’s consolidated financial statements are the starting point for the tax base determination. The rules include a limited number of book-to-tax adjustments and a framework allowing MNEs to carry forward losses.
The profit allocation rules are based on a formula that allocates 25% of an MNE’s profit in excess of 10% of the group’s revenues to eligible market jurisdictions. These profits will be allocated to market jurisdictions in proportion to the amount of revenues that the group generates in that jurisdiction, subject to any adjustment arising from the marketing and distribution profits safe harbour (MDSH). This new rule adjusts the allocation of Amount A for market jurisdictions that already have existing taxing rights over the group’s residual profits.
The rules on the elimination of double taxation will apply to eliminate any double taxation that arises from applying Amount A as an overlay to the existing profit allocation system. The rules will apply on a quantitative and jurisdictional basis to identify “relieving jurisdictions” that will be responsible for the elimination of double taxation.

Withdrawal of all existing DSTs

One of the OECD’s objectives in creating the new taxing right represented by Amount A was “to restore stability to the international tax framework and prevent further uncoordinated unilateral tax measures, as a multilaterally agreed solution will avoid the risk of retaliatory trade sanctions that could result from unilateral approaches such as digital services taxes.” To that end, the MLC will contain provisions requiring the withdrawal of all existing digital service taxes (DSTs) and similar measures with respect to all companies, and will include a definitive list of these existing measures.

Political considerations

While technical work on both Pillars One and Two of the OECD approach to the taxation of the digital economy continues, the project has run into some political hurdles. In his report, Cormann wrote “[A]ll G-7 countries, the European Union, a number of G-20 countries, and many others have already scheduled changes in their domestic legislation to introduce the model rules,” adding that “implementation of the global minimum corporate tax seems ineluctable.” However, the two-pillar plan has not yet been adopted in the EU, which originally planned to proceed to quick implementation but has not been able to get all member states on board, or in the U.S., where concerns that the new rules could have a negative economic effect has stymied the adoption process.

We have a range of insights analysing the changing landscape of the taxation of the digital economy and have submitted comments to the OECD on Pillars One and Two. View our insights within our Taxation of the Digital Economy hub.

Mark Schuette
mschuette@bdo.com

Monika Loving
mloving@bdo.com

Ross Robertson
ross.robertson@bdo.co.uk