On July 11, 2022 the OECD opened a public consultation on the Progress Report on Amount A of Pillar One, which it released on that same date. This Progress Report is a consultation document released by the OECD Secretariat for the purposes of obtaining further input from stakeholders on the technical design of Amount A. The consultation period will run until August 19, 2022.
According to the OECD, the comments provided will assist members of the Inclusive Framework in completing the work on the technical development of Amount A. The OECD seeks comments with respect to the rules described in the Progress Report. Where relevant, input should refer to the relevant section of the rules. The OECD states that while comments are invited on any aspect of the rules, input will be most helpful where it explains the additional guidance that would be needed to apply the rules to the circumstances of a particular type of business, as well as input on whether anything is missing or incomplete in the rules.
The proposals included in the consultation document have been prepared by the OECD Secretariat, and do not represent the consensus views of the Inclusive Framework, the Committee on Fiscal Affairs (CFA) or their subsidiary bodies.
The core elements of the rules that guide the functioning of Amount A are contained in Section 2 of this Report. These rules have been developed by the Task Force on the Digital Economy (TFDE), taking into account the stakeholder input received under various public consultations. While they are framed as domestic law rules, they will serve as the substantive basis for negotiating the Multilateral Convention (MLC) through which Amount A will be implemented. They consist of the following components:
- The scope rules contain thresholds that are designed to ensure that Amount A only applies to large and highly profitable Groups and, as far as possible, have been drafted to apply in a quantitative and objective manner, to be readily administrable and provide certainty as to whether a taxpayer is within scope. In exceptional cases, a Disclosed Segment may be in scope of Amount A, on a standalone basis, while the Group 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 a Group generates in the market jurisdiction. A lower nexus threshold will apply for smaller market jurisdictions to ensure that these 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 a Group are generated, based on reliable indicators or allocation keys.
- The tax base rules provide the steps to calculate the profit (or loss) of a Group that will be used for Amount A calculation purposes. It is the measure of profit that forms the basis for the partial reallocation. The Consolidated Financial Statements of a Group, prepared under Acceptable Financial Accounting Standards, form the starting point for the tax base determination. The rules include a limited number of book-to-tax adjustments and a framework allowing Groups to carry-forward losses.
- The profit allocation rules are based on a formula which allocates 25% of a Group’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, and subject to any adjustment arising from the Marketing and Distribution Profits Safe Harbour (MDSH). The latter adjusts the allocation of Amount A for market jurisdictions that already have existing taxing rights over the Group’s residual profits.
- The elimination of double taxation rules 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.
In addition to the operative provisions of Amount A, the MLC will contain provisions requiring the withdrawal of all existing digital service taxes (DSTs) and relevant similar measures with respect to all companies, and will include a definitive list of these existing measures. The MLC will also include a commitment not to enact DSTs or relevant similar measures, provided they impose taxation based on market-based criteria, are ring-fenced to foreign and foreign-owned businesses, and are placed outside the income tax system (and therefore outside the scope of tax treaty obligations). The commitment would not include value-added taxes, transaction taxes, withholding taxes treated as covered taxes under tax treaties, or rules addressing abuse of the existing tax standards. The development of the MLC will include work to further develop the definition of DSTs and relevant similar measures, and to provide for the elimination of Amount A allocations for jurisdictions imposing future measures that are within the scope of this commitment.
The substantive rules on Amount A consist out of 7 Titles and 10 Schedules.
Title 1 defines a Covered Group whose profit may be subject to a tax charge under Title 2, which contains the charging provision allowing a market jurisdiction to apply the new taxing rights to [one or more Group Entities] of a Covered Group. Title 3 contains the threshold that must be met to establish a taxable nexus in a Jurisdiction and determines when revenues are treated as arising in a Jurisdiction. Title 4 contains rules governing the determination and allocation of taxable profit to [Jurisdiction name] for a Period. Title 5 contains rules on the elimination of double taxation arising from the taxation of a portion of residual profit of a Covered Group in a market jurisdiction. Title 6 contains rules on procedural and administrative provisions. Title 7 contains definitions for the purposes of this Act and its Schedules.
The Schedules supplement and provide guidance on the application of the rules contained in the
Titles. Schedule A contains provisions on scope that supplement Article 1. Schedule B contains the rules governing the exclusion of Revenues and profits of a Qualifying Extractives Group. Schedule C contains the rules governing the exclusion of Revenues and profits derived from Regulated Financial Services. Schedule D contains the rules governing the application of this Act to any Segment Entity of a Covered Segment. Schedule E contains the detailed revenue sourcing rules that supplement Article 4. Schedule F, G, and H supplement Article 5 and respectively contain the rules for making Asset Fair Value or Impairment Adjustment, the rules for making Acquired Equity Basis Adjustments, and the rules regarding Transferred Losses. Finally, Schedules I and J contain additional provisions that complement those contained in Title 5 on the elimination of double taxation with respect to Amount A.
the Progress Report on Amount A of Pillar One, as released for consultation by the OECD on July 11, 2022, can be found here.
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