On July 11, 2023 the 138 Members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) agreed on an Outcome Statement recognising the progress made and allowing countries and jurisdictions to move forward with historic, major reform of the international tax system (The Two‐Pillar Solution). On July 12, 2023 this Outcome Statement was published on the website of the OECD.

 

The Outcome Statement summarises the package of deliverables developed by the Inclusive Framework to address the remaining elements of the Two‐Pillar Solution.

 

Part I – Multilateral Convention on Amount A of Pillar One

A text of a Multilateral Convention (MLC) developed by the Inclusive Framework, which allows jurisdictions to reallocate and exercise a domestic taxing right over a portion of MNE residual profits (Amount A of Pillar One). The Inclusive Framework will publish the text of the MLC once it has been prepared for signature, upon resolution of a small number of specific items, as a few jurisdictions have expressed concerns with some specific items in the MLC.

 

A few jurisdictions have expressed concerns with some specific items in the MLC. Efforts to resolve these issues are underway with a view to prepare the MLC for signature expeditiously. The MLC will be opened in the second half of 2023 and a signing ceremony will be organised by year end, with the objective of enabling the MLC to enter into force in 2025, allowing for the domestic consultation, legislative, and administrative processes applicable in each jurisdiction.

 

Recognising the progress made and the need to prevent disruption or delay of the ratification of the MLC, and subject to at least 30 jurisdictions accounting for at least 60 percent of the Ultimate Parent Entities (UPEs) of in-scope MNEs signing the MLC before the end of 2023, members of the Inclusive Framework agree to refrain from imposing newly enacted DSTs or relevant similar measures, as defined in the MLC, on any company between 1 January 2024 and the earlier of 31 December 2024, or the entry into force of the MLC. Assuming sufficient progress has been made by that date towards the entry into force of the MLC, members of the Inclusive Framework may agree to extend this commitment to the earlier of 31 December 2025, or the entry into force of the MLC.

 

Part II – Amount B of Pillar One

Amount B of Pillar One provides a framework for the simplified and streamlined application of the arm’s length principle to in-country baseline marketing and distribution activities with a particular focus on the needs of low-capacity countries which are most often related to the unavailability of appropriate local market comparables through which arm’s length prices can be established.

 

The Inclusive Framework recognises that Amount B is a critical component of the broader agreement on Pillar One and as such have achieved consensus on many aspects of that framework. To ensure the appropriateness of the scope and pricing framework, further work will be undertaken on the following aspects:

I       Ensuring an appropriate balance between a quantitative and qualitative approach in identifying baseline distribution activities;

II     The appropriateness of:

a)  the pricing framework, including in light of the final agreement on scope;

b)  the application of the framework to the wholesale distribution of digital goods;

c)  country uplifts within geographic markets; and

d)  the criteria to apply Amount B utilising a local database in certain jurisdictions.

 

The OECD invites input from stakeholders on the elements identified above through 1 September 2023 with the work on those elements to be completed by year end.

 

Once this work is completed, the Inclusive Framework will approve and publish a final Amount B report, content from which will be incorporated into the OECD Transfer Pricing Guidelines by January 2024 with due consideration given to both the needs of low-capacity jurisdictions (which are most often related to the absence of local market comparables), and the interdependence of Amount B and the signing and entry into force of the MLC

 

Part III – The Subject to Tax Rule (STTR) under Pillar Two

The Subject-to-Tax Rule (STTR) together with its implementation framework, which will enable developing countries to update bilateral tax treaties to “tax back” income on certain intra-group income where such income is subject to low or nominal taxation in the other jurisdiction.

 

The STTR is an integral part of achieving consensus on Pillar Two for developing Inclusive Framework members. Inclusive Framework members that apply nominal corporate income tax rates below nine per cent to intra-group interest, royalties and a defined set of other payments will implement the STTR in their treaties with developing Inclusive Framework members when requested to do so

 

The Inclusive Framework has completed and delivered:

• An STTR model provision and commentary. The STTR is a treaty-based rule, which applies to intra-group interest, royalties and a defined set of other intra-group payments (covered income). The list of covered income includes all payments for intra-group services. Where items of covered income are subject to a nominal corporate income tax rate below the STTR minimum rate of nine per cent in the residence jurisdiction, and the treaty limits the rate at which the jurisdiction in which that income arises can tax that income, the STTR allows that jurisdiction to tax it at a rate up to the difference between nine per cent and the nominal corporate income tax rate of the residence jurisdiction. The STTR is subject to certain exclusions, a materiality threshold and a mark-up threshold, and is administered through an ex-post annualised charge.
• A Multilateral Instrument (MLI), together with an Explanatory Statement, to facilitate the implementation of the STTR. The MLI will amend the treaties that it covers. The Explanatory Statement reflects the agreed understanding of the negotiators on the approach taken in the MLI. Finally, the Inclusive Framework has also agreed a process to assist developing Inclusive Framework members in implementing the STTR.

 

The MLI implementing the STTR will be open for signature from 2 October 2023. Inclusive Framework members can elect to implement the STTR by signing the MLI, or bilaterally amending their treaties to include the STTR when requested by developing Inclusive Framework members.

 

Part IV – Implementation Support

The Inclusive Framework also calls upon the Secretariat to prepare a comprehensive action plan to support the swift and co-ordinated implementation of the Two-Pillar Solution. In particular, the plan should offer additional support and technical assistance to enhance the capacity necessary for the implementation of the Two-Pillar Solution by developing countries. In this regard, the OECD should co-ordinate with relevant regional and international organisations.

 

Next Steps Towards Completion of the Two-Pillar Solution

The newly agreed Outcome Statement will be delivered to G20 Finance Ministers and Central Bank Governors at their meeting in Gandhinagar, India on 17-18 July.

 

In parallel, technical work will continue so that the MLC can be opened for signature in the second half of 2023, with a signing ceremony organised by year-end. The MLC should enter into force during 2025, allowing for the domestic consultation, legislative, and administrative processes applicable in each jurisdiction.

 

Further work on Amount B of Pillar One - to be launched next week with a public consultation, through 1 September - is slated for completion by year-end. The Inclusive Framework plans to approve a final report on Amount B and incorporate key content into the OECD Transfer Pricing Guidelines by January 2024. Due consideration will be given to the needs of low-capacity jurisdictions and the interdependence with the MLC.

 

The agreed documentation relating to the STTR will be published next week, with the Multilateral Instrument implementing the STTR to be released and open for signature from 2 October 2023.

 

The OECD will also prepare a comprehensive action plan to support the swift and co-ordinated implementation, with additional support and technical assistance to enhance capacity for implementation by developing countries.

 

Outcome Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy is available in the English, French and Spanish languages.

 

 

Copyright – internationaltaxplaza.info

 

 

Follow International Tax Plaza on Twitter (@IntTaxPlaza)