On 6 October 2022, as part of the ongoing work of the OECD/G20 Inclusive Framework (“IF”) on Base Erosion and Profit Shifting (“BEPS”) to implement the Two-Pillar solution to address the tax challenges arising from the digitalisation of the economy, the OECD released its progress report for comment.

Background

The report was prepared for the purposes of obtaining further input from stakeholders on the administration and tax certainty aspects of Amount A. Comments are requested with respect to the processes and rules contained in this document. Comments are required by no later than Friday, 11 November 2022.

Significant progress has been made in developing the comprehensive technical rules for the new taxing right (Amount A) for market jurisdictions established under Pillar One. It is recognised that the substance of these rules must be stabilised before the development and completion of a Multilateral Convention (“MLC”) which will be signed and ratified by IF members.

The MLC will establish the legal obligations of the parties to implement Amount A in a coordinated and consistent manner. This will include binding rules on all aspects of implementing Amount A, including;

• the allocation of Amount A to market jurisdictions;
• the elimination of double taxation;
• marketing and distribution safe harbour;
• the simplified administration process;
• exchange of information; and
• tax certainty process.

Work has already commenced on the overall design and framing of the individual provisions of the MLC pending finalisation of the substantive rules.

In addition to the operative provisions of Amount A, the MLC will also contain provisions requiring the withdrawal of all existing digital service taxes and relevant similar measures with respect to all companies. A commitment not to enter into such measures in the future will also be required.

The MLC will enter into force if it is ratified by a critical mass of countries which will include the residence jurisdictions of the ultimate parent entities of a substantial majority of the in-scope companies whose profits will be subject to the Amount A taxing right as well as the key additional jurisdictions that will be allocated the obligation to eliminate double taxation otherwise arising as a result of the Amount A tax. Work is underway in relation to Amount B and this will be delivered by year-end.

The progress report contains the different building blocks relating to the new taxing right under Amount A.

Amount A

It is a new taxing right which applies to a portion of the residual profit of large and highly profitable enterprises for the benefit of jurisdictions in which goods or services are supplied or consumers are located. These are known as “market jurisdictions”. 

It operates as an overlay to the existing profit allocation rules and therefore includes a mechanism to reconcile the respective different profit allocation systems and prevent double taxation.

It includes improved tax certainty processes that bring increased certainty for enterprises, on Amount A and related matters.

Rules for Amount A

There are five different types of rules relating to amount A. These are:

• Scope rules, which contain thresholds that are designed to ensure that Amount A only applies to large and highly profitable groups and have been drafted to apply in a quantitative and objective manner in order to be easy to administer and provide certainty as to whether a taxpayer is within scope.
• A special purpose nexus rule, which identifies market jurisdictions that are eligible to receive Amount A. The nexus rule contains quantitative thresholds based on the amount of revenue 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 provided methodology for determining where the revenues of the 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 calculating Amount A. It is the profit of the group that forms the basis for the partial reallocation. The consolidated financial statements of a group which are 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.
• 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.

The rules envisaged by the OECD progress report Amount A will go a long way in ensuring the tax challenges that have come about as a result of the increased digitisation of the global economy are effectively addressed.

Mark Badenhorst

Executive Consultant Tax

[email protected]