On May 27, 2022, the OECD released two public consultation documents related to the tax certainty aspects of Amount A. The first, entitled Pillar One – A Tax Certainty Framework for Amount A (the Amount A Draft), proposes new mechanisms for multinational enterprises (MNEs) to obtain certainty on different aspects of Amount A. The second, entitled Pillar One – Tax certainty for issues related to Amount A (the Related Issues Draft), proposes a mandatory binding dispute resolution mechanism for issues related to Amount A, including transfer pricing and the attribution of profits to permanent establishments (PEs). Given the potential for Amount A to result in uncertainty, disputes and double taxation, these proposed mechanisms will be of critical importance to in-scope and potentially in-scope MNEs. Such MNEs should further note that both the Amount A Draft and the Related Issues Draft provide a short two-week public comment period that closes on June 10, 2022.
In October 2021, the then-136 countries of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (IF) reached a political agreement (the IF Agreement) on a two-pillar framework to dramatically change the taxation of multinational enterprises (MNEs). Pillar One would reallocate an estimated $125 billion of annual profit to countries that would not otherwise tax such profits under current international tax norms while Pillar Two would require that all profits be subject to a global minimum tax rate of 15%. To reallocate profits, Pillar One relies in large part on a new formulary taxing right called “Amount A,” which reallocates 25% of the residual profits of approximately 100 of the world’s largest and most profitable MNEs (i.e., those with both average annual revenue in excess of €20 billion and a profit margin in excess of 10%) from the jurisdictions that currently earn the residual profits to the MNE’s market jurisdictions. The IF Agreement called for a binding dispute resolution mechanism to avoid double taxation and to address all issues related to Amount A, including transfer pricing and business profits attribution disputes impacting Amount A.
Further, the IF mandated that its subsidiary organization, the Task Force on the Digital Economy (TFDE) work out the details of Amount A, including the tax certainty aspects and dispute resolution mechanism, and to develop a Multilateral Convention (MLC) for the implementation on Amount A. The public consultation drafts on the tax certainty aspects of Amount A are the latest in a series of public consultation documents released by the TFDE in connection with this mandate.
The Amount A Draft
The Amount A Draft calls for a new tax certainty framework centered around three different mechanisms for MNEs to obtain binding certainty over different aspects of Amount A. These three mechanisms include:
- A Scope Certainty Review which would provide out-of-scope MNE groups with certainty that they are not in the scope of Amount A for an agreed period of time;
- An Advance Certainty Review which would provide certainty over certain aspects of an MNE group’s methodology for applying the Amount A rules for a number of future periods, including the methodology for revenue sourcing, categorization of revenues, choice of reliable method, its internal control framework, and potentially, its methodology for applying segmentation; and
- A Comprehensive Certainty Review which would provide binding certainty over all aspects of the new Amount A rules for a period of time that has ended, which in turn will guarantee consistent treatment and the full elimination of double taxation.
Each mechanism is voluntary at the election of the MNE group. Out-of-scope MNEs would choose the Scope Certainty Review to confirm that they are indeed out of scope, while an in-scope MNE could elect either the Advance Certainty Review to obtain advance certainty on specific aspects of Amount A compliance for future periods and/or the Comprehensive Certainty Review to obtain more comprehensive certainty on Amount A compliance for completed periods. Each review mechanism would be supported by “Determination Panels” to resolve any disputes that may arise between or among tax administrations in connection with the processes. The Amount A Draft provides over 80-pages of overviews and detailed descriptions of how the mechanisms and Determination Panels might work in practice, the specifics of which are beyond the scope of this blog post. However, at a high level, we would note that the proposed new mechanisms appear to borrow from the OECD’s relatively new International Compliance Assurance Program (ICAP). Specifically, similar to ICAP, the proposed new mechanisms contemplate relatively streamlined consensus-based multilateral processes coordinated by a Lead Tax Administration (generally, the tax administration of the ultimate parent) involving standardized documentation as the starting point for review. However, unlike ICAP, but similar to advance pricing agreements (APAs), these mechanisms would provide MNEs with binding certainty.
The Related Issues Draft
The Related Issues Draft proposes draft MLC provisions for the implementation of a new mandatory and binding mechanism for the resolution of disputes concerning “Related Issues” that Competent Authorities are unable to resolve within two years of the MNE’s presentation of the dispute to the Competent Authorities as a Mutual Agreement Procedure (MAP) case under existing procedures. While “Related Issues” would in general include certain transfer pricing and PE profits attribution issues, the draft notes that different IF members have different views regarding the scope of eligible issues, including whether: (i) other types of issues (besides transfer pricing and PE profit attribution) should be eligible, (ii) there should be a requirement for a direct or indirect connection with Amount A, (iii) there should be a quantitative materiality threshold, (iv) reservations by IF members should be permitted, and (v) the mechanism should apply in the absence of a bilateral tax treaty. The mechanism contemplates resolution of such cases by dispute resolution panels using a “last-best offer” decision-making model, similar to the “last-best offer” (or “baseball style”) arbitration provisions in the MAP articles of many income tax treaties. While the process would generally be mandatory, the Related Issues Draft also proposes an elective binding dispute resolution panel mechanism that could be used by certain developing countries.
This mechanism is likely to be of critical importance to resolve disputes considering that Amount A operates as an overlay rather than an override to the existing transfer pricing rules. This will likely create complex interactions between the new and existing rules that will put additional pressure on existing transfer pricing methodologies and create the potential for double taxation. Further, while Amount B, the new proposed Pillar One marketing and distribution safe harbor, may help MNEs simplify compliance in some cases, Amount B will nevertheless also need to be coordinated with both existing transfer pricing rules and Amount A.
Although there is currently uncertainty as to whether, when and how Pillar One will ultimately be implemented, assuming it is implemented, Amount A will raise significant uncertainty and potential for disputes and double taxation for in-scope and potentially in-scope MNEs. The risk for disputes and double taxation arises from the potential for different tax administrations to interpret the various aspects of the Amount A rules in a different manner, tax administrations challenging different aspects of an MNE’s methodology, and the interaction between Amount A and the arm’s length transfer pricing and profits attribution rules which remain in-place. Thus, the availability of mechanisms to obtain certainty, resolve disputes and avoid double taxation will be of paramount importance for MNEs. While both the Amount A Draft and Related Issues Draft are very much works-in-progress, they represent a significant step toward the development of essential dispute resolution and avoidance mechanisms. Nevertheless, because the public comment period is very short, closing June 10, 2022, time is of the essence for in-scope and potentially in-scope MNEs to review and consider submitting comments.
 For a detailed overview of the Agreement, please refer to our prior Legal Update on the subject.
 Please refer to our prior blog post for a detailed overview of ICAP.
 Related Issues Draft, footnote 3.