Amount A

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At a recent conference, individuals from the U.S. Treasury were very explicit in their desire to receive comments on the Progress Report on Amount A of Pillar One, which was released by the OECD on July 11, 2022.  Comments are due on August 19, 2022.  The next public consultation is September 12, 2022.

The Progress Report represents the current state of progress on Amount A.  While many issues have been agreed to and the debate has been narrowed for others, work remains to be done by the Inclusive Framework to reach a final agreement on how exactly Amount A will be effectuated. Continue Reading Report on the Progress Report on Amount A of Pillar One – Comments Very Much Wanted

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. Continue Reading OECD Releases Public Consultation Documents on Tax Certainty Aspects of Amount A: Comments Due June 10, 2022

On October 13, 2021, the G20 Finance Ministers and Central Bank Governors issued a Communiqué formally endorsing the political agreement reached by 136 countries of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (IF) on a two-pillar framework to dramatically change the taxation of multinational enterprises (MNEs). The  Communiqué calls on the IF…

For over a decade, countries have been looking for ways to tax the digital economy. On July 1, 130 countries announced an agreement that would provide a new taxing right to enable a country to tax a portion of digital profits even in the absence of traditional taxable nexus with the country. This new taxing right is known as “Amount A”. The quantum of Amount A remained a mystery until the publication of the OECD’s “Statement on a Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy” on July 1, 2021 (the “Statement”) which quantified Amount A to be “between 20-30% of residual profit defined as profit in excess of 10% of revenue” for in-scope enterprises. Although this quantum of Amount A represents a political compromise, a solid theoretical basis underlying that compromise is essential to sustaining consensus.

The early proposals to modify profit allocation and nexus rules for the digital economy enterprises, which ultimately produced Amount A, strived to be based on certain subjective criteria, including the concepts of user participation, marketing intangibles and/or the concept of significant economic presence. The contemplated methods for profit allocation were the Modified Residual Profit Split method, Fractional Apportionment method, and Distribution-based approaches, along with the options for business line and regional segmentation. However, the criteria and methods of the early proposals are nowhere to be found to found in the OECD July 2021 Statement, leaving many questions about Amount A still unanswered. While the final compromise on Pillar One eliminates the focus on digital economy and shifts instead to high profitability when defining in-scope MNEs, the “digital essence” still surrounds Amount A. For one thing, the introduction to the Statement continues to refer to the “two-pillar solution to address the tax challenges arising from the digitalisation of the economy.” Moreover, a widely accepted assumption in the final Pillar One negotiations is that high profits are generated by intangibles and those are increasingly concentrated with digital businesses. Therefore, an analysis of Amount A cannot be divorced from the analysis of the factors that contribute to the digital economy.Continue Reading The Elusive “Amount A”

As discussed in prior blog posts, Amount A is a proposed new taxing right over a share of the residual profit of MNE groups that fall within its defined scope. The tax base is therefore determined on the basis of the profits of a group (rather than on a separate entity basis), and it is necessary to start with consolidated group financial accounts.
Continue Reading OECD’S Pillar One Blueprint: Tax Base Determinations

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The Pillar One revenue sourcing rules determine the revenue that would be treated as deriving from a particular market jurisdiction. The rules would be relevant in applying the scope rules, the nexus rules and the Amount A formula. The sourcing rules are reflective of particularities of Automated Digital Services (ADS) and Consumer Facing Businesses (CFB) and more broadly were designed to balance the need for accuracy with the ability of in-scope MNEs to comply, without incurring disproportionate compliance costs. This is proposed to be achieved through the articulation of sourcing principles, supported by a range of specific indicators, subject to a defined hierarchy (likely to be of particular importance in connection with third party distribution). This approach of providing a range of possible indicators within the hierarchy recognizes the different ways MNEs currently collect information in the context of their business model, while still providing certainty to MNEs and tax administrations that the defined set of acceptable specified indicators can be relied upon to provide acceptable outcomes.

To source the relevant in-scope revenue to a market jurisdiction, a sourcing principle would be identified for each type of in-scope revenue, accompanied by a list of acceptable specific indicators an MNE will use to apply the principle and identify the jurisdiction of source. For example, for the direct sale of consumer goods, the principle would be to source the revenue based on the jurisdiction of final delivery of the goods to the consumer, and the acceptable indicator would be the jurisdiction of the retail store front where the consumer good is sold or shipping address.

The acceptable indicators would be organized in a hierarchy. The MNE should generally use the indicator that is first in the hierarchy, as this will be the most accurate. However, an MNE may use an alternative indicator that appears second in the hierarchy, if the first indicator was not reasonably available or if the MNE can justify that the first indicator was unreliable, and so on with the remaining indicators. This approach is intended to ensure that there is sufficient flexibility to accommodate the different ways that MNEs collect information. Information would be considered unreliable if it is not within the MNE’s possession, and reasonable steps have been taken to obtain it but have been unsuccessful. Information would be considered unreliable if the MNE can justify that the indicator is not a true representation of the principle in the source rule.

The MNE would need to justify and document its approach and include it in the standardized documentation package to be developed as part of the broader work on tax certainty. It is expected that an in-scope MNE would need to retain documentation describing the functioning of its internal control framework related to revenue sourcing, containing aggregate and periodic information on results of applying the indicators for each type of revenue and in each jurisdiction, and explaining the indicator used and, if relevant, why a secondary indicator was applied instead (such as the steps taken to obtain information or why a primary indicator was considered unreliable).Continue Reading OECD’s Pillar One Blueprint: Revenue Sourcing Rules

According to the OECD, the new international taxation framework set forth in its Pillar One blueprint recognizes that in an increasingly digital age, taxing rights can no longer be exclusively determined by reference to physical presence. The blueprint therefore contains new nexus rules for in-scope revenue under Amount A. (For an overview of Pillar One and a discussion of the scope of Amount A, please see our prior blog posts.) The scope tests seek to capture those large MNEs that are able to participate in an active and sustained manner in the economic life of market jurisdictions through engagement extending beyond the mere conclusion of sales, in order to generate profits, without necessarily having a commensurate level of taxable presence in that market (based on existing nexus rules).

The nexus rules are designed to protect the interests of smaller jurisdictions, and in particular developing economies, and their desire to benefit from the new taxing right. The new nexus rules determine entitlement of a market jurisdiction to an allocation of Amount A only. They do not alter the nexus rules for other tax purposes. The new nexus rules could apply differently for ADS (Automated Digital Services) and CFB (Consumer Facing Businesses). For ADS, exceeding a market revenue threshold could be the only test to establish nexus. According to the OECD, the very nature of the ADS allows them to be provided remotely and such businesses generally have a significant and sustained engagement with the market even if there is not a physical presence. For CFB, the OECD believes that the ability to participate remotely in a market jurisdiction is less pronounced. This, together with the additional complexity and compliance costs associated with sourcing revenue derived by CFB and the broad acknowledgment that profit margins are typically lower for CFB compared to ADS, could justify a higher nexus standard for CFB. One approach for satisfying this higher nexus standard is through a higher threshold and the presence of additional indicators (“plus” factors) which would evidence an active and sustained engagement in that jurisdiction beyond mere sales.Continue Reading OECD’s Pillar One Blueprint: Nexus for Purposes of Amount A

The new taxing right established through Amount A of Pillar One[1] only applies to those multinational entity (MNE) groups that fall within the defined scope of Amount A.  The scope of Amount A is based on two elements:  an activity test and a threshold test.

According to the OECD, the definition of the scope responds to the need to revisit taxing rules in response to a changed economy.  The existing international tax rules generally attach a taxing right to profits derived from a physical presence in a jurisdiction.  However, given globalization and the digitalization of the economy, the OECD believes that businesses can, with or without the benefit of local operations, participate in an active and sustained manner in the economic life of a market jurisdiction through engagement extending beyond the mere conclusion of sales, in order to increase the value of their products, their sales and their profits.Continue Reading Tax Challenges Arising From Digitalisation, Report on the OECD’S Pillar One Blueprint: Scope of Amount A