On 11 October 2023, the OECD released a draft multilateral convention (“MLC”) in relation to Amount A of Pillar One. The draft reflects the current consensus achieved so far amongst members of the OECD/G20 Inclusive Framework on BEPS (“IF”). On 18 December 2023, the OECD issued a statement according to which IF members commit to finalize the MLC by the end of March 2024 and open the MLC for signature by July 2024.
Background
Pillar One is part of the OECD Two-Pillar solution to address the tax challenges arising from the digitalisation of the economy. It aims at solving the inadequacy between the existing international tax framework and the development of activities taking place without a material presence. Certain jurisdictions already acted to solve these issues by implementing digital services taxes (“DSTs”). Pillar One relies on Amount A which would reallocate part of the profits realized by in-scope multinational groups to source jurisdictions and Amount B which would simplify transfer pricing rules for “baseline marketing and distribution activities” notably through the implementation of pricing matrices.
Scope
Amount A would apply to multinational groups (“Covered Groups”) cumulatively meeting two thresholds: (i) Adjusted Revenues greater than EUR 20 billion and (ii) a pre-tax profit margin greater than 10%. Adjusted Revenues correspond to the revenues reported in the consolidated financial statements after specific adjustments under the MLC. Profits from regulated financial services and extractive activities are excluded from the rules. The MLC provides for a future and conditional reduction of the revenue threshold from EUR 20 billion to EUR 10 billion.
A group that was not considered as a Covered Group in the two previous financial periods should meet two additional criteria to be considered as a Covered Group: (i) the group has a pre-tax profit margin greater than 10% in at least two of the four periods immediately preceding the period under review, and (ii) the average pre-tax profit margin over the five periods ending in the current period exceeds 10%.
Excluded entities notably include governmental entities, international organizations, investment funds, not-for-profit organizations, and pension funds.
Overview of Amount A mechanism
Amount A mechanism can be summarized as follows:
- Identify market jurisdictions entitled to an additional taxing right: The Covered Group’s revenues are classified per category and sources based on reliable indicators and allocation keys (both defined in the MLC). Nexus with a jurisdiction is established where revenue sourced in that jurisdiction is equal or greater to EUR 1 million or EUR 250,000 (for jurisdictions with GDP below EUR 40 million).
- Profit calculation and allocation: Profits reported in the consolidated financial statements are subject to several adjustments (i.e., the relevant group profits). Amount A corresponds to 25% of the relevant group profits reduced by the normal profits (10% of adjusted revenues). Allocation to source jurisdictions with nexus is proportionate to the adjusted revenues sourced from such jurisdiction.
- Allocated Amount A is adjusted downward with the marketing and distributions profits safe harbour designed to adjust for existing taxation rights of the source jurisdiction.
- Specific rules are then applied to eliminate double taxation that may result from the application of the existing allocation of taxing rights based on the “return on depreciation and payroll” in each jurisdiction.
- Several mechanisms are available to grant certainty to taxpayers.
- DSTs: The MLC provides for a list of DSTs that IF members commit to remove as well as the commitment to not introduce similar measures.
Next steps
Work on Amount A aims to resolve existing objections expressed by some IF members as reflected in the draft MLC. For the MLC to enter into force, it needs to be ratified by at least 30 jurisdictions including the headquarters jurisdictions of at least 60% of expected Covered Groups.
At EU level, on 9 November 2023, the European Commission welcomed the progress made with respect to the MLC and called on EU Member States to swiftly sign and ratify the MLC.
Regarding DSTs, the existing standstill agreement amongst IF members on DSTs is still subject to renewal for 2024. The Luxembourg government stated in its 2024-2028 coalition program that it would not support the implementation of DSTs.
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