On 11 October 2023, the members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (Inclusive Framework) published the text of the Multilateral Convention to Implement Amount A of Pillar One (the MLC) with additional guidance. The purpose of the MLC is to enhance stability in the international tax system by:

1. Coordinating a reallocation of taxing rights (Amount A) for market jurisdictions over a portion of the excess profit of the largest and most profitable multinational enterprises (MNEs) operating in their markets, with a corresponding obligation to relieve double taxation;
2. Providing tax certainty to in-scope MNEs with respect to both Amount A disputes and other tax disputes on existing rules;
3. Preventing the imposition of digital services taxes (DSTs) and other similar measures on all companies (whether or not they fall under the scope for Amount A).

The MLC reflects the current consensus achieved among members of the Inclusive Framework. Amount A of Pillar One coordinates a reallocation of taxing rights to market jurisdictions with respect to a share of the profits of the largest and most profitable MNEs operating in their markets, regardless of their physical presence. It also ensures a repeal of (and prevents the proliferation of) digital services taxes and relevant similar measures, secures mechanisms to avoid double taxation, and enhances stability and certainty in the international tax system.

On October 11, 2023, the OECD published the following package of documents:

• Text of the MLC
• Explanatory Statement to the MLC
• Understanding on the Application of Certainty for Amount A of Pilar One
• Overview
• Update Report on the Economic Impact Assessment of Pilar One

Background of Pillar One: Profit Allocation and Nexus

Addressing the challenges posed by digitalization of the global economy and the shifting of profits to low-tax jurisdictions is the goal of the broader OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The Pillar One initiative specifically focuses on addressing how taxing rights are allocated between countries; it seeks to ensure that MNEs pay their fair share of taxes in the countries where they operate, especially in the digital economy.

How Amount A works

To comply with Amount A, MNEs will have to follow a set of rules that can be distilled down to the following five steps:

Step 1: Determine whether you are in scope

A group revenue test, along with profitability tests, must be conducted in order to determine whether a MNE is in scope. These quantitative and objective thresholds apply to ensure that only the most profitable MNEs fall within scope. The MNE’s revenue must be above €20 billion and the profitability must be greater than 10 percent.

Step 2: Identify the eligible market jurisdictions

To allocate the revenue of MNEs to the market jurisdictions, specific revenue sourcing rules must be applied. The purpose of these revenue sourcing rules is to identify the exact jurisdiction where the end customer consumes or uses the goods or services provided by the in-scope MNE. In addition, a quantitative threshold must be met in order for the market jurisdiction to exercise taxing rights. The quantitative thresholds for a market jurisdiction is a) €1 million of sourced revenue and b) €250,000 sourced revenue for jurisdictions with a GDP below €40 billion.

Step 3: Calculate and allocate a portion of your excess profit

The initial reference point is the profit as reported in the financial accounts of the MNE after applying a certain but limited amount of book-to-tax adjustments and taking into account any prior losses sustained by the MNE. After determining the group profit of the MNE, a formula is applied to determine 25 percent of the MNE’s profit in excess of 10 percent of the MNE’s revenue. This defined portion of excess profit is then allocated to the market jurisdictions using a revenue-based allocation key. To prevent double counting, the allocated profit is adjusted downwards. This mechanism of preventing double counting is referred to as the Marketing and Distribution Safe Harbour Adjustment (MDSH).

Step 4: Eliminate double taxation

The MNE first calculates its profit in each jurisdiction by summing the accounting profit (or loss) of each entity in the jurisdiction and making several book-to-tax adjustments. It then determines its depreciation and payroll (D&P) in each jurisdiction on a similar basis, and expresses the jurisdictional profit as a return on depreciation and payroll (RODP).

A tiered approach, determined by the RODP of each jurisdiction, is used to allocate the obligation to relieve double taxation at the jurisdictional level. Those obligations are allocated first to the jurisdictions with the highest RODP, often jurisdictions with high levels of asset ownership. Furthermore, specific rules must be applied to identify within each relieving jurisdiction the entities of the MNE that are entitled to claim relief from double taxation.

Step 5: File, Pay and have access to tax certainty

A single tax return with a standardized documentation is filed in order to comply with the MNEs Amount A tax liabilities across the globe. This Amount A tax return must be filed with the lead tax administration that is typically the parent jurisdiction of the MNE. A Designated Payment Entity (DPE) within the MNE handles all payments related to the Amount A tax obligations, and other entities within the MNE are obligated to make compensatory payments to finance the DPE.

Improving Tax Certainty under the MLC

The Amount A tax certainty framework consists of the following three mechanisms to provide certainty relating to certain items of Amount A:

1. An advance certainty review provides MNE with a binding multilateral certainty that is methodology for applying provisions of the MLC is accepted.
2. A scope certainty review provides an out-of-scope MNE with the confirmation that it is not in-scope of Amount A.
3. A comprehensive certainty review provides an MNE with a binding multilateral certainty over its application of the rules on Amount A in jurisdictions that have implemented the MLC.

Removal and standstill of DSTs and other similar measures

Signing the MLC requires a country to remove existing DSTs, which creates a standstill on the implementation on taxes that are similar to DSTs (Relevant Similar Measure). This applies to all companies, not only the in-scope MNEs. Countries not agreeing with this removal and standstill forfeit their right of allocation of Amount A in the period they levy DSTs or Relevant Similar Measures.

Any future measures will be evaluated to determine if they qualify as a DST or any other Relevant Similar Measure. Three criteria are used to assess this matter:

1. The tax is based on market criteria (e.g., users, customers, and location).
2. It is focused on foreign-owned businesses or nonresidents.
3. It is outside the scope of tax treaties.

The parties to the MLC will decide whether a measure is considered a DST or Relevant Similar Measure.

Entry into force and effect

Key Takeaways / What can taxpayers do?

• Determine whether you fall in scope of Amount A and determine the impact of the reallocation of profits in relation to your effective tax rate.
• Subject to DSTs? Assess the impact of the removal of the DSTs and monitor the DSTs in local jurisdictions.
• Be involved in policy discussions regarding the implementation of Pillar One at levels of the OECD and the EU as well as on a jurisdictional level.

Contact

For more information, please reach out to Wesley Boldewijn or Wouter Vos.