OECD Releases Pillar One Amount A Multilateral Convention

On October 11, 2023, the OECD published the  Multilateral Convention to Implement Amount A of Pillar One (MLC).

Although the MLC is not yet open for signature (as there is still no consensus between IF members on certain aspects), the OECD also released an Explanatory Statement and the Understanding on the Application of Certainty of Amount A.

The MLC runs to over 200 pages, and the explanatory notes are over 600 pages. Whilst the general operation of the Amount A charge and allocation rules in the MLC follows previous draft rules (including the July 2022 Progress Report on Pillar One),  the MLC is considerably more detailed and includes additional detail on areas that were previously undecided (eg the impact of withholding taxes) as well as including tax certainty provisions that were previously in draft rules.

Articles 48 and 49 of the MLC require ratification by 30 States accounting for at least 60% of the UPEs of MNEs expected to be in the scope of Amount A. Once these minimum conditions are met, the States that have ratified can decide when the MLC will enter into force.

The ratification process is by no means straightforward – particular for the U.S as a two-thirds majority in the Senate is needed to ratify treaties. Yesterday, the U.S. Department of the Treasury announced a request for public input on the MLC (and accompanying documents).

Annex I, Table 2 of the MLC assigns points to IF members based on the proportion of UPEs of Covered Groups residing in each jurisdiction (out of 1000).  600 points are necessary under Article 48 of the MLC for the MLC to enter into force. At 486 points, the U.S is by far the largest jurisdiction and as such will be a determining factor in whether the MLC is ratified. 

The MLC will take precedence over existing double tax treaties to the extent needed for the application of Amount A. Other treaty provisions as well as tax treaties with jurisdictions which aren’t Parties to the MLC will not be affected.

The Conference of the Parties will carry out a review of the implementation of the MLC seven years after it enters into force. It is at this point that the revenue threshold will be reduced from EUR 20 billion to EUR 10 billion, unless the implementation of Amount A is not deemed to be successful.

Signing the MLC means that parties agree not to impose digital services taxes (DSTs) and other relevant similar measures on any company (whether within the scope of Amount A or not).

The determination as to whether a tax is a DST or relevant similar measure is made by the Conference of the Parties. If a tax is a DST or a relevant similar measure, the jurisdiction is not allowed any Amount A allocation until the tax is withdrawn.

The MLC Explanatory Notes confirm that Significant Economic Presence concepts  and other similar nexus rules are not treated as DSTs under the MLC if they are in the scope of tax treaties. (For instance under Section 9 of the Indian Income Tax Act, 1961, a foreign entity with a significant economic presence is subject to corporate income tax. Section 5 of Finance Act 2020 expanded the definition to include income from advertisements that target Indian consumers, income from the sale of data collected from India and income from any related sale of goods or services. This would not come within the DST restriction under Amount A but amendments may be made to the legislation to prevent overlap)

Operation of the MLC for MNEs