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Pillar One Profit Allocation Calculator

On July 11, 2022 the OECD released a progress report which includes information on the status of its Pillar One and Two proposals.

Whilst most of the OECDs technical work on Pillar Two has been done, Pillar One has lagged behind due in part because of the sheer scope of its operation. It results in a significant rewrite of the rules governing how profits of large MNE groups are allocated to jurisdictions.
 
As part of the progress report, the OECD has included draft rules for the operation of Pillar One. These are presented as. domestic law rules (ie a guide to what individual jurisdictions could enact in their local law).
 
Whilst these draft rules are subject to a consultation, they nevertheless make interesting reading, particularly as there has, to date, been very little detailed information on the marketing and distribution safe harbour.
 
The profit allocation rules are at the heart of Pillar One as they determine the amount of profit that is allocated to the market jurisdictions.
 
The approach taken in the draft rules is in line with the suggested approach in the OECDs statement in October 2021.
 
Profits available for reallocation are 25% of the profits above a 10% profitability threshold. They are then allocated to jurisdictions based on the proportion of local revenue to total group revenue.
 
However, what’s of more interest is the marketing and distribution safe harbour. This is based on a measure of profits that the OECD terms ‘elimination profits’. This is the financial accounting profit subject to a number of adjustments. Many of the adjustments are also the same adjujstments that would be made for determining Pillar Two GloBE income.
 
The next step is to calculate the ‘elimination threshold return’. This is essentially the jurisdictional revenue x 10%/jurisdictional depreciation and payroll.
 
The elimination profits are then reduced by a deemed profit figure which is an amount so that the return on depreciation and payroll would equate to the higher of the elimination threshold or 40%.
 
The result of all this is then multiplied by an (as yet undetermined) offset percentage.
 
Whilst this is a formulaic approach to a carve out for allocated profits it is by no means straightforward.  However, the safe harbour can have a significant impact on the profits allocated. 
 
The Pillar One profit allocation calculator below shows the broad operation of the above rules. It is based on a number of simplifications (eg that the elimination profits equal the profits in the jurisdiction). Feel free to adjust the figures and offset percentage to see the potential impact.