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Pillar One Amount A: Scope

Pillar One Amount A: Scope

Contents

General Scope Provision

Under Title 1, Article 1(2) of the Progress Report on Amount A of Pillar One, multinational groups subject to the Amount A reallocation are defined as ‘Covered Groups’. 

A group is a covered group where in a fiscal year:

  • the revenue of the group for the period is more than 20 billion euros (this is adjusted if the accounting period is not 12 months); and 
  • the pre-tax profit margin of the group is more than 10 percent. 

Where the group was not a Covered Group in the two previous periods, it is a covered group if its pre-tax profit margin exceeds 10% in at least two of the four preceding periods or on average over the current period and the four preceding periods. 

What is a Group for Amount A?

As for the Pillar Two GloBE Rules, the Pillar One Amount A calculation relies on the financial accounts heavily. 

A group is:

  • a collection of entities that would be consolidated on a line-by-line basis in the consolidated financial statements of an Ultimate Parent Entity (UPE), or would be if the UPE had prepared consolidated accounts, or
  • an entity that meets the above revenue and profit margin test, providing it is not an excluded entity, an investment fund or real estate investment entity that is a UPE and is not part of another group.
Excluded Entities and UPE’s for Amount A Purposes

Just as for Pillar Two, excluded entities are excluded from the scope of Amount A. The definition is the same as for the Pillar Two GloBE Rules with one exception.

For the purposes of the Pillar Two GloBE Rules, an entity owned by an excluded entity can also be treated as an excluded entity for Pillar Two where at least 85% of the value of an entity is owned (directly or indirectly) by one or more excluded entities (excluding pension services entities), and where substantially all of the entity’s income is dividends or equity gains or losses excluded from the Pillar Two GloBE income or loss calculation. This does not apply for the definition of an excluded entity under the Pillar One Amount A Rules.

A UPE is an entity except for a government entity or pension fund that directly or indirectly owns a controlling interest in another entity providing it is not itself owned by another entity (aside from a government entity or pension fund). Therefore, the application of Article 1(2) of the Progress Report on Amount A of Pillar One restricts Amount A to the largest MNE groups. 

Segmentation 

Segmentation was a big issue in the original Pillar One Blueprint, and has been scaled back significantly in the latest version of the draft rules. 

Under Articles 1(6)-(10) of the Progress Report on Amount A of Pillar One, segmentation can apply where an MNE group has revenues that exceed the 20 billion euros threshold, but where it doesn’t meet the profit margin test (ie its pre-tax profit margin is less than 10%).

In this case a segment of the group disclosed in the consolidated financial accounts of the UPE can be a ‘covered segment’. A covered segment is subject to the Amount A rules (with some adjustments) irrespective of the fact that the MNE group may not be subject to Amount A. 

This means that a covered segment would be subject to the revenue sourcing and profit reallocation requirements.

A covered segment is a segment that has revenues in excess of 20 billion euros and who’s pre-tax profit margin is more than 10%.

Just as for covered groups, the 10% pre tax profit margin test applies to the current period but if the segment was not a covered segment in the previous two years it is a covered segment if its pre-tax profit margin exceeds 10% in at least two of the four preceding periods or on average over the current period and the four preceding periods. 

Again, the segmentation rules closely follow the financial accounting treatment. IFRS 8, for example, requires disclosures for certain operating segments of publicly traded entities.

Special rules apply where there is a segment change. 

A segment change occurs where there is a change to the composition of the disclosed segments of a group in any of the previous four periods and where the group is required to restate prior year figures under an acceptable financial accounting standard.

In this case, providing restated accounts were prepared for the segment, the rules as above apply.

If there was no restated segment accounts the segment is a covered segment and subject to the Amount A calculation if it meets the 20 billion euros revenue test in the period, and it meets the 10% profitability test in the period or on average over the periods following the segment change.

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