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Highlights of the OECD Progress Report on the Administration of Amount A

Highlights of the OECD Progress Report on the Administration of Amount A

Contents

 
On October 6, 2022, the OECD issued the Progress Report on the Administration and Tax Certainty Aspects of Amount A of Pillar One (the ‘Progress Report’), which includes draft Model Rules on the administration of Amount A.
 
These are draft rules subject to a public consultation until November 11, 2022. 
 
Key Issues
The first section of the Progress Report addresses the tax administration aspects of the Amount A Rules. These are significant for a number of reasons, not least that due to the nature of the Amount A rules, MNEs may find themselves being subject to tax under Amount A in numerous jurisdictions.
 
In many of these jurisdictions they may have not, to date, had any tax filing obligation (eg as there was no permanent establishment and/or a final withholding tax applied to other income). 
 
This could be an extremely significant compliance burden on MNEs if they were required to register and submit income tax returns locally in each jurisdiction. 
 
This arises partly from the fact that the Amount A rules are directly linked with the domestic jurisdictions income tax system. Any Amount A profit is taxed locally under the domestic tax regime. Jurisdictions could simply incorporate Amount A into their income tax legislation, or they could enact separate legislation for specific tax treatment.
 
Irrespective of the approach taken domestically, this could lead to multiple tax registrations and filings with individual tax jurisdictions and different returns, filing deadlines and payment dates. 
 
The other key issue is the difference between how domestic corporate income tax regimes apply and how the Amount A calculation applies.
 
Amount A reallocates taxing rights over a portion of an in-scope MNE group’s residual profits to market jurisdictions, based on the consolidated financial statements of the group. However, domestic corporate income tax regimes generally tax entities. 
 
There is therefore a mismatch and provisions are required to determine which group entity will be required to file and pay Amount A tax. 
 
This also applies to the requirement to eliminate double taxation arising from Amount A. This is based on a formulaic approach on a jurisdictional basis. However, domestic tax regimes again generally apply an entity approach. 
 
The Progress Report provides that domestic regimes will apply their own double tax relief provisions to Amount A. As part of this Amount A profit is therefore required to be subject to an income tax or the equivalent to an income tax in the jurisdiction. 
Filing
General
The Amount A return is referred to as the ‘Amount A Tax Return and Common Documentation Package’.
 
It is a standardized form that effectively contains all the information to support the Amount A calculation and the profits reallocated to market jurisdictions.
 
Therefore, it contains information on the group, revenue sourcing rules, residual profits, the marketing and distribution safe harbour figures and the amount of double taxation relief available.
 
The Amount A Tax Return and Common Documentation Package will be the same for each jurisdiction and the same form/information will be filed for each jurisdiction. As such, tax administrations for all jurisdictions will effectively see the same information. 
 
Whilst the filing requirement applies to any entity liable to tax under Amount A, Article 12(2) of the Model Rules provides a simplification option such that the filing obligation is met in all jurisdictions if the documents are filed centrally with the Lead Tax Administration by the Group’s Coordinating Entity.
 
The Lead Tax Administration then provides the information to other market jurisdictions (or jurisdictions where there is relief under the double taxation provisions) under information exchange provisions. 
Streamlined Compliance
As well as the centralized filing simplification above, Article 14 of the Model Rules includes a streamlined compliance provision. 
 
This effectively replaces any requirement to submit a domestic corporate income tax return with the Amount A return. As such, if the Amount A return is submitted there is no requirement to submit a local tax return. This will be of clear benefit to many MNEs not least because the Amount A return is just focused on the Amount A profit allocation, and they will also benefit from the harmonised payment and filing dates. 
 
An entity can use streamlined compliance where it is not a resident of the market jurisdiction, has no other income tax obligations in the market jurisdiction and is not utilising group loss relief or tax consolidation in the market jurisdiction. 
 
The OECD expects that streamlined compliance will apply to most Amount A liabilities in market jurisdictions.
 
Note that there is no streamlined compliance for claiming double tax relief. As such a domestic tax return would need to be filed. 
The Taxpayer
As noted above, one of the key issues to determine from an administrative perspective is who is the taxpayer, given the Amount A profit reallocation is based on a group/jurisdictional calculation?
 
The OECD doesn’t have an answer to this yet, but it does identify two options, a single taxpayer approach or a multiple taxpayer approach. 
Single Taxpayer Approach

Under the single taxpayer approach a single entity in each MNE group is liable for the Amount A tax in all market jurisdictions.

Importantly that entity may be a different entity than the entity or entities entitled to double taxation relief.

Multiple Taxpayer Approach

Under the multiple taxpayer approach, one or more entities from each jurisdiction that is required to eliminate double taxation are liable for the Amount A tax.

A single group entity coordinates payment and compliance as an agent on their behalf. 

The Progress Report considers the relative advantages and disadvantages of both options, and a decision has not yet been made on the approach to be taken.
 
The single taxpayer approach has a clear benefit in terms of simplicity and is similar to a group consolidation regime. However, it raises issues in terms of the double tax relief provisions as the single taxpayer would not (unless it qualified in its own right) be the entity that is entitled to double taxation relief in the relieving jurisdictions.
 
There would then need to be deeming provisions for entities eligible for double tax relief, even though they don’t have a liability to tax, as under this approach this rests with the single taxpayer. 
 
Funding the entity or entities liable for payment would also need to be taken into account (eg intercompany payments or dividends etc), with the associated tax implications (eg withholding tax). 
Administrative Process
The first step would be for an MNE group to determine whether it is in the scope of Amount A.
 
Where it is, it then ascertains its market jurisdictions using the revenue sourcing rules, calculates adjusted profits and applies the profit allocation rules (taking account of the marketing and distribution profits safe harbour) to allocate profits to market jurisdictions. It then calculates the amount of double taxation relief to be claimed in each relieving jurisdiction and the relief to be claimed by the relevant entities.
 
The compliance requirements at this stage then depend on whether the filing entity is eligible for the streamlined compliance process or not. 
Streamlined Compliance
Where the entity (either under the single taxpayer or multiple taxpayer approach above) is able to use streamlined compliance, the Amount A Tax Return and Common Documentation Package replaces a domestic tax return in the market jurisdiction. There would then be no other income tax filing obligations in the market jurisdiction, aside from settling any Amount A tax liability. 
 
The lead tax administration then distributes the Amount A Tax Return and Common Documentation Package to other relevant tax authorities within 15 months after the Period has ended.
 
Amount A tax payments are required within 18 months after the end of the period.
 
Non-Streamlined Compliance
In this case the entity just includes the Amount A reallocated profit/double taxation relief in the domestic income tax return in the market jurisdiction.
 
Because of the nature of the streamlined compliance requirements, if the entity doesn’t qualify it would in any case already have a taxable presence in the relevant jurisdiction.
 
Double taxation relief
General
The Amount A elimination of double taxation provisions in Title 5 of the Progress Report on Amount A of Pillar One apply to prevent a multinational group being taxed twice on profits allocated to a market jurisdiction where there is already some form or physical establishment that is subject to tax.  They are therefore a key aspect of the Amount A rules. 
 
The profits allocated to jurisdictions for the purposes of double tax relief are calculated under the Progress Report on Amount A of Pillar One. However, given the significant differences amongst jurisdictions in the mechanics of giving double tax relief, it is left to individual jurisdictions to determine how double taxation relief is given.
 
This is therefore one of the few cases that Pillar One (and Pillar Two for that matter) adopt a non-harmonised approach over a significant aspect of the application of the rules. The OECD does note that if entities qualify for double tax relief for Amount A they would already have a taxable presence in the jurisdiction and as such be liable to corporate income tax filing etc. 
 
Article 19 of the Progress Report provides for a backstop rule so that jurisdictions are required to give the benefit of double taxation relief within a certain number of days or months after 18 months from the relevant period.
Allocation to Entities
Whilst the provisions of the Progress Report on Amount A of Pillar One calculate the profits allocated to jurisdictions for the purposes of double tax relief, they don’t identify the entities within the relevant jurisdiction that are allocated double taxation relief. This is another area that the OECD has not determined yet.  It proposes a number of options, including:
 
  • Use the Return on Depreciation and Payroll (RoDP). Group entities with the highest RoDP would be entitled to the most relief; 
  • Use accounting profit, with entities with the highest profit allocated the most relief;
  • Use taxable profit and again allocate relief to the highest taxable profit; or
  • Use the Elimination Profit and again allocate relief to the highest taxable profit. 
 
Once the pool of group entities entitled to relief is determined, double tax relief then needs to be allocated to those entities. The OECD identifies two approaches here:
 
Firstly, a waterfall approach based on the current draft rules for the calculation of double taxation relief in the Progress Report on Amount A of Pillar One
 
Essentially whichever of the above options is chosen, the entity with the highest amount is given double tax relief first until that amount is reduced to the amount of the next entity etc.
 
This has a benefit in that it allocates relief to the most profitable entities (or other measure used above). 
 
The second option is to use a pro rata approach with the amount of double tax relief allocated amongst all the entities in the jurisdiction in proportion to their share of the measure identified above. 
Transitional Rules
The Progress Report on Amount A of Pillar includes transitional rules that allow MNEs to use simplified revenue sourcing rules during a transitional period. Article 16 of the Progress Report expands on this and provides that during the transitional period MNEs will not be subject to adjustments to their revenue sourcing providing reasonable measures to apply the rules have been taken.
 
This essentially allows MNEs who are within the scope of Amount A when the Multilateral Convention comes into force six periods to develop their systems to apply the revenue sourcing rules.
Currency Conversion
Currency conversion may be required at various stages of the application of the Amount A rules.
 
Firstly, when making the actual calculations under the Model Rules, amounts may need to be translated into a common currency.  Article 17(1) of the Model Rules requires any amounts used in the calculations on Amount A to be translated to the presentation currency of the Consolidated Financial Statements of the MNE group. 
 
Secondly, Article 17(2) of the Model Rules states that any Euro amounts in the Model Rules (eg the 20 Billion profitability threshold) are required to be translated from a foreign currency based on the average exchange rate during the period.
 
Thirdly, for the purposes of payment, the Amount A liability and any double tax relief may need to be translated back into local currency. Article 17(5) also requires that the average exchange rate is used. 
 
The average exchange rate is based on the exchange rate published in the International Financial Statistics of the International Monetary Fund. If the relevant currency isn’t published by the IMF, the exchange rates quoted by the central bank of the relevant jurisdiction are used. 

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