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Pillar One: Amount A Double Tax Relief

Pillar One: Amount A Double Tax Relief

Contents

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. 

It does this by using the return on depreciation and payroll as a proxy for physical activities. 

The rules are complex and operate in a defined order with jurisdictions being classified as Tier 1, Tier 2, Tier 3A or Tier 3B. The obligation to eliminate double taxation is allocated to Tier 1 jurisdictions first, then Tier 2, Tier 3A and finally Tier 3B.

The amount allocated is generally restricted to the Amount A profits available for double taxation relief or a given threshold which varies depending on the Tier.

The elimination of double taxation provisions rely heavily on the definitions used to calculate the marketing and distribution profits safe harbour, which is itself intended to reduce double taxation by reducing any profit reallocation where there are physical activities within a jurisdiction that would be taxed under domestic law. 

The issue the OECD has is aligning the domestic taxing right, which is calculated on an entity level basis, with the Amount A allocation, which is calculated at the level of the group (or in exceptional circumstances, a segment). 

Specified Jurisdictions

In order for a jurisdiction to be allocated the obligation to relieve double taxation it must be a ‘specified jurisdiction’. These are jurisdictions that:

You can read more on the definition of elimination profit at: Marketing and Distribution Profits Safe Harbour. It is the profit used in the calculation of the Marketing and Distribution Safe Harbour, as opposed to the adjusted profit used in the profit reallocation calculation. Elimination profit is subject to more adjustments than adjusted profit for profit reallocation purposes and many of the adjustments tie into the adjustments also made for Pillar Two GloBE income.

The obligation to eliminate double taxation is then allocated to specified jurisdictions dependent on what category of jurisdiction they are. 

Categories of Jurisdictions

Article 9(5) of the Progress Report on Amount A of Pillar One provides rules for categorising jurisdictions for the purposes of double tax relief:

Amount A profits that qualify for double taxation relief are allocated firstly to Tier 1 jurisdictions. If not all of the Amount A profits are allocated to Tier 1 jurisdictions, Tier 2 jurisdictions are then considered. This carries on until all qualifying profits have been allocated to jurisdictions to relieve double taxation.

Examples of Tier 1, Tier 2, Tier 3A and Tier 3B Jurisdictions

The Jurisdictional Return on Depreciation and Payroll is the Elimination Profit of the group in a Jurisdiction, divided by the total depreciation and payroll costs in that jurisdiction. 

For example, if an MNE Group had elimination profit in a jurisdiction of 10 Million Euros and depreciation and payroll costs were 2 Million Euros, the jurisdictional return on depreciation and payroll would be 500% (10 Million/2 Million).

Tier 1

Tier 1 jurisdictions are calculated by comparing this amount with the Return on Depreciation and Payroll for the entire group. 

If, the MNE Group had total elimination profit of 50 Billion and payroll and depreciation of 16 Billion, the group Return on Depreciation and Payroll would be 313%.

In order to be a Tier 1 jurisdiction, the  jurisdictional return on depreciation and payroll would need to be above 4688%, which is not the case in this example.

Tier 2

Tier 2 jurisdictions use an ‘Adjusted Jurisdictional Return on Depreciation and Payroll’ which is then compared to the Group Return on Depreciation and Payroll. This is similar to the jurisdictional return on depreciation and payroll but the elimination profit used in the calculation is reduced by any Amount A profit that has already been allocated to that jurisdiction under the double tax relief provisions. 

If we assume in our example that no profit has otherwise been allocated under the double tax relief provisions, the adjusted jurisdictional return on depreciation and payroll would simply be the same as the jurisdictional return on depreciation and payroll ie 500%. 

The jurisdiction would be a Tier 2 jurisdiction if this amount was more than 150% of the group return on depreciation and payroll.

In this example, the group return on depreciation and payroll is 313%. 150% of this would be 469%. Therefore, this jurisdiction would be a Tier 2 jurisdiction under the Amount A rules. 

Tier 3

Tier 3 jurisdictions involve a consideration of the elimination threshold return on depreciation and payroll (the ‘elimination threshold return’). It is calculated as 10% of the group revenue divided by the groups depreciation and payroll in the jurisdiction. 

For instance, if revenue was 10 Billion Euros and depreciation and payroll was 250 Million Euros, the elimination threshold return would be 400% (10%*10 Billion/250 Million). 

Tier 3A

A Tier 3A jurisdiction is a jurisdiction where the adjusted jurisdictional return on depreciation and payroll is more than 40% and also more than the elimination threshold return.

Tier 3B

A Tier 3B jurisdiction is just a jurisdiction where the adjusted jurisdictional return on depreciation and payroll exceeds the elimination threshold return. 

To have an elimination threshold return of less than 40%, the depreciation and payroll costs would need to be very large compared to revenue. For instance, Revenue of 1 Million Euros and Depreciation and Payroll of 300,000 Euros would give an elimination threshold return of 33%.

Allocating Profits to Jurisdictions for Relief

Once the jurisdictions have been identified, profits can then be allocated to jurisdictions for the purposes of double tax relief under Article 9(6) of the Progress Report on Amount A of Pillar One.  

Tier 1

It begins with the jurisdiction with the highest jurisdictional return on depreciation and payroll. Amount A profits are allocated to the Tier 1 jurisdiction to the lowest of the following amounts:

Example – Allocation of Profits for Double Tax Relief

Assume an MNE operates in two jurisdictions, Country X and Country Y.

Country X

Elimination Profit = 1 Million Euros

Depreciation and Payroll = 20,000 Euros

Adjusted Return on Depreciation and Payroll = 5000%

Country Y

Elimination Profit = 5 Million Euros

Depreciation and Payroll = 1 Million Euros

Adjusted Return on Depreciation and Payroll = 500%

The Group Elimination Profit is 50 Million Euros with Depreciation and Payroll costs of 20 Million. The Group Adjusted Return on Depreciation and Payroll is therefore 250%. 

Country X is a Tier 1 jurisdiction as the jurisdictional return on depreciation and payroll exceeds 1500% of the groups return on depreciation and payroll.

The amount allocated to Country X is the lower of:

The amount that reduces the Adjusted Jurisdictional Return on Depreciation and Payroll for Country X until it is equal to the Jurisdictional Return on Depreciation and Payroll of Country Y. 

As Country Y has a return of 500%, Country X would need to be allocated profits of 900,000 Euros to reduce the jurisdictional return on depreciation and payroll to 500% (ie 100,000 euros/20,000 = 500%).

The Amount A Profit of the MNE Group

In this example we will assume the Amount A profit equals the Group elimination profit (ie 50 million euros)

The amount that reduces the Adjusted Jurisdictional Return on Depreciation and Payroll for the Tier 1 Jurisdiction to 1500 per cent of the Return on Depreciation and Payroll for the MNE Group. 

The group’s adjusted return on depreciation and payroll is 250%. 1500% of this is 3,750%.

Therefore, Country X would need to reduce its return on depreciation and payroll from 5000% to 3750%. However, given this exceeds the return on depreciation and payroll for the second highest jurisdiction (Country Y), we can discount this. 

As such, in this case 900,000 euros is available for allocation.  

However, under Article 9(7) of the Progress Report on Amount A of Pillar One, both Country X and Country Y would be allocated part of the Amount A profit for double taxation relief purposes.

The allocation is on a pro-rata basis until the amount allocated is the lower of:

This then continues for each Tier 1 jurisdiction taking the next Tier 1 jurisdiction with the next highest adjusted jurisdictional return on depreciation and payroll until the Amount A profit is fully allocated or the adjusted Jurisdictional Return on Depreciation and Payroll for each Specified Jurisdiction in Tier 1 is equal to 1500 per cent of the Return on Depreciation and Payroll for the MNE Group.

Tier 2

After Tier 1 jurisdictions have been allocated Amount A profit, if any remains there is a Tier 2 allocation. 

This is allocated to Tier 2 jurisdictions in the ratio of the Jurisdictional Tier 2 Residual Profit of that Specified Jurisdiction to the total Jurisdictional Tier 2 Residual Profit of all Specified Jurisdictions in Tier 2  until either the Amount A profit is fully allocated or the adjusted jurisdictional return for Tier 2 jurisdictions equals 150% of the Return on Depreciation and Payroll for the Covered Group.

Tier 3A

A similar process for Tier 3A allocation applies as for Tier 2 except that the amount allocated to Tier 3A jurisdictions is the amount to reduce the Adjusted Jurisdictional Return on Depreciation and Payroll for the Tier 3A Jurisdictions to the higher of 40 per cent and the Elimination Threshold Return on Depreciation and Payroll of the Covered Group.

Tier 3B

The Tier 3B allocation operates in the same way as Tier 3A except the amount allocated reduces the Adjusted Jurisdictional Return on Depreciation and Payroll for the Tier 3B Jurisdictions to the Elimination Threshold Return on Depreciation and Payroll of the MNE Group.

Ongoing Work

Article 11 of the Progress Report on Amount A of Pillar One acknowledges that there is still some work to do.

Whilst the above explains the process of calculating the amount to be allocated to jurisdictions for calculating double tax relief, the actual method of relief as well as ascertaining the group entities that qualify for relief is still outstanding. 

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