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.
1.1 Identify if they are In-Scope
Under Article 3 of the MLC, 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.
1.2 Determine if Segmentation would apply
Under Annex C, Section 4 of the MLC 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.
1.3 Determine Excluded or Exempt Entities
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.
There are also specific exclusions for certain industries. Eg Annex C included exclusions for extractives, regulated financial services, and defence), and purely domestic-oriented businesses.
Articles 6/7 and Annex D of the MLC provides for detailed revenue sourcing rules.
In general, revenues are sourced according to the type of revenue.
The rules include details of various different types of revenue and where they are deemed to be sourced from. There are also a number of reliable indicators that can be used to determine, for example, the place of use, in order that the revenue can then be sourced. In certain situations an allocation key can be used as a proxy for the actual sourcing requirements.
Once the revenue is sourced, if it is less than 1 million euros in a jurisdiction (or 250,000 euros for smaller jurisdictions), there is no reallocation requirement for that jurisdiction.
For more information, see:
Amount A Revenue Sourcing Rules.
Amount A: Reliable Indicators.
Once it is established that revenue sourced to a jurisdiction is more than 1 million euros (or 250,000 euros in a small jurisdiction), the multinational would then need to calculate its adjusted profits.
Amount A allocates a proportion of the adjusted profit before tax of the MNE group or segment to market jurisdictions.
The adjusted profit before tax is based on the financial accounting profit or loss of the UPE as reported in its consolidated financial accounts, which is then subject to a number of adjustments under Annex B Section 2 of the MLC.
For more information, see Amount A: Adjusted Profits.
Once adjusted profits have been determined, the MNE group has to carry out the profit reallocation calculation.
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 Article 5 of MLC is in line with the suggested approach in the OECDs statement in October 2021.
Profits reallocated to a jurisdiction are 25% of the profits above a 10% profitability threshold. They are then allocated to jurisdictions based on the proportion of local revenue sourced to that jurisdiction to total group revenue.
Profits that are reallocated to a jurisdiction are then taxed based on the corporate income tax regime of that jurisdiction.
For more information, see Amount A: Profit Reallocation.
One of the key reliefs for MNE groups is the marketing and distribution profits safe harbour. Where it applies, it reduces the profits allocated to the market jurisdiction. The calculation of this is complex.
One of the purposes of the safe harbour is to prevent double taxation, where a multinational group has already established a taxing right in a jurisdiction due to physical presence.
For more information, see Amount A: Marketing and Distribution Profits Safe Harbour.
Use our Marketing and Distribution Safe Harbour Calculator to simplify the calculation.
The Amount A elimination of double taxation provisions in Article 11 of the MLC 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.
See: Amount A Double Tax Relief
There are then filing and payment responsibilities, with a single tax return filed with
Amount B is separate from Amount A and relates to the application of the arm’s length basis to in-country baseline marketing and distribution activities.
In particular, it will provide a fixed return for baseline marketing and distribution activities that is intended to deliver a similar outcome to the arms length basis.
The purpose is to simplify transfer pricing rules for both tax authorities and multinational groups.
Although detail on the application of Amount B was provided in the October 2020 Blueprint, the July 2021 Statement issued by the OECD stated that Amount B is being revisited and redrafted.
On December 8, 2022, the OECD published a consultation document on Amount B of Pillar One.
July 11, 2023 Update
On July 11, 2023, the OECD issued an Outcome Statement on Pillars 1 & 2 that gives an update on the status and timeline for implementation of Amount A and B of Pillar One.
Amount A
A Multilateral Convention (MLC) for the implementation of Amount A of Pillar One has been developed. It will be published for signature in the second half of 2023, with a signing ceremony organised by year-end. The MLC should enter into force during 2025, allowing for the domestic consultation, legislative, and administrative processes applicable in each jurisdiction.
Amount B
On February 19, 2024, the OECD published its final report on Pillar One Amount B. Jurisdictions can choose to apply the simplified and streamlined approach (‘the simplified approach’) for in scope transactions in their jurisdictions for fiscal years commencing from January 1, 2025.
Digital Service Taxes
138 countries and jurisdictions have also agreed in the Outcome Statement to not impose any new DSTs (or relevant similar measures) on any company before December 31, 2024, or the entry into force of the MLC if earlier, provided the signature of the MLC has made sufficient progress by the end of the year.
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