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Today the Organisation for Economic Co-operation and Development (OECD) published updated Pillar 1 and 2 Blueprints, together with accompanying documentation including an impact assessment. The Blueprints are expected to be approved by the G20 Finance Ministers on Wednesday, and are now open for public consultation until 14 December 2020.

The updated Blueprints provide detail on the technical design and features of each Pillar, identify areas that require further technical work prior to finalisation, and also highlight aspects where political agreement will be necessary.

Pillar One: Profit Allocation and Nexus


The Unified Approach
  • Pillar One is a set of proposals to revisit tax allocation rules in a changed economy.
  • The intention is that a portion of multinationals’ residual profit (likely to be generated by capital, risk management functions, and/or intellectual property) should be taxed in the jurisdiction where revenue is sourced.
  • Applies to Automated Digital Services (ADS) businesses and Consumer-Facing Businesses (CFB).  The scope is intended to be broad and covers businesses that are able to profit from significant and sustained interaction with customers and users in the market.
  • Links taxing rights in respect of these businesses to their sources of revenue, which need not depend on physical presence in the jurisdiction.

Market engagement allocation

  • “Amount A”: New taxing right allocates high value profits based on a formula, not necessarily the arm’s length position. 
  • Covers profits earned from activities with an automated digital (mainly online) character or goods / services commonly sold to consumers (as well as associated IP licences).  Specific inclusions and exclusions are proposed.
  • Amount A allocated based on local revenues (determined via sourcing rules) with double taxation elimination measures.
  • “Amount B”: Standard arm’s length remuneration for “baseline” routine marketing and distribution activities.
  • Alternative Amount B methodologies may be adopted if supported by evidence.

What businesses need to know

  • These changes are multinational in scope and technically complex.  The effects are likely to be far-reaching for many businesses, and the effects are not yet certain.
  • Scope of covered businesses is not yet final, but it will not be limited to highly digitalised business models.
  • Much of the detail remains to be agreed including scale thresholds, how the proposals are intended to apply to CFB, how the Nexus and revenue sourcing rules will operate, and the US proposal that departure from the arm’s length principle should be on a safe harbour basis.
  • A period of open consultation on the proposals will now follow until 14 December 2020.  The OECD has published its global impact analysis; potentially affected businesses should consider what these changes could mean for their ETRs.

Pillar Two: Global Minimum Taxation

Levelling the playing field

  • Pillar Two has four new rules granting jurisdictions additional taxing rights where other jurisdictions have not exercised their primary taxing rights or income is subject to low rates of tax.
  • An Income Inclusion Rule (IIR) that would subject foreign income of branches and controlled entities to an agreed minimum tax in the parent jurisdiction.
  • An Undertaxed Payments Rule (UTPR) that acts as a backstop to the IIR denying deductions or introducing source-based taxation under certain conditions.
  • A Subject to Tax Rule which complements the UTPR in certain cases.
  • A Switch-over Rule that applies where a PE is “undertaxed” switching off a treaty based exemption in the head office jurisdiction and replacing it with a credit based method of taxation.

Exclusions and simplifications

  • The intention for most practical purposes is that these rules should only apply to MNE Groups with a total consolidated group revenue above €750 million or equivalent.
  • The rules are designed to focus on “excess income”, particularly intangible-related income, which is regarded as most susceptible to diversion.
  • The proposals therefore include a “carve-out” and simple fixed return for payroll and certain tangible asset costs.
  • A further in-principle exclusion may be to recognise tax already imposed under the US GILTI regime (still to be agreed).
  • To limit the compliance burden on low-risk businesses, simplification options are proposed which may be based on some or all of CbyCR data, de minimis  profits, or low local tax risk.

What businesses need to know

  • Work on Pillar Two has greatly advanced towards consensus, the main areas which still need to be resolved are around simplification measures.
  • Pillar Two could have a significant impact on the effective tax rates of MNE Groups by itself or in combination with Pillar One.
  • Implementation of the rules will involve a combination of changes to domestic tax laws and bilateral tax treaties (expected to be via a Multilateral Instrument)
  • A period of open consultation on the proposals will now follow until 14 December 2020.  The OECD has published its global impact analysis; potentially affected businesses should consider what these changes could mean for their ETRs.

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