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Executive summary
On 6 October 2022, the Secretariat of the Organisation for Economic Co-operation and Development (OECD) released a Progress Report on the Administration and Tax Certainty Aspects of Amount A of Pillar One (the Report (pdf)) in connection with the ongoing OECD/G20 project on Addressing the Tax Challenges Arising from the Digitalisation of the Economy (the BEPS 2.0 project). The Progress Report is a consultation document that covers important building blocks not included in the Progress Report on Amount A of Pillar One released on 11 July 2022,1 namely the rules on the administration of the new taxing right and the tax certainty-related provisions. The Secretariat document does not represent the consensus views of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) jurisdictions.
The Report has been released by the OECD Secretariat in order to obtain further input from stakeholders on the administration and tax certainty aspects of Amount A, with written comments requested by 11 November 2022.
The Report also indicates that two other public consultation documents will be released by the end of 2022: one addressing the withdrawal and standstill of digital services taxes and other relevant similar measures, and the other one on Amount B.
Finally, the Report states that the work on Amount B will proceed with a view to completing it in the first half of 2023.
Detailed discussion
Background
In January 2019, the OECD began the current project with the release of a Policy Note describing two pillars of work: (i) Pillar One addressing the tax challenges of the digitalization of the economy and the allocation of taxing rights to market jurisdictions; and (ii) Pillar Two addressing remaining concerns about potential BEPS activity and tax rate competition among countries.2 The project is being conducted through the Inclusive Framework, in which 141 jurisdictions are participating currently. The OECD issued a consultation document on the project in February 20193 and hosted an initial public consultation in March 2019.4
Since then, the OECD has released a series of documents on the development of the two pillars, including the release in October 2020 of detailed Blueprints on both Pillar One and Pillar Two.5 This was followed in July 2021 with the release of a high-level statement reflecting agreement of members of the Inclusive Framework on key parameters with respect to the two pillars.6
In October 2021, a high-level political agreement7 was reached on key parameters of both pillars together with an implementation plan. Of the 141 participating jurisdictions, 137 members of the Inclusive Framework have joined the agreement reflected in the October 2021 Statement.
In December 2021, the OECD announced plans to release a series of Secretariat working documents in the first half of 2022 on the separate building blocks of Amount A of Pillar One in order to obtain stakeholder input. In this period, the following public consultation documents on Amount A were released:
Nexus and Revenue Sourcing (4 – 18 February)8
Tax Base Determinations (18 February – 4 March)9
Scope (4 – 18 April)10
Extractives Exclusion (14 – 29 April)11
Regulated Financial Services Exclusion (6 – 20 May)12
A Tax Certainty Framework for Amount A and Tax Certainty for Issues Related to Amount A (27 May – 10 June)13
On 11 July 2022 the OECD released the Progress Report on Amount A of Pillar One for public consultation requesting input on the design of the rules. The July 2022 Progress Report covered many of the building blocks of Amount A and reflected some updates addressing comments received on the earlier consultation documents but did not cover tax certainty or administration. A public consultation meeting was held on 12 September 2022 to discuss the comments submitted on the July 2022 Progress Report.14
Overview
The Report is structured as follows:
Part I - Administration of Amount A
Part II – Tax Certainty Framework for Amount A
Part III - Tax Certainty for Issues Related to Amount A
Part I outlines the possible procedures for how in-scope Groups should comply with the Amount A rules, from the filing of the relevant information to payment of tax and access to timely relief from double taxation. Unlike Parts II and III, the administrative process contained in Part I is being released for public consultation for the first time. In this regard, the Report notes that Part I is in the form of draft rules supplemented with an explanatory note.
Part II sets forth the Tax Certainty Framework for Amount A, which is intended to ensure certainty for Covered Groups for all aspects of the new Amount A rules, including the elimination of double taxation.
Part III covers the dispute prevention and resolution mechanisms for issues related to Amount A.
Part III, while being drafted in the form of Model Rules, does not constitute draft Model Rules as is the case for other public consultations on aspects of Amount A. The Report indicates that work will begin at a later stage to translate parts of the text into Model Rules, text for a Multilateral Convention (MLC) or other agreements or tools as needed.
Part I Administration of Amount A
There are two sections to Part I: the administration framework for Amount A, which takes the form of an explanatory note, and draft Model Rules and commentary for the administration of Amount A.
Administration framework for Amount A
The Report indicates that the Administration Framework for Amount A is intended to minimize the compliance burden on taxpayers and the administrative burden on jurisdictions.
As such, the Inclusive Framework has developed a process for administration and compliance with respect to Amount A, based on the existing entity-based corporate tax regimes and legal frameworks, as outlined below.
Amount A income would be included in the income tax base of market jurisdictions
To ensure effectiveness of the current double taxation relief mechanisms in jurisdictions, the Report indicates that Amount A income would need to be recognized to be subject to an income tax or the equivalent to an income tax.
The current administrative rules in each jurisdiction would apply to Amount A income and double taxation relief, including in relation to income tax filings, assessments and penalties, with certain exceptions.
Information filing requirements for Amount A
The Progress Report provides that because Amount A would be calculated on a group basis, an entity liable to tax on Amount A or eligible for double taxation relief would be required to submit documentation to tax administrations that outlines the relevant calculations – an Amount A Tax Return and Common Documentation Package – to each relevant tax administration, so called Affected Parties. As the name suggests, the Common Documentation Package will be standardized, both to prevent duplicative efforts and to eliminate information asymmetries.
The filing of such documentation would not affect a jurisdiction’s right or ability to request further information or clarification in relation to Amount A as part of a review or audit (although limitations may apply during a tax certainty process).
Amount A income liabilities in market jurisdictions
The Report indicates that the preferred approach for identifying entities liable to tax on Amount A income is yet to be decided. However, it has been decided that a liable entity would be required to comply with the income tax requirements of each market jurisdiction in relation to its Amount A-related income tax obligation. Liable entities will be required to register in every market jurisdiction where they have filing requirements. This is recognized as an issue and the Report indicates that jurisdictions are willing to consider it along with related issues such as the requirements for resident representatives and foreign bank accounts.
If a liable entity is not a tax resident in a market jurisdiction, does not currently have an income tax obligation in the market jurisdiction and is not utilizing group tax relief/tax consolidation in that market jurisdiction, it would be eligible for a streamlined compliance process. With streamlined compliance, the Amount A Tax Return and Common Documentation Package would only need to be filed with the Lead Tax Administration (in principle, this would be the tax administration of the Ultimate Parent Entity unless selected otherwise) and then would be shared through exchange of information channels with the relevant market jurisdictions.
Double taxation relief for Amount A in relieving jurisdictions
The Report indicates that it will be left to individual jurisdictions to determine the form of double taxation relief (i.e., whether exemption or credit) to ensure compliance with a jurisdiction’s obligation. However, the Inclusive Framework is committed to limiting the potential cash flow costs to Covered Groups. Where a relief entity meets certain requirements, relieving jurisdictions will be required to give the “benefit of double taxation relief” within a certain timeframe based on the streamlined payment date. Further work is being undertaken by the Inclusive Framework in this area.
Administration compliance process for Amount A and timing
The Report includes a high-level description of the administrative process for Covered Groups and Group entities in relation to complying with Amount A.
Once the relevant income and relief amounts have been determined in accordance with such process, the compliance requirements for the relevant entities in a Covered Group will depend on whether the relevant filing is eligible for streamlined compliance.
Where streamlined compliance is available to a liable entity, the Amount A Tax Return and Common Documentation Package will satisfy the income tax filing requirements in the market jurisdiction, with no other filing obligations.
Where streamlined compliance is not available to an entity, the entity will be required to include in its domestic income tax return (in the relevant jurisdiction) its Amount A income and/or the amount of double taxation relief it is claiming.
Single taxpayer and multiple taxpayer approaches
The Report indicates that discussions within the Inclusive Framework are continuing regarding the process for identifying the taxpayer in market jurisdictions and the relief entities in relieving jurisdictions, with two approaches being identified for coordinating Amount A and the existing entity-based income tax system: (i) the single taxpayer approach (in which a single entity in a Covered Group is liable for the Amount A tax in all jurisdictions); and (ii) the multiple taxpayer approach (in which one or more entities from each jurisdiction that is required to relieve double taxation are liable for the Amount A tax, with one entity acting as an agent and coordinating payment and compliance on their behalf). Whether the single taxpayer approach or the multiple taxpayer approach is adopted, centralized and harmonized filing and payments would be available.
While a majority of the members of Inclusive Framework have indicated provisional support for the single taxpayer approach, at this stage no decision has been made by the Inclusive Framework. The Progress Report further indicates that because no decision has been made regarding the approach to follow, the draft Model Rules for the Administration Framework for Amount A included in the Progress Report have been crafted to accommodate both approaches.
Identifying relief entities in relieving jurisdictions
The Report indicates that the Inclusive Framework has concluded that the approach to identifying the relief entities will need to incorporate a degree of flexibility for relieving jurisdictions to identify the appropriate relief entities, subject to some constraints given the recognized need for consistency and certainty.
Two aspects would need to be addressed for this purpose: (i) the metric used to identify the pool of Group Entities that might be entitled to double taxation relief (i.e., return on depreciation and payroll, accounting profit, taxable profit, or elimination profit); and (ii) the allocation of the amount of relief to which entities within that group are entitled (i.e., waterfall approach or pro-rata approach). These issues are still under discussion in the Inclusive Framework.
Interaction with the Tax Certainty Framework for Amount A
According to the Report, a Covered Group would indicate its intention to participate in either an Advance Certainty Review or a Comprehensive Certainty Review as part of its filing of the Amount A Tax Return and Common Documentation Package. For a Scope Certainty Review (where a Group seeks certainty to confirm it is out of scope of Amount A), a Common Documentation Package would not be required, and separate documentation would be developed.
Discussions are ongoing on whether payments to market jurisdictions should be suspended for the relevant Periods for which a Covered Group requests to participate in a Comprehensive Certainty Review.
Other Administration issues in relation to Amount A of Pillar One
The Report indicates that further issues related to the Administration Framework of Amount A will be discussed as part of the development of the MLC or the finalization of the Model Rules or will be developed as part of the Pillar One Implementation Framework. This will include developing an Exchange of Information and Cooperation provision under the MLC.
The Model Rules also provide for the development of a potential future Pillar One Implementation Framework, which will include the following workstreams – Administration Coordination, Tax Certainty, Administrative Guidance and Capacity Building and technical assistance.
Finally, the Model Rules will also address the interaction of Amount A with Pillar Two.
Model Articles and Commentary for the Administration of Amount A
The Progress Report includes proposed Model Articles and related Commentary for the administration of Amount A:
Article 12 - Amount A Filing Requirements. This article provides the approach for filing the information relevant for the calculation of Amount A income and the amount of double taxation relief available for a Covered Group and the relevant Group Entities.
Article 13 - Content of the Amount A Tax Return and the Common Documentation Package. This article sets out the content of the Amount A Tax Return and the Common Documentation Package.
Article 14 - Streamlined Compliance for Entities where the [Amount A Tax Return] is used. This article provides certain entities with streamlined compliance requirements. The intention of the article is that, where such an entity has filed an Amount A Tax Return (locally or centrally with the Lead Tax Administration), it should not be subject to further income tax filing obligations.
Article 15 - Secondary Liability In Relation to Amount A Income. This article provides a mechanism that allows a market jurisdiction to enforce a liability on the Ultimate Parent Entity of a Covered Group where an entity liable to tax or claiming double taxation relief fails to pay the tax or where no entity liable to tax can be identified because the Group failed to file the appropriate returns.
Article 16 - Amount A Transition Periods. This article provides transition rules for Groups or Disclosed Segments with respect to applying the revenue sourcing rules and the rules on exclusion of revenues and profits of Qualified Extractive Groups and from Regulated Financial Services.
Article 17 - Uniform Currency Conversion Rules for Amount A Calculations and Liabilities. This article provides rules on translation into a common currency.
Article 18 - Amendments due to the Tax Certainty Framework. The article, which is still under development, is intended to provide a framework for refining the Amount A Tax Return and Common Documentation Package to reflect amendments due to the outcome of a Comprehensive Certainty Review under the Tax Certainty Framework.
Article 19 - Back-stop rule for timely double taxation relief. This article imposes a requirement on relieving jurisdictions to provide double taxation relief within a time frame to be determined.
Part II Tax Certainty Framework for Amount A
The Report aligns closely with the consultation document on the Tax Certainty Framework for Amount A that was issued in May 2022 (the Tax Certainty for Amount A Consultation Document).15 However, there are a few notable differences outlined below:
Changes to the Advance Certainty Review Scope
The scope of the Advance Certainty Review in the Report is broader than the one in the Tax Certainty for Amount A Consultation Document. It now includes not only revenue sourcing, categorization, and choice of reliable method, but also:
A Group’s categorization of revenues and costs for the purpose of applying the rules on exclusion of revenues and profits of Qualifying Extractives Groups and Groups conducting Regulated Financial Services (RFS).
The Group’s methodology for determining non-Extractives/non-RFS adjusted profit before tax (segmented as applicable).
Tax Certainty in the first years of Amount A
The transitional approach to the tax certainty rules on Amount A has also been revamped from the Tax Certainty for Amount A Consultation Document. The Report outlines an initial phase, which would start before the MLC on Amount A is in force. This phase would aim to achieve consistency in the Covered Group’s and tax authorities’ understanding of the new rules and would include developing guidance; model templates; responses to frequently asked questions and other tools as needed.
Guidance may also be developed for tax administrations on how to undertake a Scope Certainty Review, an Advance Certainty Review and a Comprehensive Certainty Review. Prior to the MLC coming into effect, any guidance developed by the Inclusive Framework could only be advisory in nature. Once the MLC is in effect, consideration would be given as to the extent interpretative or other guidance should have greater authority. This initial phase may continue after the MLC comes into effect, to the extent a further need for guidance and other tools is identified.
When the MLC comes into effect, specific simplification features will be available to Covered Groups, which will take different forms:
- First, as already noted in the Tax Certainty for Amount A Consultation Document, for the first three periods after the MLC comes into effect, Covered Groups will be permitted (but not required) to use specified allocation keys in lieu of Reliable Indicators for the purposes of revenue sourcing. Additionally, for the first six periods after the MLC comes into effect, Qualifying Extractives Groups will be permitted to use simplified methods (including relying on information prepared for the purposes of a Group’s Disclosed Segments) to demonstrate that they do not meet the non-Extractives (Segment) profitability test.
- Second, Covered Groups’ application of the following rules shall be accepted, provided they take reasonable measures to reflect a correct application:
- The revenue sourcing rules for the first six periods after the MLC comes into effect
- The Exclusion rules for Qualified Extractives Groups for the first nine periods after the MLC comes into effect
- The Exclusion rules for RFS in the first three periods after the MLC comes into effect
In relation to the transition rule on the revenue sourcing it is noteworthy that the Report does not reflect the final or consensus views of the Inclusive Framework and members hold different views as to whether this provision should apply for the six-year period described or for a shorter period.
Additional guidance on the application of the rules described above may be provided if the Group has submitted a request for Comprehensive Certainty or a Scope Certainty, which the Group will be expected to take into account.
- Third, where an Advance Certainty request is submitted for a Group’s Revenue Sourcing Approach to apply from one of the first six periods after the MLC comes into effect and the Group has taken reasonable measures to apply the Reliable Indicators correctly, the Group’s approach will be accepted. The Review Panel may give direction on improving the application of the Reliable Indicators.
Simplified procedure for Follow-Up Scope Certainty Review
Under the Report, the simplified Follow-up Scope Certainty Review, which was available to all Groups under Tax Certainty for Amount A Consultation Document, appears to only be available for Qualified Extractives Groups and Groups conducting RFS under the Progress Report.
Changes to the Comprehensive Certainty Review
Under the Report, the Comprehensive Certainty Review Panel generally would be supported by an Expert Advisory Group of systems specialists to provide advice on the reliability of the Group’s internal control framework if no Advance Certainty Outcome applies to the issue at hand.
Part III Tax Certainty for Issues Related to Amount A
Part III of the Report reflects several changes from the Consultation Document on Tax Certainty for Issues Related to Amount A that was issued in May 2022.16 The changes include a new definition of Related Issues, a new Article [Y], which is an additional Mutual Agreement Procedure (MAP) provision for cases where there is no Existing Tax Agreement (defined in the Progress Report as an agreement of which one of the purposes is the avoidance of double taxation), and a new Commentary on Article [X] which contains a MAP provision for cases where there is an Existing Tax Agreement.
Related Issues Definition
Related Issues, according to the Report, include issues that: (i) have current or potential impact on the application of Amount A by a Covered Group; and (ii) are covered under an Existing Tax Agreement’s substantive transfer pricing and permanent establishment profit attribution rules. This includes actions under domestic anti-avoidance rules, though there are differing views within the Inclusive Framework on whether such rules should be subject to mandatory and binding dispute resolution.
Related issues do not include adjustments to certain transactions that are not expected to impact the Amount A calculation, such as adjustments to profits between members of Groups that are Regulated Financial Institutions or Groups that are Extractives Entities.
The Progress Report specifies that the definition does not reflect the final or consensus views of the Inclusive Framework. Discussion is still ongoing on a number of issues, such as what “potential impact” on the application of Amount A should entail, whether the definition should include a quantitative materiality threshold and whether reservations to the scope of the definition should be permitted.
MAP Provisions and Commentary
The Report includes draft provisions on tax certainty issues related to amount A. The Report describes these provisions as setting out a mandatory and binding mechanism that will be used to resolve transfer pricing and permanent establishment profit attribution disputes that Competent Authorities are unable to resolve through the MAP within two years of the presentation of the MAP case to the Competent Authorities.
Two provisions in relation to MAP are included: one article would apply when there is an existing treaty relationship between the jurisdictions involved in the Related Issue (Article [X]), and the other article would apply when there is no such treaty relationship between the jurisdictions involved in the Related Issue (Article [Y]). The Progress Report also includes Commentary on Article [X].
Articles [X] and [Y] are similar, and both follow the OECD/United Nations Model Tax Convention format. Article [X] outlines the interaction between a MAP filed under Article [X] and the MAP provisions of an Existing Tax Agreement, the European Union (EU) tax dispute resolution Directive, and the EU Arbitration Convention. It also specifies that a MAP filed thereunder will not be eligible for the arbitration provision under an Existing Tax Agreement. Article [Y] includes the option for a MAP in cases of doubts and difficulties and Related Issues not provided for in the MLC. Article [X] does not include this option but the Commentary clarifies that Competent Authorities can continue to rely on the doubts and difficulties provisions in the Existing Tax Agreement.
Finally, Article [X] gives Competent Authorities the option to extend the outcome of a MAP case to subsequent years.
Mandatory binding dispute resolution mechanism
The Report includes a proposed Article 19 (Resolution of disputes with respect to Related Issues) of the MLC and a Commentary to it. Article 19 provides an option for a dispute resolution panel request for MAP cases filed under both Article [X] and Article [Y]. However, the Progress Report indicates that Inclusive Framework jurisdictions have different views on whether the dispute resolution mechanism should apply when there is no bilateral tax treaty. Article 19 as outlined in the Progress Report does not differ significantly from what was contained in the Consultation Document on Tax Certainty for Issues Related to Amount A.
Implications
The Report provides significant new information with respect to the administration of Pillar One Amount A and notable updates from the prior public consultations on Tax Certainty for Amount A and Related Issues. Once the main building blocks of Pillar One are stabilized, administration and tax certainty will become critical elements of the Pillar One discussion. The Progress Report does not represent the final or consensus views of the Inclusive Framework jurisdictions, but it does provide an indication of the overall direction in which the administration and tax certainty for Amount A and Related Issues may develop.
The consultation documents on Digital Services Taxes and unilateral measures and on Amount B that the OECD expects to release by the end of 2022 will provide important additional information relevant to the operation of the rules.
It will be important to continue to monitor developments with respect to both Pillar One and Pillar Two closely over the coming months. Businesses also may want to consider taking the opportunity to engage with the OECD and country policymakers through the ongoing consultation processes.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP, Rotterdam
- Ronald van den Brekel
- Marlies de Ruiter
Ernst & Young Belastingadviseurs LLP, Amsterdam
- Oana Popescu
Ernst & Young Limited (New Zealand), Auckland
- Matt Andrew
Ernst & Young LLP (United Kingdom), London
- Joel Cooper
Ernst & Young LLP (United States), New York
- Tracee Fultz
- Jose A. (Jano) Bustos
- Joana Dermendjieva
Ernst & Young LLP (United States), Washington, DC
- Barbara M. Angus
- Mike McDonald
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.
