The OECD’s proposals under Pillar I seek to revise the allocation of the tax base in a digitalized and global economy. To this end, Amount A grants taxing authority to market jurisdictions over a portion of the global profits of the largest multinational companies.
Below is a summary of the processes governing the operation of the Pillar A rules.
| Step 1.
Determining Scope
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Determine whether the multinational enterprise falls within the scope of Amount A:
- The multinational enterprise must exceed the scope thresholds of 20,000 million EUR in revenue and have a profit margin exceeding 10%;
- If the multinational enterprise does not meet these thresholds, but one of its reported segments does so independently, that reported segment will be subject to Amount A; and
- Revenue and profits related to the extractive industries and regulated financial services shall be excluded.
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Step 2.
Connection and Source of Revenue |
Determine which jurisdictions are eligible to tax a portion of the multinational enterprise’s residual profits
- A jurisdiction may tax Amount A if the Covered Group derives more than 1 million euros in revenue from that jurisdiction or, alternatively, 250 thousand euros if that jurisdiction’s GDP is less than 40 billion euros; and
- To determine the amount of revenue derived from each jurisdiction, the Covered Group must apply the revenue attribution rules set forth in Article 4 and Annex E.
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Step 3.
Determination of the Tax Base |
Determine the relevant measure of the Covered Group’s profit:
- The taxable income rules will use the Covered Group’s total profit (or loss) in its Consolidated Financial Statements as the starting point;
- A limited number of accounting adjustments for tax purposes will be made to arrive at a standardized adjusted profit before tax; and
- Losses will be carried forward subject to certain limitations.
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Step 4.
Allocation of
Amount A |
Allocate Amount A to eligible market jurisdictions:
- The profit from Amount A allocated to an eligible market jurisdiction (as determined in Step 2) is calculated using the following formula:
- First, take 25% of the adjusted pre-tax profit that exceeds 10% of the Covered Group’s profit.
- Revenue, to determine the total Amount A benefit; and then allocate the Amount A benefit to the market jurisdiction in proportion to the amount of Revenue that the Covered Group derives from that jurisdiction (as determined in Step 2).
2. Amount A of the profits allocated to a market jurisdiction is adjusted and reduced by the safe harbor for marketing and distribution profits when that jurisdiction already has taxing rights over the residual profits of the covered group.
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| Step 5.
Elimination of Double Taxation |
Eliminating double taxation:
- Double taxation resulting from the application of Amount A as an overlay to the existing profit allocation system shall be eliminated through the mechanism provided for in Articles 7 through 11; and
- These rules will be applied on a quantitative and jurisdictional basis to determine which jurisdictions will be responsible for eliminating double taxation and in what amounts.
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It is expected that, through these processes, tax authorities and consultants will be able to identify affected taxpayers and effectively implement Amount A once the respective governments approve the legislation in their jurisdictions.
