21/02/22

INTERNATIONAL TAX: OECD consults on calculations for reallocating MNE’s profits to end-user markets.

As published on step.org/industry-news, Monday 21 February, 2022.

A consultation has begun on the OECD's draft rules for tax base determinations under Amount A of its Pillar One reforms to the taxation of large multinational enterprises (MNEs).

The rules will establish the profit (or loss) of an in-scope company, for the purpose of reallocating a portion of its profits to market jurisdictions under Pillar One, agreed in October 2021 by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (the Inclusive Framework) as a key part of reforms to international business taxation. It deals with nexus and revenue sourcing for MNEs to address the tax challenges arising from digitalisation and globalisation of the world economy, in which MNEs can earn large revenues from a jurisdiction without having a significant presence there.

Pillar One assigns revenue to the end-market jurisdictions where goods or services are used or consumed. The nexus threshold will be EUR1 million for jurisdictions where annual gross domestic product (GDP) exceeds EUR40 billion and EUR250,000 for others.

The purpose of the tax base determinations rules is to establish the profit or loss of an in-scope MNE. That will then be used for the Amount A calculations to reallocate a portion of the MNE’s profits to the market jurisdictions in which it earns revenue. The rules determine that profit will be calculated on the basis of the consolidated group financial accounts, making a limited number of book-to-tax adjustments. The rules also include provisions for the carry forward of losses.

The OECD’s consultation document stresses that no consensus has been reached on the substance of the draft rules, and the stakeholder input received on them will assist Inclusive Framework members to finalise them.

A related consultation on draft rules for nexus and revenue sourcing under Pillar One closed last week. The current consultation on Amount A calculations closes on 4 March 2022.