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February 21, 2022

OECD releases Pillar One public consultation document on draft rules for tax base determinations

Executive summary

On 18 February 2022, the Secretariat of the Organisation for Economic Co-operation and Development (OECD) released a public consultation document with draft rules for tax base determinations under Amount A for Pillar One of the OECD/G20 project on Addressing the Tax Challenges Arising from the Digitalisation of the Economy (the so-called BEPS 2.0 project).

Pillar One involves the development of new nexus and profit allocation rules that assign a greater share of the taxing rights over global business profits to the market jurisdictions. This is done through a formulaic approach, by first determining the global profits of the group and then allocating a portion of these profits to the market jurisdictions by using a revenue-based formula. The tax base determines the total profits of a group to which the formula will be applied. The starting point for this determination is the consolidated group financial accounts. The draft rules provide specifics on the calculation of the tax base, including book-to-tax adjustments, treatment of restatements, carryforward of losses and taking into account changes in the group structure.

The consultation document includes footnotes describing the further explanation that will be provided in the commentary that will be issued to support the model rules.

The consultation document indicates that it is a working document released to obtain input from stakeholders. The release of the document does not reflect consensus of the Inclusive Framework member jurisdictions on the substance of the document. Comments may be provided on any aspect of the rules, but the consultation document identifies areas where specific input is sought (e.g., the conversion of non-equivalent financial accounting standards, the cap on restatement adjustments, the inclusion of time limitations on loss carry forwards, and the treatment of changes in the group structure).

The OECD invites comments on the draft rules to be submitted in writing by 4 March 2022.

Detailed discussion


The OECD has been considering tax issues related to the digitalization of the economy since the outset of the original Base Erosion and Profit Shifting (BEPS) project in 2013. In 2019, the OECD launched the BEPS 2.0 project, which consists of Pillar One on new nexus and profit allocation rules and Pillar Two on global minimum tax rules.1 Currently, there are 141 jurisdictions participating in the BEPS 2.0 project through the Inclusive Framework.

In 2021, agreement was reached on key parameters of both pillars and an implementation plan.2 Of the 141 participating jurisdictions, 137 members of the Inclusive Framework have joined this agreement.

With respect to Pillar One, the agreed components include the following:

  • The scope of Amount A will be multinational enterprises (MNEs) with global turnover above €20 billion and profitability above 10%, calculated using an averaging mechanism.
  • Under Amount A, 25% of “residual profits,” defined as profit in excess of 10% of revenue, will be allocated to market jurisdictions where the in-scope MNE has nexus using a revenue-based allocation key.
  • The relevant measure of profit or loss of the in-scope MNE will be determined by reference to financial accounting income, with some book-tax adjustments and taking into account the carry-forward of losses.

In December 2021, the OECD announced plans to release a series of Secretariat working documents in the coming months on the separate building blocks of Amount A in order to obtain stakeholder input, as well as a public consultation document on Amount B in mid-2022. The first of these working documents on Amount A was released on 4 February 2022 as a public consultation document on the nexus and revenue sourcing rules.3

Tax base

On 18 February 2022, the OECD released a public consultation document related to the tax base rules for Amount A of Pillar One. The document includes draft model rules that once finalized will be the basis for the substantive provisions of the Multilateral Convention, as well as a template for domestic legislation, through which Amount A will be implemented. The document also includes footnotes with descriptions of additional information that will be contained in the commentary that will support the model rules.

Under the draft rules, the tax base determines the total profits of a Covered Group to which the reallocation-formula is applied under Amount A. The tax base is the adjusted profit before tax of an in-scope MNE group. The determination of the adjusted profit before tax starts from the financial accounting profit (or loss), with specified book-to-tax adjustments and the deduction of net losses that are carried forward.

The financial data is to be derived from the audited consolidated financial statements prepared by the Ultimate Parent Entity (UPE) under a Qualifying Financial Accounting Standard (QFAS) in which the assets, liabilities, income, expenses and cash flows of the UPE and other group entities are presented as those of a single economic entity. A QFAS means the International Financial Reporting Standard (IFRS) and the Equivalent Financial Accounting Standards, which are the Generally Accepted Accounting Principles (GAAP) of specified countries. The consultation document notes that the GAAP of other countries may subsequently be considered for inclusion in this definition.

For the purpose of the rules, financial accounting profit (or loss) means the profit or loss set out in the consolidated financial statements of the UPE taking into account all income and expenses of the group except for those items reported as other comprehensive income.

Book-to-tax adjustments

The draft rules provide an exhaustive list of items of income and expense that are to be reversed from the group’s financial accounting profit (or loss) as calculated under a QFAS:

  1. Tax expense (or tax income), which is defined as the current and deferred income tax expense (or income).

  1. Dividends, which is defined as dividends or distributions that are received or accrued in respect of an ownership interest.

  1. Equity gain or loss, which is defined as the net gain or loss arising from the disposition of an ownership interest, changes in the fair value of an ownership interest under fair value accounting, and profit or loss included under the equity method of accounting (other than profit or loss derived from a joint venture in which the group has joint control). In this regard, the consultation document notes that the treatment of gains and losses associated with disposal of equity interests is still under discussion, indicating that under the current draft rules, gains and losses associated with disposal of asset interests are included in the tax base but gains and losses associated with disposal of equity interests are not but that changes may be made to this approach.

  1. Policy disallowed expenses, which is defined as expenses for illegal payments (e.g., bribes and kickbacks), fines and penalties.

In addition, subject to specified limitations, restatements required under accounting rules are reflected as adjustments to the tax base of the group in the period that the restatement is identified and recognized, rather than going back and recalculating the tax base for prior periods. The consultation document indicates that the current draft rules include a cap on the restatement adjustment for a period of 0.5% of group revenues for the period, but that the level of the cap will be subject to further analysis.


Net losses are the accounting losses, from eligible prior periods, exceeding the total financial accounting profits of the group after making book-to-tax adjustments. As indicated in the consultation document, the current draft rules set out the general rule for the calculation of unrelieved net losses from prior periods to be carried forward and deducted from the adjusted profit before tax which is based on a three-step ‘’earn-out’’ mechanism:

  1. Identification of the eligible prior periods - The eligible prior periods are the earliest period of the group that generated unrelieved losses within the applicable time limits and all subsequent periods of the group before the current period The determination of the eligible prior periods depends on whether the losses are considered pre- or post-implementation of Amount A. The consultation document reflects a potential carryforward of between 5 and 15 years for post-implementation losses, further noting that the question of whether there should be time limitations on loss carryforwards is still under discussion. With respect to pre-implementation losses, the consultation document reflects a potential carryforward of between two and eight years, further noting that both the recognition of pre-implementation losses and any time limitation on any carryforward of such losses are still under discussion,

  1. Calculation of net losses by reference to the eligible prior periods.

  1. Carryforward and deduction of such net losses in the current period.

Special rules apply when there are changes in the group structure. In the cases where a business combination or division occurred during a period, the net losses would also include any transfer of losses to or from the group, provided specified conditions are met.


If adopted, the application of the draft model rules would have significant implications for companies that are in scope of Pillar One Amount A, affecting the amount of profits to be re-allocated to market jurisdictions and leading to new compliance requirements including requiring a new calculation of a tax base separate from the entity-based domestic tax base calculations.

This consultation document is the second of a series of consultation documents that the OECD is expecting to release in the coming months, including segmentation rules that could have implications for the tax base determination. Companies that could be in scope of Pillar One Amount A should monitor these developments closely and start evaluating the impact of the different proposed rules. They should also consider the opportunity to submit comments on the consultation document.


For additional information with respect to this Alert, please contact the following:

Ernst & Young Belastingadviseurs LLP, Rotterdam

Ernst & Young Belastingadviseurs LLP, Amsterdam

Ernst & Young Limited (New Zealand), Auckland

Ernst & Young LLP (United States), New York

Ernst & Young LLP (United States), Washington, DC



  1. For additional information see EY Global Tax Alert, OECD’s new insights describe growing support on comprehensive changes to international tax policy, beyond digital, dated 29 January 2019; EY Global Tax Alert, OECD opens public consultation on addressing tax challenges arising from digitalization of the economy: time-sensitive issue impacting all multinational enterprises, dated 14 February 2019; EY Global Tax Alert, OECD hosts public consultation on document proposing significant changes to the international tax system, dated 18 March 2019; EY Global Tax Alert, OECD workplan envisions global agreement on new rules for taxing multinational enterprises, dated 3 June 2019; EY Global Tax Alert, OECD releases BEPS 2.0 Pillar One Blueprint and invites public comments, dated 19 October 2020; and EY Global Tax Alert, OECD releases BEPS 2.0 Pillar Two Blueprint and invites public comments, dated 19 October 2020.

  2. See EY Global Tax Alert, OECD releases statement updating July conceptual agreement on BEPS 2.0 project, dated 11 October 2021; and EY Global Tax Alert, OECD announces conceptual agreement in BEPS 2.0 project, dated 1 July 2021.

  3. See EY Global Tax Alert, OECD releases Pillar One public consultation document on draft nexus and revenue sourcing rules, dated 11 February 2022.


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