October 30, 2023
OECD releases Multilateral Convention to implement Pillar One Amount A
On 11 October 2023, the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) released a text of the Amount A MLC. The objective of the MLC is to create a coordinated agreement to reallocate taxing rights to market jurisdictions with respect to a portion of the profits of in-scope multinational enterprises (MNEs) in excess of 10% of their global revenues.
Together with the MLC, the Inclusive Framework also released an explanatory statement, which clarifies how each provision is intended to apply. In addition, the MLC is accompanied by an Understanding on the Application of Certainty for Amount A of Pillar One, which contains further details on how aspects of the Amount A tax certainty framework will operate in practice. An additional overview document provides a brief summary of the MLC, its layout and selected issues.
According to the Inclusive Framework, the text of the MLC, which is not yet open for signature, reflects the consensus achieved so far among member jurisdictions, with different views on a handful of specific items noted in footnotes by a small number of jurisdictions.
This Alert provides a high-level summary of core components of the Amount A MLC and accompanying documents.
In October 2021, the OECD released a statement reflecting the high-level agreement of Inclusive Framework-member jurisdictions on core design elements of Pillars One and Two of the BEPS 2.0 project.1 Since that agreement was reached, the Inclusive Framework released a series of consultation documents on Pillar One during 2022, covering core elements of the nexus and profit allocation rules of Amount A and the related commitments to eliminate digital services taxes (DSTs) and relevant similar measures as well as the simplified transfer pricing approach to baseline marketing and distribution activity of Amount B.2 More recently, on 17 July 2023, the OECD released a further consultation document on Amount B.3 These working drafts did not reflect consensus agreement in the Inclusive Framework and were released to obtain input from stakeholders.
On 12 July 2023, the OECD released a statement reflecting the agreement reached by 138 of the 143 member jurisdictions of the Inclusive Framework on the remaining elements of the BEPS 2.0 project.4 The July 2023 statement indicated that the Inclusive Framework had developed a text of the MLC for Pillar One Amount A that sets out the substantive features necessary for it to be prepared for signature and includes several provisions designed to address the particular circumstances of developing countries.
However, the statement indicated that efforts were underway to resolve concerns raised by a few jurisdictions about specific items in the MLC, with the aim of preparing the MLC for signature expeditiously. On timing, the statement referenced the intention for the MLC to be opened for signature in the second half of 2023, with a signing ceremony to be arranged by year-end, and the objective of having the MLC enter into force in 2025.
The July 2023 statement also addressed the existing standstill agreement on imposing newly enacted DSTs and similar measures, which currently runs through 31 December 2023. The statement reflected the agreement of Inclusive Framework-member jurisdictions to refrain from imposing newly implemented DSTs or similar measures on any company during the period between 1 January 2024 and 31 December 2024 (or the date the MLC enters into force, if earlier).
However, this extension is subject to the condition that at least 30 jurisdictions, accounting for a minimum of 60% of the Ultimate Parent Entities5 of Covered Groups, sign the MLC before the end of 2023. In addition, the statement noted that if sufficient progress is made toward implementing the MLC by the end of 2024, Inclusive Framework members may agree to extend this deadline to the earlier of 31 December 2025 or the date the MLC enters into force.
The Amount A MLC
Release of documents
The text of the Amount A MLC released on 11 October 2023 was approved for publication by the Inclusive Framework and reflects the current consensus among Inclusive Framework member jurisdictions on the design of Amount A. Included in the text are footnotes describing different views of a small number of jurisdictions on specific items. Efforts to resolve these differences are ongoing.
The Inclusive Framework also approved for publication two documents that accompany the Amount A MLC: the Explanatory Statement and the Understanding on the Application of Certainty. Together, the three Amount A documents released on 11 October run to almost 900 pages and provide some significant new information regarding the intended operation of Amount A. The documents indicate that their publication is intended to ensure transparency, facilitate the ability of some Inclusive Framework-member jurisdictions to engage in necessary internal processes, facilitate resolution of the remaining differences and prepare the MLC for signature. The text of the MLC as released is not yet open for signature, and the Inclusive Framework did not make any announcement regarding the expected timing of the release of a text that will be open for signature or scheduling of a signing ceremony.
The Inclusive Framework also did not make any statement regarding any further developments with respect to the agreement announced on 12 July 2023 to extend for an additional year the current standstill on imposition of new DSTs or relevant similar measures that is set to expire at the end of 2023; this extension is conditioned on a sufficient number of countries signing the MLC before the end of 2023.
On the same date as the release of the Amount A documents, the US Department of the Treasury announced that it is requesting public input on these documents, seeking comments in particular on new issues identified by a review of the complete text, implementation and administrability issues, and technical adjustments to address errors or clarify the operation of the MLC. The due date for written comments is 11 December 2023.
Also on 11 October 2023, the OECD released a working paper providing updated estimates of the economic and revenue impacts of Amount A prepared by the OECD Secretariat. The estimates are based on the design of Amount A as reflected in the Amount A MLC, with the economic and revenue impacts generally projected based on data for 2017 to 2021. The document includes a caveat that the estimates should be interpreted as illustrating the broad order of magnitude of the impacts of Amount A.
The main findings of the OECD Secretariat as highlighted in the working paper include the following, all based on 2021 data:
In addition, the OECD released a document prepared by the OECD Secretariat providing an overview of the Amount A MLC.
Application and Personal Scope (Part I of the MLC)
Part I outlines the way in which the MLC operates and describes its scope of application.
Article 1 provides for the application of the MLC only to Group Entities of Covered Groups. It also notes that the MLC has no implications other than specifically for the identification of in-scope Groups, administration of Amount A and treatment of specific measures enacted by Parties to the MLC that relate to Amount A.
General Definitions and Covered Group (Part I and II of the MLC and Annexes B and C)
Part II contains defined terms relevant for the entire text of the MLC. It also contains provisions on scope, including the quantitative thresholds for revenue and profitability and the rules on how certain segments may fall within the scope of the MLC. The exclusions from scope applying to specific industries and to domestic-oriented businesses can also be found in Part II.
Annex B contains supplementary definitions and includes a detailed description of how to calculate Adjusted Profit before Tax, which is used as the basis of a number of different operative provisions of the MLC. Annex C describes the application of the rules in the context of reorganizations and provides details on the scope exclusions for regulated financial institutions, qualifying extractives groups, defense groups and autonomous domestic businesses.
Article 2 provides general definitions of terms used throughout the document, including definitions of "Acceptable Financial Accounting Standards" in line with the definition in the prior consultation document. Article 2 also defines "Adjusted Revenues," among other terms. Adjusted Revenues are defined as revenues exclusive of value added taxes, goods and services taxes or other similar consumption taxes, and modified for certain exclusions covered in Annex B.
Article 3 provides the definition of a Covered Group. The definition of in-scope Covered Groups is similar to what was included in the July 2022 consultation document, under which a Group is in scope of Amount A if for the Period it has Adjusted Revenues greater than €20b and a pretax profit margin greater than 10%.
If in the two preceding Periods before the Period, the Group was not a Covered Group (i.e., it did not satisfy the revenue and profit before tax criteria), it will not be considered a Covered Group for the Period unless it satisfies the additional criteria. The additional criteria to qualify as a Covered Group remain as described in the July 2022 consultation document: (i) the Group has a pretax profit margin greater than 10% in at least two out of the four Periods immediately preceding the Period (previously referred to as the prior period test) and (ii) the average of the pretax profit margin for the five-year Period ending with the Period is greater than 10% (previously referred to as the average test).
Annex B has provisions for excluded entities, which includes governmental entities, international organizations, investment funds, not-for-profit organizations, pension funds and pension services entities, consistent with the July 2022 consultation document. Annex B also provides an updated definition of Adjusted Profit Before Tax for a Covered Group, which is defined as the Financial Accounting Profit (or Loss) from Qualified Financial Statements, after excluding: (i) current and deferred income tax expense (or income); (ii) dividends or other similar distributions; (iii) gains or losses arising from certain specified transactions; (iv) expenses related to payments considered illegal by the jurisdictions of the Ultimate Parent Entity, the Group Entity that made the payment or the Group Entity that incurred the expenses; and (v) expenses or fines exceeding €50,000. Annex B also provides for additional adjustments to Adjusted Profit Before Tax related to gains and losses attributable to fair value or impairments, acquisition of equity interest in another Entity and disposition of assets other than inventory.
Annex C has special provisions for Group Mergers and Demergers, Internal Fragmentation, Dual-listed Arrangements and Stapled Structures. It also provides details on the exclusions for Regulated Financial Institutions and Qualifying Extractives Groups and the treatment of Disclosed Segments. In addition, it provides a new autonomous domestic business exemption and a new defense group adjustment.
Autonomous domestic business exemption
Where a Jurisdiction is an autonomous domestic business jurisdiction under the MLC, adjustments are made to exclude the financial results of the operations that are substantially all domestically and autonomously focused in the Jurisdiction for purposes of elimination of double taxation and Amount A Profit allocation. Three conditions need to be met simultaneously for a Jurisdiction to be an autonomous domestic business jurisdiction. First, the revenues sourced to the Jurisdiction must be compared to the financial accounting revenues booked in the jurisdiction; the revenues sourced to the Jurisdiction under the rules provided must be within between 95% and 105% of the entity financial accounting revenues (third-party revenues). This condition is intended to capture a Covered Group that is selling to third parties in that Jurisdiction, as opposed to selling to third parties located in another Jurisdiction. The second and third conditions compare the cross-border intra-group revenues and expenses in a Jurisdiction to the total revenues and deductible expenses in that Jurisdiction after eliminating transactions between Group Entities in the Jurisdiction but before eliminating transactions with Group Entities in another Jurisdiction. The second and third criteria are met, respectively, if the cross-border intra-group revenues and the cross-border intra-group expenses do not exceed 15% of the total revenues and expenses thus calculated.
Where the Covered Group meets the exemption for a jurisdiction, that Jurisdiction will not be allocated any Amount A Profit nor any obligation to relieve Amount A under the elimination of double taxation framework. Additionally, that Jurisdiction's Return on Depreciation and Payroll will not be taken into account for calculating the elimination of double taxation amount for other Group Entities.
"Defence group" adjustment6
A "defence group" is defined as a Group that derives any amount of "defence revenues," regardless of whether that is the main activity of the Group. "Defence revenues" are defined as revenues earned providing a supply that has a "defence purpose." The "defence purpose" definition draws on the phrases "defence or intelligence services" and "security interests preserved by defence or intelligence services."
The defence group adjustments effectively exclude defence revenues and profits from the calculation of the revenues and profits of the Covered Group and ensure that the elimination of double-tax calculations and obligations only apply to non-defence revenues and profits. The MLC applies to the remaining revenues and profits of the Covered Group regardless of their amount. The scope threshold is nevertheless applied before eliminating defence revenues and profits from the revenues and profits of the Covered Group. This is different than the approach taken for the exclusions that apply to Regulated Financial Institutions and Qualifying Extractives Groups. For those Groups, after the application of the exclusion, the scope thresholds are reapplied to determine whether the Group is in scope having regard only to the nonregulated financial institution or non-extractives portion of the Group.
Allocation and Taxation of Profits (Part III of the MLC and Annex D)
Part III of the MLC outlines the rules for allocation of Amount A profit to each participating jurisdiction, including the marketing and distribution profits safe harbor adjustment. It also contains the provisions on determining sources of revenue and the revenue-based nexus test.
Annex D provides additional detail on each category of revenues and also defines enumerated indicators and the relevant allocation keys used.
Articles 4 and 5
Once the total amount of profit to be allocated under Amount A is determined, Articles 4 and 5 provide the rules for allocating Amount A to each of the market jurisdictions. The basic allocation mechanism is generally similar to the mechanism described in the July 2022 consultation document, but there are important differences and clarifications.
The July 2022 approach
To describe the MLC's treatment of the Amount A allocation, it is useful to begin with the July 2022 consultation document. In that document, the profit allocation formula for the global Amount A of a jurisdiction was primarily based on that jurisdiction's proportionate share of global revenues. The jurisdictional allocation of Amount A was reduced by that jurisdiction's marketing and distribution safe harbor (MDSH) adjustment. Thus:
Amount A = Global Amount A * (Jurisdiction Revenues / Group Revenues) - MDSH
The MDSH adjustment was a formulaic measure of excess profits deemed to be taxed under the regular tax system, which accordingly reduced the Amount A allocation in a jurisdiction. The July 2022 consultation document defined excess profits as profits in excess of a routine return, which was defined as a return on deprecation and payroll (D+P). The MDSH adjustment could, at most, reduce the Amount A allocation in a jurisdiction to zero, and in the July 2022 consultation document the MDSH adjustment was defined as:
MDSH = [Elimination Profits — (max ((Elimination Threshold Return on D+P), 40% return on D+P)) * Y]
The Elimination Threshold Return was 10% of the Group's adjusted income divided by the sum of the Group's D+P. This and the alternative 40% return on D+P were intended to provide a measure of "routine" returns in order to provide a measure of the double counting of Amount A profits.
The parameter "Y" generated much comment on the July 2022 consultation document. "Y" was an undefined and unexplained haircut on the overall MDSH adjustment (for example, a value of "Y" equal to 1.0 would reflect a zero haircut to the MDSH and a value of 0.0 would reflect total elimination of the MDSH).
Finally, the July 2022 consultation document did not make any allowances for withholding taxes. Many comment submissions (including the global comment letter submitted by EY) stressed that conceptually, if Amount A is intended to address a concern that market jurisdictions do not have "enough" taxing rights under existing international tax rules, that determination should consider all taxes that the jurisdiction imposes, whether it chooses to exercise its taxing rights through a gross-basis withholding tax on deductible payments or through a tax on net income. Under this view, the MDSH adjustment should take into consideration withholding taxes.
The MLC approach
The basic framework of the allocation rules in the October 2023 MLC is similar to the July 2022 consultation document. However, there have been significant modifications and clarifications in its detailed articulation.7
First, the MLC determines that any jurisdiction that has nexus may tax the Designated Payment Entity for the Amount A profit allocable to that jurisdiction. The July 2022 document included an approach under which multiple entities could have been the taxpayer for Amount A tax.
Second, the MLC provides a pro-rata reduction in the Amount A profit that would otherwise be allocated to a taxing jurisdiction to the extent that the party that should eliminate double taxation (i.e., relieving jurisdiction) is not a Party to the MLC (referring to those jurisdictions that do not incorporate Amount A into their domestic law and do not ratify the MLC) and provided there is a bilateral tax treaty, between the taxing jurisdiction and the non-participating relieving jurisdiction, that incorporates Article 7 of the OECD Model Tax Convention or the UN Model Tax Convention. Such non-participating jurisdictions would, by definition, not surrender their taxing rights, and the pro-rata reduction in Amount A allocable to the taxing jurisdiction is intended to prevent double taxation on these amounts.8
Third, the routine return used to determine excess profits (referred to as adjusted jurisdictional excess profits) is no longer defined as the Group's Elimination Threshold Return on D+P or 40%. Instead, it is defined as the higher of the Elimination Threshold Return on D+P for the Covered Group multiplied by the Jurisdictional D+P of the Covered Group in that Jurisdiction (which is no change from the July 2022 consultation document), or 3% of the Jurisdiction's Adjusted Revenues (which is a change from the July 2022 consultation document).9
Fourth, the MDSH adjustment "haircut" (formerly known as "Y") that was contained in the July 2022 consultation document has been renamed the "Jurisdictional Offset Percentage" and is defined as:
Finally, and unlike the 2022 consultation document, the MLC increases the MDSH adjustment to account for withholding taxes on cross-border deductible payments made to Covered Groups.11 Specifically, the Adjusted Jurisdictional Excess Profits are calculated including a Withholding Tax Upward Adjustment amount which, all else equal, serves to increase the amount of the MDSH adjustment and reduce the Amount A allocation to a jurisdiction.12
The basis for the withholding adjustment is the Withholding Tax Upward Adjustment amount, which is defined as the covered withholding tax divided by the income tax rate of the Jurisdiction. This determines the amount of profits that would be required under the income tax to yield the same amount of withholding taxes. The Withholding Tax Upward Adjustment amount effectively equates profits associated with withholding taxes and profits associated with income taxes for purposes of the MDSH.
Similar to the MDSH as it applies to income taxes, there is a formulary exclusion defining so-called routine returns to apply the excess profit concept to withholding taxes. This is accomplished through an adjustment equal to one minus the "withholding tax upward adjustment reduction factor," defined as 30% or 60% for specified categories of jurisdictions with less than €50,000 of D+P (or 40% or 70% for jurisdictions that also are Lower Income Jurisdictions), and 15% otherwise. Thus, the excess profit associated with the withholding tax that will be included in the MDSH adjustment will be 70% or 40% (or 60% or 30% for Lower Income Jurisdictions) of what it otherwise would be for jurisdictions with less than €50,000 of D+P and 85% of what it otherwise would be for all other jurisdictions.
Under special transition rules, the Withholding Tax Upward Adjustment to the MDSH adjustment will not apply for the first two years in which the MLC applies (technically, the "withholding tax upward adjustment reduction factor" is 100% for the first two years), and after the first two years only 25% of the Withholding Tax Upward Adjustment to the MDSH adjustment will apply to jurisdictions with less than €50,000 in D+P until the time that the €20b revenue threshold for being in scope of Amount A is reduced to €10b (which is to follow an implementation review to be performed after the seventh year of the entry into force of the MLC).
Articles 6 - 8
Sources of revenues are determined separately for each defined category of revenues identified in the MLC, namely finished goods, digital content, components, services, intangible property, user data, immovable property, government grants, and non-customer revenues. As in prior iterations of this rule, the category is determined based on the ordinary or predominant character of the underlying transactions. For purposes of revenue categorization, the MLC defines "transaction" as an item priced separately to the customer. Aggregation of transactions is allowed. Revenues that do not fit into any category can be sourced by reference to the closest analogy.
Revenues must be sourced using a "reliable method." A reliable method is a method that identifies where revenues arise based on a reliable indicator, or, if certain conditions are met, based on an allocation key. In general, a reliable method must account for differences in the nature, quantity and prices of the products or services. There is a simplification to that rule provided for so-called "supplementary revenues," which are derived from a group of transactions that would not have been entered into but for a need created by another group of transactions. Such revenues may be sourced just based on the sourcing of the other group of transactions. However, there is a monetary cap on such supplementary revenues and if the cap is exceeded, the revenues must be sourced independently.
Where no source for the revenues has been determined using a reliable indicator, an allocation key may apply if: (i) the allocation key is expressly permitted in Annex D; (ii) the taxpayer demonstrates it has taken reasonable steps to identify a reliable indicator enumerated in Annex D; and (iii) certain jurisdictions where revenues could not have arisen are removed from the application of the allocation key (the "knock-out rule").
Article 7 provides sourcing principles for determining what is a reliable sourcing method. It sets out sourcing principles for finished goods, digital content, components, services, online advertising, non-online advertising, intermediation services that facilitate the sale or purchase of tangible goods, digital content or services, transport services, customer reward programs, other services, intangible property, user data, immovable property, grants, subsidies and refundable credits.
The revenue sources rules in the MLC closely follow the July 2022 consultation document. Annex D provides more detailed rules on all of the enumerated indicators.
The Article 8 nexus rules remain broadly unchanged from the July 2022 consultation document. The nexus test is met for a Period if the Adjusted Revenues of a Covered Group treated as arising in a Jurisdiction is equal to or greater than €1m for jurisdictions with annual Gross Domestic Product (GDP) equal to or greater than €40b, and €250,000 for jurisdictions with annual GDP of less than €40b. The nexus test applies solely to determine whether a market Jurisdiction qualifies for profit re-allocation in relation to Amount A. It has no other tax implications for any Group Entity of the Covered Group. For example, a Covered Group Entity meeting the Article 8 nexus rules cannot be deemed to have a permanent establishment under the definition of permanent establishment in bilateral tax treaties.
Elimination of Double Taxation (Part IV of the MLC)
Part IV of the MLC contains the rules for the elimination of double taxation arising as a consequence of the taxation of Amount A profit in a jurisdiction, including the identification of the relieving entities.
In essence these rules determine which jurisdiction should forego taxing rights (i.e., jurisdictions from which taxable profit is allocated). The rules operate on a quantitative and jurisdictional basis to identify the jurisdictions responsible for the elimination of double taxation. There are three steps applicable here:
Step 1 (Article 10)
A Jurisdiction will be a specified jurisdiction if it falls withing any one of three group:
Step 2 (Article 11)
The mechanism for allocation of the obligation to eliminate double taxation aims to ensure that the obligation is borne by the jurisdictions in which the Covered Group earns its residual profits. The allocation essentially uses a waterfall approach to determine which of the specified jurisdictions are required to provide relief (the relieving jurisdictions).
The specified jurisdictions are grouped into four Tiers depending on their RODP:
Jurisdictions with no residual profit within any of these tiers will not be required to relieve double taxation arising from Amount A.
There is also a mechanism to catch-up on relief not provided for in prior Periods.
For purposes of eliminating double tax, the Elimination Profit (or Loss) in a given jurisdiction is reduced by the MDSH adjustment, adjusted for the Withholding Tax Upward Adjustment, and the Amount A already relieved by that jurisdiction.
Step 3 (Articles 12 and 13)
A relieving jurisdiction should identify relief entities and allocate the double taxation relief obligation on Amount A Profit among the relief entities. This allocation is done on the basis of one of the following measures of profit:
A relieving jurisdiction allocates the double taxation relief to the Group Entity with the highest profit, reducing that profit by the Amount A relieved until one of the below is first satisfied:
This shall be applied iteratively until one of the below is first satisfied:
A relieving jurisdiction provides relief from double taxation to each relief entity using one of the following methods:
This is different from the July 2022 consultation document, which provided for either an exemption or credit method to provide double taxation relief. Footnote 5 of that document noted that further work would be undertaken to consider other relief methods. As stated above, the MLC provides payment, credit and deduction options for relief of double taxation, but it does not mention the exemption method.
Administration and Certainty (Part V of the MLC and Annexes E, F and G)
There are four sections to Part V, which cover administration, provision of tax certainty, exchange of information and international cooperation.
Section 1: Administration
A single Amount A Tax Return covering all the Covered Group's Amount A tax liabilities across the world, together with a Common Documentation Package, is to be filed by the coordinating entity with the lead tax administration (typically the Ultimate Parent Entity jurisdiction), which distributes the package to all affected jurisdictions. The filing deadline is between 9 and 12 months from the end of the Period, as set by the lead tax administration.
The Conference of the Parties will develop a standard template that will be used for purposes of the Amount A Tax Return and Common Documentation Package. The template will contain information that allows a tax administration to assess the tax liability of the Designated Payment Entity under Amount A, such as information on the identity of the Covered Group, the Ultimate Parent Entity and the Designated Payment Entity and financial information needed to compute Amount A.
A Designated Payment Entity meets the requirements for a streamlined compliance process in a jurisdiction if it has no income liable to tax in the jurisdiction other than income liable to tax in accordance with Article 4 of the MLC and income that is subject to a final withholding tax and has not benefitted from a regime in that jurisdiction permitting it to utilize income tax attributes of another Group Entity of the Covered Group in the Period.
A Designated Payment Entity also meets the requirements for a streamlined compliance process in a jurisdiction if it is liable for tax in that jurisdiction in accordance with Article 4 of the MLC, with no reduction for income tax attributes of other Group Entities, and under a regime where tax is levied independently from other taxes on business profits.
Under the streamlined compliance process, the Designated Payment Entity would pay the Amount A tax within 18 months of the end of the period to each tax administration without the Designated Payment Entity being required to comply with any domestic tax compliance requirements other than for purposes of tax charged in accordance with Article 4 of the MLC. Where the Amount A Tax Return and Common Documentation Package is filed in accordance with the MLC, the Designated Payment Entity is to be treated as having satisfied all income tax filing obligations in a jurisdiction in relation to income liable to tax in accordance with Article 4 of the MLC.
If a Designated Payment Entity does not meet the requirements for the streamlined compliance process in a jurisdiction, income liable to tax in a jurisdiction is to be deemed to be derived for income tax purposes by the Designated Payment Entity.
Group Entities that are relief entities are required to make compensation payments to fund the Designated Payment Entity (with those payments ignored for tax purposes). Relief entities are entitled to double tax relief under the domestic laws of the applicable relieving jurisdictions within 90 days of a claim through an immediate reduction in installment payments.
The MLC requires Covered Groups to have an internal control framework that lays out the Group's policies, processes and procedures, endorsed by the Group's senior management, that are designed and implemented to ensure the accurate application of the Amount A provisions.
Annex E supplements Section 1 with provisions on transition periods and simplified scope calculations.
Section 2: Tax certainty framework for Amount A
Covered Groups have access to a mechanism that is intended to provide binding multilateral certainty over all aspects of Amount A rules in all relevant jurisdictions. The Amount A Tax Certainty Framework contains three mechanisms to provide binding multilateral certainty:
Specific deadlines have been incorporated in these certainty mechanisms for each stage of the review. A Covered Group will have the opportunity to present its approach and respond to any concerns that are raised.
Requests for certainty are subject to payment of the tax certainty user fee to be agreed by the Conference of the Parties. In each case, outstanding disagreements will be referred to a determination panel for a final resolution. This is intended to ensure that any Covered Group that submits a request for certainty obtains a binding certainty outcome unless it is considered to have withdrawn that request or is not cooperative and transparent in the process.
The Amount A tax certainty framework is accompanied by the Understanding on the Application of Certainty for Amount A of Pillar One, which contains further details on how aspects of the Amount A tax certainty mechanisms are to operate in practice.
Annex F supplements Section 2 with provisions on certainty reviews, the determination panel to resolve disagreements, the composition of a determination panel and relevant definitions for Part V of the MLC.
Section 3: Tax certainty framework for issues related to Amount A
Covered Groups have access to a mandatory binding dispute resolution process for tax disputes on existing rules that are related to Amount A.
These related issues are issues that are covered under the provisions of a covered tax agreement based on or equivalent to Article 5, 7 or 9 of the OECD Model Tax Convention or the UN Model Tax Convention, including questions concerning the applicability of these provisions, and that have: (a) an impact on the elimination of double taxation with respect to Amount A; or (b) a material impact on the Elimination Profit (or Loss) or Amount A Profit of a covered jurisdiction. Consequently, related issues can be issues in relation to transfer pricing, permanent establishment rules, characterization issues on withholding taxes, etc.
This "related issues" tax certainty process is based on the mutual agreement procedure included in the bilateral tax treaty between the respective jurisdictions. If the issue is unresolved in a mutual agreement procedure, a mandatory binding dispute resolution process can be initiated. This is an enhanced process allowing panels to resolve disputes not otherwise subject to mandatory binding resolution. Each panel would consist of the two competent authorities involved, two independent experts (selected by each competent authority) and an independent expert chair.
Annex G supplements Section 3 with provisions on the statement of information and terms of reference, the competent authority agreement on mode of application, the appointment of dispute resolution panel members, the communication of information and confidentiality of dispute resolution panel proceedings, the dispute resolution panel process and the costs of dispute resolution panel proceedings.
Section 4: Exchange of information and international cooperation framework in relation to Amount A
Under the MLC, the respective tax authorities shall exchange any information that is foreseeably relevant for the administration or enforcement of the MLC or the domestic laws concerning taxes imposed in accordance with the MLC.
Treatment of Specific Measures Enacted by Parties (Part VI of the MLC and Annexes A and H)
Part VI contains the rules for the treatment of specific measures enacted by the Parties, including provisions:
Annex A lists the existing measures subject to removal as provided in Article 38.
Annex H contains provisions on the review process and early clarification on DSTs and other similar measures.
The first category of specific measures addressed by the MLC are specified in Annex A: the DSTs in Australia, France, Italy, Spain, Tunisia, Turkey and the United Kingdom and the Indian Equalization levies on online advertisement services and on e-commerce. The MLC compels Parties to withdraw these specific measures. This list had not been included in the December 2022 consultation document.
As agreed in the October 2021 statement and indicated in the December 2022 consultation document, a Party will not be allowed to apply these measures to any person, regardless of whether the person is in scope of Amount A or whether the person is resident in a jurisdiction to which the MLC applies.
The second category of specific measures are DSTs or relevant similar measures. The MLC eliminates Amount A allocations for Parties where such measures are in force and effect during a Period.
The term "digital services tax or relevant similar measures" is defined as a tax imposed by a Party, however described, that meets three cumulative conditions and is not described in a list of exceptions.13
The three cumulative criteria are:
Under (2) above, there are two alternative tests. The first test is to establish whether the measure is applicable by its terms solely to businesses carried out by persons that are nonresidents or foreign-owned businesses. The second test addresses measures that, while applicable on their face regardless of residency or foreign ownership, nevertheless have specific design features that result in de facto ring-fencing. This second test requires a three-step assessment to test whether:
If all questions have been answered in the affirmative, the measure is considered as de facto ring-fenced.
The relevant provisions of the MLC refer to three categories of "legislative features" that may result in ring-fencing: (i) revenue thresholds, (ii) exemptions from domestic corporate income tax in that Party and (iii) other scope restrictions like the definition of specific activities or specific categories of taxpayers that are subject to the tax.
The list of exceptions describes three categories of measures that are excluded from the definition of "digital services tax or relevant similar measures":
The December 2022 consultation document indicated that work would be done on the development of procedures for the evaluation of new measures. The detailed provisions of Annex H provide the procedures through which the Conference of the Parties may determine whether a measure is a "digital services tax or similar measure." The provisions prescribe timelines and stipulate that the Depository shall make the decision of the Conference of the Parties on a measure public. If the Conference of the Parties itself is unable to reach a decision by consensus, an advisory panel is to be set up. For the implementation of the decision, the Annex H defines the timing of application of the denial of Amount A allocations in specific situations, with the possibility of the denial being applied retroactively if specific criteria have been met. Annex H further indicates that generally the same process will be followed for the review of measures enacted by a subnational entity of a Party.
The elimination of Amount A allocations is subject to the review of the measure under the procedures of Annex H, under which it must be determined that the Party adopted a prohibited measure with effect for that Period, and it must be the case that the Conference of the Parties has not determined that the Party has withdrawn the measure.
This process is important for testing whether the particular measure meets the de facto ring-fencing criteria. Also, the elimination of Amount A allocations will be subject to interpretation and decision by the Conference of the Parties, rather than interpretation of the terms of the MLC by the Parties' authorities and judiciaries.
The last category of measures covered by Part VI are measures that are in scope of bilateral tax treaties and that are intended to apply tax in the enacting jurisdiction based on the interaction of the Group Entity or Covered Group with the economy of that jurisdiction, without requiring physical presence.
The intent of such measures and the intent of Amount A may overlap. The provisions of Article 40 therefore generally prevent Parties from applying such measures to a Covered Group or its Entities. Excluded from this rule, however, are measures that are permitted under a bilateral tax treaty.
In addition, the MLC specifies, for the avoidance of doubt, that this is not intended to limit the ability of Parties to impose withholding taxes under domestic law.
Finally, the procedures of Annex H do not apply to determine whether a measure falls in the last category of measures covered by Part VI.
Final provision (Part VII of the MLC and Annex I)
Steps to be taken for the Convention to apply
The MLC is to take effect only once several steps have been taken and decisions have been made:
Signature — The MLC will be open for signature on a date yet to be agreed. The opportunity to sign will be open to all States. Special provisions address the extension of territorial coverage of the MLC.
Ratification — Signature of the MLC is to be followed by ratification, acceptance or approval, depending on the domestic legal requirements of the particular signatory. Signatories need to deposit their instrument of ratification, acceptance or approval with the Depository, which will be the OECD Secretary-General.
Entry into Force — The Depositary will invite the Contracting States to decide whether and when to bring the MLC into force. For this purpose, the Depositary will convene a meeting no later than three months after two conditions have been fulfilled:
Of the 999 total points attributed to the jurisdictions listed in Annex I, 486 points have been attributed to the United States and the remainder of the points have been attributed to 17 other jurisdictions.
If a decision is not reached at the first meeting, the Depositary will invite the Contracting States to meet regularly until a decision is reached.
The decision on entry into force can only be made if it is supported by a simple majority of the Contracting States at the time the meeting is convened and by Contracting States that represent at least 600 points under Annex I. This means that the MLC will only enter into force with the support of the United States.
In making a decision on the entry into force, the MLC suggests that the Contracting States will consider (i) the level of participation of Contracting States that are expected to have obligations to eliminate double taxation; (ii) the geographic diversity of the Contracting States; and (iii) whether the Contracting States account for about 60% or more of worldwide Gross Domestic Product.
For a Signatory that ratifies, accepts or approves the MLC after the decision on its entry into force, the entry into force for that Signatory will be the later of the entry into force date or the first day of the calendar month that is three months after the date of deposit of its ratification instrument.
Entry into effect — Detailed rules determine when the provisions of the MLC apply. For the application of the rules for Amount A in a Party, the entry into force of the MLC for that Party is the main trigger. Generally, for a Covered Group, the rules apply in a Party for any Period that begins during or after the calendar year that begins on or after the expiration of a six-month period from the entry into force of the MLC. For example, if the MLC enters into force on 1 August 2026, the provisions implementing Amount A will first apply for a Covered Group in the period that starts in 2028.
Special provisions govern the treatment of jurisdictions or territories for whose international relations a State may be responsible. For such a jurisdiction or territory, a State may deposit a declaration extending territorial application of the MLC.
If a declaration for application of the MLC to a jurisdiction has been made, key provisions of the MLC are to apply as if the jurisdiction were a separate Party. For example, the rules on revenue sourcing, nexus and relief apply separately. Also, the provisions relating to the removal and standstill of DSTs are to be considered separately. Specific rules prescribe how a jurisdiction is represented in certain procedures under the MLC, which may depend on the nature of the particular jurisdiction.
The Inclusive Framework is still discussing whether to include an election for a common application of the MLC to a jurisdiction that was not a member of the Inclusive Framework on 11 July 2023, and if so, how to give effect to that election in a way that respects the interest of other Parties. A footnote specifies that the United States believes such an election is necessary, while other Inclusive Framework members oppose such election.
Conference of the Parties
Served by a Secretariat in the OECD, the Conference of the Parties is to exercise any functions as required or appropriate under the MLC, including addressing questions of interpretation or implementation of the MLC. The Conference of the Parties also is to update the points attributed to the jurisdictions in Annex I. This update will first take place once the MLC has been deemed successful for a least a year. Further revisions will take place every five years.
Unless otherwise specified or agreed, the Conference of the Parties is to make decisions by consensus.
Reservations, amendments and protocols
In contrast with the Multilateral Instrument for BEPS, no reservations may be made to the MLC, meaning that a Signatory accepts all provisions of the MLC. Parties may however propose amendments to the MLC to be considered by the Conference of the Parties. The MLC may be supplemented by a protocol.
Review process to lower the revenue threshold
The MLC anticipates that the Adjusted Revenue Threshold for determining Covered Groups may be reduced from €20b to €10b provided the implementation of the MLC has been deemed successful. The reduced threshold applies to any period that commences on or after one year from the date that implementation has been deemed successful.
The review is to begin seven years after the first entry into force of the MLC and to be completed within a year. The MLC describes specific aspects of the implementation to be considered in the review.
Three months after the completion of the review, the implementation is automatically deemed successful. However, this can be blocked by submission of written objections by a simple majority of Parties or by a group of at least 20 Parties representing at least 600 points.
Compatibility with existing tax treaties
To the extent of conflict with provisions of an existing tax treaty, the provisions of the MLC are to prevail. The MLC does not include detailed compatibility clauses such as those that were included in the Multilateral Instrument on BEPS.
Withdrawal and termination
The MLC allows a State to withdraw from the MLC, but no earlier than five years after the first entry into force of the MLC.
Such withdrawal may result in the automatic termination if the total amount of points allocated to the remaining Parties falls below 550. Under the points attribution reflected in Annex I, this would mean that the MLC would be automatically terminated if the United States were to withdraw.
Termination of the MLC may also be triggered if written objectives during the implementation review process have prevented the implementation from being deemed successful.In addition, theMLC may be terminated if the Parties decide so by consensus.
The Pillar One MLC is an unprecedented development in the international tax landscape, which, if it enters into effect, would bring groundbreaking changes in the way that income of MNEs is allocated among jurisdictions. Importantly, it also is intended to eliminate the imposition of digital services taxes and relevant similar measures.
Businesses should pay close attention to developments with respect to finalization, signature and ratification of the MLC and the implications for DSTs and similar measures. They also should monitor developments with respect to the unilateral application of concepts developed in connection with the design of Amount A by jurisdictions, even without the MLC having entered into force.
Ernst & Young Belastingadviseurs LLP (Netherlands)
Ernst & Young Limited (New Zealand)
Ernst & Young LLP (United Kingdom)
Ernst & Young LLP (United States)
Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor
1 See EY Global Tax Alert, OECD releases statement updating July conceptual agreement on BEPS 2.0 project, dated 11 October 2021.
2 See EY Global Tax Alert, OECD releases Pillar One public consultation document on draft nexus and revenue sourcing rules, dated 11 February 2022; OECD releases Pillar One public consultation document on draft rules for tax base determinations, dated 21 February 2022; OECD releases public consultation document on draft rules regarding scope under Amount A for Pillar One, dated 12 April 2022; OECD releases public consultation document on Extractives Exclusion under Amount A for Pillar One, dated 25 April 2022; OECD releases public consultation document on Regulated Financial Services Exclusion under Amount A for Pillar One, dated 16 May 2022; OECD releases public consultation documents on tax certainty under Amount A for Pillar One, dated 7 June 2022; OECD releases Progress Report on Amount A of Pillar One, dated 15 July 2022; OECD releases public consultation document on administration and tax certainty aspects of Amount A of Pillar One, dated 21 October 2022; and OECD releases public consultation document on Pillar One Amount A and Digital Services Taxes, dated 23 December 2022.
3 See EY Global Tax Alert, OECD releases public Consultation Document on Pillar One Amount B,dated 26 July 2023.
4 See EY Global Tax Alert, OECD releases outcome statement on progress on Pillars One and Two, dated 12 July 2023.
5 Capitalized terms in this Alert denote terms defined in the MLC.
6 The British spelling of "defence" is used in this section due to its use in the MLC.
7 A more exhaustive description would provide a fuller discussion of all the new terms incorporated into the MLC to implement Articles 4 and 5. This has been kept to a minimum here for ease of expression, but the new terms include: Jurisdictional Offsetting Profits, Jurisdictional Offset Percentage, Adjusted Jurisdictional Excess Profits, Low Depreciation and Payroll Jurisdiction, Adjusted Elimination Profits, Withholding Tax Upward Adjustment, Withholding Tax Upward Adjustment for the Current Period, Withholding Tax Upward Amount, Low Depreciation and Payroll Jurisdiction, and Withholding Tax Upward Adjustment Reduction Factor.
8 The adjustment takes into account the Amount A Profit for that Period and does not take into account prior Period unallocated Amount A.
9 Brazil, Colombia and India have raised objections related to the 3% rule.
10 Brazil, Colombia, and India have raised objections related to the low D+P jurisdictions language.
11 Withholding taxes on dividends, capital gains, and payments made to out-of-scope Groups are not included in the Withholding Tax Upward Adjustment amount.
12 Brazil, Colombia, and India have raised objections relating to the Withholding Tax Upward Adjustment.
13 This general framework was reflected in the December 2022 consultation document. However, the MLC reflects refinements to the conditions that test whether a measure targets nonresident or foreign-owned businesses.