OECD Releases Multilateral Convention to Implement Amount A of Pillar One, but Technical Issues Remain

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting on October 11 released the text of a new multilateral convention that would implement Amount A of Pillar One, a reallocation of taxing rights over a portion of large multinationals’ profits to market jurisdictions in which they operate, whether or not they have a physical presence in those jurisdictions.

The publication of the convention represents another milestone in the process towards finalization of the OECD’s two-pillar solution to address the tax challenges arising from the digitalization and globalization of the economy.

However, OECD Secretary-General Mathias Cormann acknowledged in a press release that while the convention reflects the current consensus among members of the Inclusive Framework, technical issues remain. A cover note in the convention itself explains that the text includes “different views on a handful of specific items noted in footnotes by a small number of jurisdictions who are constructively engaging to resolve differences.” Brazil, Colombia, and India are specifically identified in the convention as having objections to some of its provisions. 

The cover note also states that one of the purposes of the publication is to prepare the convention for future signature.

Digital Services Taxes

The jurisdictions that become parties to the convention commit not to impose digital services taxes (DSTs) and relevant similar measures on any company (whether or not within the scope of Amount A). Annex A of the convention includes a list of existing measures that must be removed, including DSTs in Austria, France, Italy, Spain, Tunisia, Turkey, and the UK, as well as India’s equalization levy on e-commerce and online advertisement services.

Future measures that may constitute DSTs will be subject to a robust review mechanism, which will consider three specified factors to determine its status as a DST. The determination will be made by the “Conference of the Parties,” a body established under the convention to make decisions and exercise functions, including with respect to interpretation and implementation.

If the Conference of Parties determines that a measure is a DST, the jurisdiction that adopted the measure would be denied an Amount A allocation until the measure is withdrawn.

Additional Guidance

The OECD also released four accompanying documents:

• An overview of the convention.
• A 638-page explanatory statement on the multilateral convention.
• A document on Understanding on the Application of Certainty of Amount A that sets out the parties’ understanding of how Part V (Administration and Certainty) of the convention will operate in practice.
• An updated economic impact assessment of Pillar One. 

Amount A Scope

Amount A applies to MNEs with global revenue exceeding EUR 20 billion and profits exceeding 10% of their global revenue. Then, 25% of those excess profits (above 10%) would be reallocated to jurisdictions where the MNE’s revenues are sourced, if those jurisdictions meet a revenue threshold to receive an Amount A allocation. 

The EUR 20 billion revenue threshold may fall to EUR 10 billion seven years after the entry into force of the convention, contingent on the successful implementation of Amount A. The determination whether Amount A has been successfully implemented will be made by the Conference of the Parties. 

Next Steps

To enter into force, the convention must be ratified by 30 jurisdictions accounting for at least 60% of the ultimate parent entities of multinational entities (MNEs) initially expected to be in scope for Amount A. Once these minimum conditions are met, the jurisdictions that have ratified can decide when the MLC will enter into force.

U.S. Treasury Requests Comments

Also on October 11, the U.S. Department of the Treasury announced a request for public input on the draft multilateral convention and accompanying documents.

This marks the first time Treasury has opened such a consultation regarding the taxation of the digital economy project. However, many components of both Pillar One and Pillar Two have been the subject of public consultations at the OECD level.  

Treasury explained its decision noting that the October 11 releases represent the first time that a complete draft text of the Amount A convention documents have been made available to the public.  Treasury is especially interested in comments on novel issues identified by a review of the text, implementation and administrability issues (including the balance between simplification and technical precision), and technical adjustments to address errors or clarify the operation of the convention provisions.   

To provide input, written comments must be submitted by December 11, 2023, to [email protected].