OECD Issues Draft Rules for Tax Base Determinations Under Amount A of Pillar One

The OECD on February 18 issued a public consultation document setting out draft model rules for tax base determinations under Amount A of Pillar One of the two-pillar solution to address the tax challenges arising from the digitalization of the economy. The two-pillar plan is embodied in the framework the OECD set out on October 8, 2021, which has been endorsed by 137 jurisdictions.

The tax base determinations rules will be used to establish the profit (or loss) of an in-scope multinational entity (MNE) that will be used for the Amount A calculations to reallocate a portion of the MNE’s profits to market jurisdictions. Under the proposed model rules, profit (or loss) will be calculated on the basis of the consolidated group financial accounts, with a limited number of book-to-tax adjustments. The draft rules also include provisions addressing the carry-forward of losses.

As was the case with the other titles of the Pillar One model rules that the OECD has previously released for comment, the tax base determination draft rules do not reflect consensus among the drafters regarding the substance of the document.

Rather, the stakeholder input received will help guide the OECD in revising and finalizing the rules.

Comments must be submitted no later than March 4, 2022.

 

Tax Base Determination Draft Rules

“Amount A” refers to the share of a business’s residual profits that will be subject to the new taxing right created under Pillar One. The tax base is the measure of profit that forms the basis for partial reallocation under Amount A rules.

Because Amount A is determined based on the profits of a group (rather than on a separate-entity basis), the model rules prescribe the use of consolidated group financial accounts as the starting point for computing the Amount A tax base. More specifically, the draft model rules call for the use of “Qualifying Financial Accounting Standards” to ensure that the profit that is applied for Amount A purposes is not impacted by accounting practices that do not align with common practice.

The draft model rules provide that the computation of the Amount A tax base will start from the bottom line figure of the P&L statement (that is, the MNE’s total profit or loss). That number will then be subject to some book-to-tax adjustments, such as the deduction of certain items of income and the addition of certain expenses, to arrive at a standardized Adjusted Profit Before Tax.

The adjustments the draft model rules adopt reflect instances where the goals of accounting standards and Amount A may differ in some points, including occasions where the adjustment is required to prevent potential double counting of income or to prevent the deduction of specified expenses for policy reasons.

The proposed model rules state that, for ease of administration and compliance, the proposed adjustments will be kept to a minimum to limit complexity.

The draft tax base determination rules also include provisions allowing the carryforward of losses.