On February 4, 2022, on the OECD announced that the Inclusive Framework will consult stakeholders on a number of aspects of Pillar One and Pillar Two over the coming months. On the same date the OECD also launched a public consultation the first building block of Amount A under Pillar One. Interested parties are invited to send their written comments no later than February 18, 2022. Instructions for submitting comments can be found in the consultation document.

Pillar One

For Amount A under Pillar One, the Inclusive Framework is launching a public consultation that will occur in stages, by releasing Secretariat working documents on each building block to obtain feedback quickly and before the work is finalised. This approach, rather than waiting for a comprehensive document to be ready, will allow work to continue in parallel, in order to remain within the political timetable agreed in October 2021.

Amount A under Pillar One – Draft Model Rules for Nexus and Revenue Sourcing

On February 4, 2022 the first building block was released for public comments. According to the OECD, the Draft Rules for Nexus and Revenue Sourcing have been agreed for release by the Inclusive Framework to obtain public comments, but the draft rules do not reflect consensus regarding the substance of the document.

The purpose of the revenue sourcing rules is to allow in-scope MNEs to identify the relevant market jurisdictions from which revenue is derived, and to apply the revenue-based allocation key. As noted in the October 2021 agreement, revenue is sourced to the end market jurisdictions where goods or services are used or consumed.

To do this, the revenue sourcing rules provide the detail that is necessary to identify the end market for specific categories of transactions. By providing different rules for different categories of transactions, the rules seek to take the relevant commercial context into account, and ensure that the rules are complete so that they can be applied to all types of MNEs. Not all categories are relevant for each type of MNE. For example, some consumer goods MNEs will only need to apply the rules related to finished goods and will not need to apply any of the other categories of sourcing rules; others might apply the rules for online advertising for much of their revenue.

The revenue sourcing rules have been designed to fulfil the policy objective of accurately identifying the market jurisdiction and the associated revenue, while limiting and simplifying compliance burdens as much as possible. This balance is struck in a number of ways.

First, the rules used to identify the market jurisdiction (as defined for that category) are designed to allow MNEs to, as much as possible, draw on information that they are already collecting and using as they operate their business, and avoid the need to change information collection practices or create new reporting obligations. While the rules provide a consistent identification of the end market, they have been designed with in-built flexibility as to how the MNE applies that rule, without being prescriptive as to which data point must be used. This recognises that different business models will have different types of information at hand.

The revenue sourcing rules acknowledge that there will be cases where transactional information is not available to the MNE or where it would be disproportionately burdensome to obtain it. In these cases the rules allow for the use of proxies including allocation keys, rather than require highly complex and new information reporting systems, or changes in commercial contracting arrangements. The allocation keys use either industry or macro-economic data to provide a simplified way to approximate the end market, that provides certainty while ensuring that all revenue is sourced without gaps. This should significantly ease compliance burdens in the most difficult revenue sourcing cases, such as sales through independent distributors, sales of components, and B2B services.

Compliance burdens are also addressed in a number of other ways. This includes a materiality approach to smaller sets of sales where the market cannot reasonably be identified at transactional level (such as sales through independent distributors); taking into account the nature of distribution arrangements in the EU single market; maximising the commercial information available to the MNE that can “knock-out” unlikely markets to result in a more tailored allocation key; allowing certain “supplementary” de minimis transactions to be sourced in the same way as the main transaction to limit the different types of rules that need to be applied. It also includes a coherent design in the sourcing rules to identify the same end market in cases where there is a potential for an overlap in the categorisation of certain revenue streams, thus easing the pressure on characterisation questions and by anticipating a systems level compliance approach in connection with an early certainty process that is part of a multilateral and binding dispute prevention and resolution regime.

However, striking the balance between accuracy and operational realities is a challenge in any rule design. Stakeholder input will be especially valuable in identifying cases where this balance could be better achieved, and finalising the delivery of revenue sourcing rules that achieve the desired policy objective but at the same time are practical and avoid unnecessary burdens.

The PUBLIC CONSULTATION DOCUMENT: “Pillar One – Amount A: Draft Model Rules for Nexus and Revenue Sourcing” can be found here.

Amount B under Pillar One

For Amount B of Pillar One, a public consultation document will be issued in mid-2022, with a public consultation event to follow the comment period.

Pillar Two

The Pillar Two Model Rules issued in December 2021 provide a template for domestic implementation of the GloBE Rules. These Rules will be supported by a Commentary to provide tax administrations and taxpayers with guidance on the interpretation and application of those Rules, which is currently under development, also drawing on input from a Business Advisory Group set up by BIAC.

An Implementation Framework is being developed to facilitate the co-ordinated implementation of the GloBE rules and will address administrative and compliance issues, including the development of safe harbours. A public consultation on the Implementation Framework will be launched later this month, with a consultation event to follow in March.

For the Subject to Tax Rule (STTR) of Pillar Two, the draft model provision and its commentary will be released in March 2022 with a defined set of questions set for input. The multilateral instrument to facilitate the implementation of the STTR would also be released for comment at the same time.

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