On April 4, 2022 the OECD opened a public consultation on the draft rules for scope under Amount A of Pillar One. With a closing date of April 18, 2022 the consultation period is relatively short.
As part of the ongoing work of the OECD/G20 Inclusive Framework on BEPS to implement the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy, the OECD is seeking public comments on the Draft Model Rules for Domestic Legislation on Scope under Amount A of Pillar One.
Amount A of Pillar One has been developed as part of the solution for addressing the tax challenges arising from the digitalisation of the economy. It introduces a new taxing right over a portion of the profit of large and highly profitable enterprises for jurisdictions in which goods or services are supplied or consumers are located (hereafter, “market jurisdictions”).
Model Rules on Scope
The Model Rules on Scope determine when a Group will be in scope of Amount A and subject to the detailed provisions contained within the Model Rules. The scope rules are designed to ensure Amount A only applies to large and highly profitable Groups and, as far as possible, have been drafted to apply in a quantitative and objective manner, such that they are readily administrable and provide certainty as to whether a taxpayer is within scope.
The Model Rules on Scope apply at the level of a Group, in accordance with the general design of Amount A. The concept of a Group is specifically prescribed for Amount A purposes and, broadly, is defined by reference to an Ultimate Parent Entity (UPE) that is set at a level where Consolidated Financial Statements are commonly prepared under financial accounting standards. The Model Rules include a small number of exceptions which provide that certain Entities cannot be a UPE and these rules apply in limited circumstances to ensure a standardised approach to define a UPE. Further, the Model Rules include an anti-abuse provision that will apply as a deterrent to prevent a Group that is held under certain types of entities from being artificially fragmented into numerous Groups in order to circumvent the scope rules.
A Group will be in scope of Amount A where it meets two threshold tests. The two tests are simple in concept and provide, firstly, that the Group’s Total Revenues must exceed an absolute amount of EUR 20 billion (or equivalent) in a Period1 and, secondly, the Group’s relative profitability as measured against its Total Revenues must exceed 10%.
Additionally, the Model Rules provide that a Group’s profitability must exceed the 10% threshold in at least two of the four prior Periods (referred to as “the prior period test”), following the general design of the GLoBE rules, and on average across those four prior Periods and the current Period (referred to as “the average test”). These rules seek to deliver neutrality and stability to the operation of Amount A, and ensure Groups with volatile profitability are not inappropriately brought into scope, which limits the compliance burden placed on taxpayers and tax authorities. The application of the prior period test and the average test are appropriately modified where a Group undertakes a business reorganisation. While these tests are presented in this manner in the public consultation document, commentators should note that this does not reflect the final or consensus views of the Inclusive Framework and that the TFDE is currently exploring a number of open questions in this area of the Amount A design, including the following two open issues:
• whether the Total Revenues of a Group should be subject to equivalent rules as the prior period test and the average test (which apply to profitability); and
• whether the prior period test and the average test should apply, as currently drafted, as a permanent feature of the scope rules or, alternatively, apply as an “entry test” only. Under the latter option, once a Group falls in scope of Amount A for the first time, the prior period test and average test would no longer apply, and thereafter only the Total Revenues and profitability of the Group in the current Period would determine whether the Group is in scope.
The Model Rules include a placeholder for exceptional scoping provisions which may apply to a disclosed segment as reported in a Group’s Consolidated Financial Statements. These rules will operate in limited circumstances to bring a disclosed segment in scope of Amount A where the disclosed segment meets the revenue and profitability thresholds, discussed above, on a standalone basis, but the Group as a whole does not. The detailed provisions governing the application of Amount A to a disclosed segment will be provided in a separate schedule and this will be released at a later date.
Finally, consistent with the Statement, two targeted exclusions are provided under the draft Model Rules:
• for Extractives and Regulated Financial Services. Schedule F will contain the detailed provisions governing the operation of the Extractives Exclusion; and
• Schedule G will contain the detailed provisions governing the operation of the Exclusion for Regulated Financial Services. These provisions will be released for public consultation at a later date.
The consultation document
It should be noted that according to the OECD the consultation document is a working document released by the OECD Secretariat for the purposes of obtaining input from stakeholders and that it does not reflect the final views of the Inclusive Framework members. It presents the work undertaken to date, which has reached a sufficient level of detail and stability such that it is now suitable for consultation. The Task Force on the Digital Economy (TFDE) has agreed that this working version can be released on the basis that it is without prejudice to the final agreement. As such, while the rules are intended to illustrate the framework for scope, further changes may be made. Thus, the release of this document reflects consensus within the TFDE as a procedural matter that public comments should be sought at this time, but does not reflect consensus within the TFDE regarding the substance of the document.
The OECD further ads that comments are sought with respect to the rules included in the consultation document. Where relevant, input should refer to the relevant section of the rules. While comments are invited on any aspect of the rules, input will be most helpful where it explains the additional guidance that would be needed to apply the rules to the circumstances of a particular type of business, as well as input on whether anything is missing or incomplete in the rules.
The consultation document is available in the English and the French language.
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