OECD Pillar One – Amount A Multilateral Convention

On 11 October 2023, the OECD published the ‘current consensus’ of a multilateral convention for the implementation of Pillar One Amount A (‘multilateral convention’). The multilateral convention is accompanied by an explanatory statement and an Understanding on the Application of Certainty under Amount A. An updated estimate of the economic impact of Amount A and an overview document have also been published.

This follows the agreement by 138 members of the OECD Inclusive Framework in July 2023 on nexus and profit allocation challenges (Pillar One) and global minimum tax rules (Pillar Two).

Amount A rules

The Amount A rules reallocate taxing rights to market countries through the creation of a new taxing right over ‘Amount A’ profits. The complex rules are set out in the ‘current consensus’ of the multilateral convention and comprise five steps:

Step 1. Determine if the business is in scope

• Group revenue and profitability test - the Amount A rules broadly apply to groups which have revenue in the period of greater than EUR 20 billion (revenue test) and an adjusted pre-tax profit margin of greater than 10% (profitability test).
• Segmentation rule – exceptionally, where a group does not meet the thresholds but one of the segments disclosed in its consolidated financial statements meets the group revenue and profitability tests on a standalone basis, the segment is in scope.
• Limited exclusions apply to specific industries: extractives; financial services and (new) defence.
• ‘Autonomous Domestic Business Exemption’ – where this applies, a country will not be obliged to relieve double taxation nor allocated Amount A in respect of that business. The exemption applies where quantitative tests are met that are designed to assess the level of the integration of a potentially ‘purely domestic oriented business’ in a jurisdiction with the rest of the group. The quantitative tests examine the level of revenues sourced to the country, cross-border intra-group revenues and cross-border intra-group expenses.

Step 2. Identify eligible market jurisdictions

• Revenue sourcing rules - revenues must be sourced to individual market countries according to the category of revenues earned. Revenues that fall under more than one category are sourced according to their predominant character.

• • Businesses may source revenues from supplementary transactions in line with the rules applicable to the main transaction.
  • Each category of revenues has its own specific sourcing rules, including the sourcing principle, potential reliable indicators (i.e. sources of information) and any allocation keys.
  • The specified categories of revenues are: finished goods; digital content; components; services (location-specific services, advertising services, online intermediation services, passenger transport services, cargo transport services, customer reward programmes and other services); intangible property (relating to: finished goods, components, services and digital content); user data; immoveable property; government/international organisation grants; and non-customer revenues.
  • During an initial transition phase, groups are not required to apply the specific sourcing rules and instead may apply the relevant broad allocation keys. This covers the first three periods for Amount A.
• Nexus test based on revenue - a market country will only be entitled to an allocation of Amount A if it has sufficient ‘nexus’, i.e. if the group’s annual revenues arising in the country exceed EUR 1 million. A lower threshold of EUR 250,000 applies for countries with a GDP of less than EUR 40 billion.

Step 3. Calculate and allocate a portion of excess profit

• Determine relevant group profit - the Amount A tax base is determined using the financial accounting profit/loss of the consolidated financial statements. A relatively limited number of book-to-tax adjustments are required to determine adjusted profit before tax.
• Allocate a portion of excess profit to markets - the total amount of profit that can be reallocated under Amount A is 25% of a business’s profit above a 10% profit margin. Profits are reallocated to market countries in proportion to sourced revenues.

Marketing and distribution profits safe harbour

The marketing and distribution profits safe harbour aims to address ‘double counting’ issues where a market country already taxes the residual profit. After an initial ‘grace’ period, withholding taxes (including taxes withheld on interest, royalties and technical fees) are taken into account in the calculation and can reduce the profits allocated to a market jurisdiction under Amount A. Withholding taxes on dividends and capital gains are not taken into account. The marketing and distribution profits safe harbour applies when the adjusted profit before tax in a jurisdiction is EUR 50 million or more.

Step 4. Eliminate double taxation

• Determine relevant jurisdictional profit and return on depreciation and payroll - ‘return on depreciation and payroll’ is used as a proxy for profitability and to identify which countries are required to eliminate double taxation.
• Allocate obligation to relieve double taxation to jurisdictions - the obligation to eliminate double taxation arising in respect of any Amount A liability will be allocated among countries that earn residual profits (‘relieving jurisdictions’), using a formulaic tiered approach. Obligations are first allocated to jurisdictions with the highest ‘return on depreciation and payroll’. Withholding taxes suffered at source on income received reduces the residual profits and therefore potentially the obligation of a jurisdiction to relieve double taxation.
• Identify relief entities within a jurisdiction using a formulaic approach based on profit.

Step 5. File and pay

• A central coordinating entity will file the Amount A tax return and common documentation package with the lead tax administration, typically the parent jurisdiction. The deadline for filing will be between nine and twelve months from the end of the period, as determined by the filing country. Tax authorities will exchange information with affected countries. A standard Amount A tax return and common documentation package template will be developed.
• Payment of tax by a single group entity (‘designated payment entity’) is due eighteen months after the end of the period. ‘Relief entities’ are required to make compensating payments to the designated payment entity, which are disregarded for all tax purposes.
• Double taxation relief should be provided by the relieving jurisdiction within 90 days of the submission of a claim (or through a reduction in instalment payments).

Tax certainty

A tax certainty framework for Amount A includes mechanisms designed to provide binding certainty: an Advance Certainty Review of the methodology used by a business e.g. for revenue sourcing; a Scope Certainty Review for potentially out-of-scope businesses; and a Comprehensive Certainty Review of a business’s application of the Amount A rules in all relevant countries.

Enhanced tax certainty processes have been developed in respect of disputes on existing tax treaty rules that potentially affect Amount A calculations. A mandatory binding dispute resolution process is available for related issues that are unresolved in a Mutual Agreement Procedure (MAP). A related issue is a transfer pricing, business profits/permanent establishment or withholding tax characterisation dispute covered by a tax treaty. Developing countries which are not a member of the OECD or G20 and which have had low levels of MAP disputes are generally entitled to an elective (rather than mandatory) dispute resolution process.

Removal of digital services taxes

The multilateral convention includes a list of specific measures which must be removed for all businesses (including those not in the scope of Amount A) as part of the implementation of Amount A. The list includes the DSTs implemented by Austria, France, Italy, Spain, Tunisia, Turkey and the UK, as well as India’s equalisation levies on online advertisement services and e-commerce.  

Countries which impose a DST or other relevant similar measure will not receive Amount A tax allocations of taxable profit, even where they are market countries and would otherwise be entitled to them.

A digital services tax or other relevant similar measure is one which meets the following conditions:

• its application is determined primarily by reference to the location of customers or users;
• it is either:

• applicable solely to non-residents or foreign-owned businesses; or
• applicable in practice ‘exclusively or almost exclusively’ to non-residents or foreign-owned businesses as a result of thresholds, exemptions for businesses subject to domestic corporate tax, or other restrictions (with the effect that domestic businesses are insulated from the tax); and
• the tax is not treated as an income tax.

In addition, ‘significant economic presence’ concepts that are in the scope of tax treaties do not meet the criteria to be treated as DSTs but countries that have ratified the multilateral convention will not apply such taxes to in-scope businesses once the Amount A rules apply.

Next steps

The multilateral convention reflects the current consensus among Inclusive Framework members. Work will continue to reach agreement on specific outstanding areas (as noted in footnotes to the multilateral convention). Once the multilateral convention has been finalised it will be opened for signature.

The multilateral convention will enter into force once it has been ratified by at least 30 countries accounting for at least 60% of the ultimate parent entities of businesses expected to be in-scope for Amount A. The objective is for the multilateral convention to enter into force during 2025.