OECD publishes draft Tax Base Determination rules for Pillar 1 Amount A
Introduction
As part of a rolling release of draft Model Rules for Amount A of Pillar 1, on 18 February 2022, the OECD released for public comment draft Model Rules for defining the Tax Base that is the subject of the income reallocation envisioned by Amount A of Pillar 1. As currently proposed, Amount A would reallocate to market jurisdictions 25% of a covered company’s profit before tax above 10% of revenues.
In general, the Amount A adjusted profit before tax is determined by starting with the company’s consolidated global accounting final profit for each year as reported under an acceptable accounting method and as adjusted upwards or downwards by specified items of income or expense. Acceptable accounting methods include IFRS and the accounting methods of Australia, Brazil, Canada, Member States of the European Union, Member States of the European Economic Area, Hong Kong (China), Japan, Mexico, New Zealand, the People’s Republic of China, the Republic of India, the Republic of Korea, Russia, Singapore, Switzerland, the United Kingdom, and the United States of America.
To minimize complexity the OECD is limiting the adjustments to the financial statement profit. These adjustments include (i) tax expenses, (ii) dividends, (iii) equity gains or losses and (iv) policy disallowed expenses. In addition, accounting profit may be adjusted for loss carry-forwards (subject to earn-out and other limitations) as well as for certain eligible financial statement restatements. Unfortunately, detailed rules for applying the adjustments to book profits are going to be set forth in the yet-unpublished commentaries to these model rules and definitions.
Like the previous release these Model Rules, the 18 February publication is a working draft that is open to a short public consultation closing on 4 March 2022.
Background for the Tax Base Model Rules
Amount A of Pillar 1 has been developed as part of the solution for addressing the tax challenges arising from the digitalization of the economy by introducing a new taxing right over a portion of the profit allocable to market jurisdictions.
This latest release from the OECD addresses the Tax Base determination for the purpose of Amount A. This release is part of a number of releases providing detailed rules to apply Amount A of Pillar 1.
OECD Public Releases
| Pillar 1: Amount A | Status | |
| Title 2 | Scope | Companies >20B Euro revenues and >10% profit margin |
| Title 3 | Nexus | |
| Title 4 | Revenue Sourcing | |
| Title 5 | Tax Base Determination | 18 February 2022 draft model rules and definitions released |
| Title 6 | Profit Allocation Rules | Future update |
Proposed Tax Base Determination for Amount A of Pillar 1
The tax base for applying Amount A in any tax year is the Adjusted Profit Before Tax, which is financial accounting profit (or loss) of the Covered Group after making the book-to-tax adjustments and restatement adjustments set forth below and deducting any net losses calculated in accordance with the Model Rules.
For the purposes of making the book-to-tax adjustments and restatement adjustments the following expenses in the computation of the Financial Accounting Profit (or Loss) of the Period will be reversed:
i. Tax Expense (or Tax Income)1 ;
ii. Dividends2 ;
iii. Equity Gain (or Loss)3 ; and
iv. Policy Disallowed Expenses4
An Eligible Restatement Adjustment for the Period will be made to the Financial Accounting Profit (or Loss) of the Covered Group in the current tax year.
For the purposes of deducting Net Losses under the Model Rules, Net Losses for a Period constitute the total amount of cumulative Financial Accounting Losses that exceeds the total amount of cumulative Financial Accounting Profits of the Covered Group over the Eligible Prior Period(s), after making allowable adjustments. However, detailed rules for applying the loss carry-forward rules are still under discussion at the OECD.
Where an Eligible Business Combination or an Eligible Division occurs, and if the Business Continuity Conditions are met, the related Transferred Losses, if any, are added (or subtracted) to the Net Losses of the Covered Group. Eligible business combinations will include situations where a company with net losses becomes a member of the Amount A covered group or where a member of the covered group with losses leaves the covered group. As is the case with other loss carry-forward rules, detailed rules to apply the Business Combination provisions are still under discussion.
Closing thoughts
The February 18 release is another rolling submission by the OECD necessary to keep up with the ambitious timeline aiming to implement Amount A of Pillar 1 by January 1, 2023. As is the case with other OECD releases, many key details to apply the Tax Base rules are still subject to discussion by OECD inclusive framework member countries.
1 Future commentaries will elaborate on the practical application of the exclusion of tax expense (or tax income). This item is excluded on the basis that income tax expenses are usually not deductible for corporate income tax purposes in Inclusive Framework jurisdictions.
2 Future commentaries will elaborate on the practical application of the exclusion of dividend income. This item is excluded on the basis that dividends are excluded, in whole or in part, from the corporate income tax base in many Inclusive Framework jurisdictions, or in other instances the recipient benefits from tax relief (such as indirect credit for taxes paid).
3 Future commentaries will elaborate on the practical application of the exclusion of specified equity gains and loss. This item is excluded to ensure that the tax base of a Covered Group does not include specified gains or losses deriving from gains or losses generated by another entity.
4 Future commentaries will elaborate on the practical application of the exclusion of policy disallowed expenses. This item is excluded as it related to behaviors that governments regard as undesirable but are treated as expenses under financial accounting rules.
