OECD releases draft Model Rules on Scope of Amount A under Pillar 1

On 4 April 2022, the OECD issued draft Model Rules with respect to scope under Amount A of Pillar 1 for public comment. Amount A establishes a new taxing right over a portion of the profit of large, high-revenue enterprises for jurisdictions in which their goods or services are supplied or consumers are located. Comments on the draft rules are due on April 18, 2022.

The following chart outlines the status of previous releases from the OECD in relation to key aspects of Amount A of Pillar 1.

1. Governmental entities
2. International organizations
3. Nonprofit organizations
4. Pension funds
5. Investment funds that satisfy sub-paragraphs (a)(i) and (a)(ii) of the definition of UPE and 
6. Real estate investment vehicles that satisfy sub-paragraphs (a)(i) and (a)(ii) of the definition of UPE.

Also excluded are entities where at least 95 percent of their value is owned (directly or through a chain of Excluded Entities) by one or more Excluded Entities referred to in subparagraphs (a)(i) through (vi), other than a pension services entity, and where that entity: 14 i. operates exclusively or almost exclusively to hold assets or invest funds for the benefit of the Excluded Entity or Entities, or ii. only carries out activities that are ancillary to those carried out by the Excluded Entity or Entities.

An anti-abuse provision 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.

Scope criteria for non-excluded entities  

The public consultation document reconfirms previous OECD announcements, which state that a group will fall within the scope of Amount A in cases where the group meets two threshold tests.  First, the group's total revenues must exceed EUR20 billion (or equivalent) in a period at issue, or a proportionate amount for a period less than one year. Second, the group's pre-tax accounting profit – as measured against its total revenues – must exceed 10 percent:

• In the period at issue
• In at least two of the four prior periods (ie, the prior period test) and
• On average across those four prior periods and the current period (ie, the average test).

Special rules are provided for groups that merged or de-merged during the relevant profit testing periods under which the profit tests are applied to the acquiring or de-merged group members.

Excluded activities

Consistent with the statement on a two-pillar solution released in October 2021, two targeted exclusions from Amount A are made for entities that are 1) extractive entities (eg, mining or oil extraction) or 2) regulated financial services entities. Future releases will contain the detailed provisions of the extractives exclusion and the exclusion for regulated financial services, including rules for including within the scope of Amount A the non-extractive or non-financial services activities of these types of groups.

Amount A scope and business segments

Finally, the Model Rules include a placeholder that may apply to a disclosed business segment as reported in a group’s consolidated financial statements. These rules will operate in limited circumstances to bring a disclosed segment within the scope of Amount A where the disclosed segment meets the revenue and profitability thresholds on a standalone basis, but where the group as a whole does not.

Similar to the draft Model Rules on Nexus and Sourcing and Tax Base Determination for Amount A under Pillar 1 published earlier this year, this is a working document released by the OECD for the purposes to obtaining input from stakeholders by April 18, 2022.