On 12 October 2020 the OECD introduced a report on the Pillar One Blueprint on digital economy taxation.

Pillar One consists of a new taxing right for market jurisdictions over a share of residual profit calculated at an MNE group or segment level, known as Amount A; a fixed return on certain baseline marketing and distribution activities carried on in the market jurisdiction (Amount B); and dispute prevention and resolution mechanisms.

Amount A

The new taxing right would apply to a broad range of groups but groups must be able to cope with the compliance demands. The OECD is considering thresholds and other features to keep the approach targeted while minimising compliance costs. Design features would include a revenue threshold based on annual consolidated group revenue coupled with a de minimis foreign in-scope revenue carve-out.

A new nexus rule would identify market jurisdictions eligible to receive Amount A, with detailed sourcing rules. The approach for reallocating residual profit would involve eligible market jurisdictions receiving a portion of residual profit, calculated on the basis of income exceeding an agreed level of profitability, using a formula. A loss carry-forward regime would be included.

The mechanism for eliminating double taxation would identify the paying entities and set out methods to eliminate double taxation.

Amount B

Amount B would be the fixed return for baseline marketing and distribution operations, defined as distributors that buy from related parties and resell to unrelated parties; or that have a routine distributor function. There are still different views on the breadth of baseline activities that should be included in its scope.

Dispute Resolution

Improved tax certainty would be achieved through improved tax dispute prevention and dispute resolution procedures.

Implementation and administration

Scope of Amount A

Amount A would include automated digital services (ADS) and consumer facing businesses (CFB). These can have significant and sustained interactions with customers and users in a market jurisdiction. There could be a phased implementation. The US has proposed implementing the new taxing right on a “safe harbour” basis, allowing an MNE group to elect on a global basis to be subject to Pillar One.

Amount of profit to be reallocated (the “Quantum”)

Agreement on reallocation of residual profit under the new taxing right would depends on the determination of different threshold amounts and percentages for the purpose of scope, nexus and profit allocation. The scope must first be agreed before the allocation can be finalised.

Extent of Tax Certainty

There are different views on the scope of mandatory binding dispute resolution and the Blueprint puts forward some proposals.

Scope and application of Amount B

The Blueprint assumes that in-scope distributors would be identified on the basis of a narrow scope of baseline activities, but some countries are considering broadening the scope of Amount B. Some countries consider that an initial pilot programme may allow some evaluation of the benefits in practice.