On 18 February 2022 the OECD launched a public consultation in relation to tax base determinations for Amount A of Pillar 1 of the two-pillar international tax initiative. This is a continuation of the work by the Inclusive Framework in relation to base erosion and profit shifting (BEPS) and the implementation of the two-pillar initiative on the tax challenges arising from the digital economy. The OECD is inviting public comments in relation to draft rules for tax base determination under Amount A of Pillar One.

Amount A would give countries a new taxing right over a part of the profit of large multinational enterprises. This taxing right would be given to jurisdictions where goods or services are supplied (the market jurisdictions) even if the multinational does not have a subsidiary or permanent establishment in the market jurisdiction.

The draft rules on tax base determinations are designed to establish the profit of a multinational to be used for the Amount A calculations that would reallocate part of the profits to market jurisdictions. The profit of a multinational that is within the scope of the Pillar One rules will be computed using the group consolidated financial accounts, with certain adjustments for tax purposes.

Adjustments to the net consolidated profit as shown in the consolidated profit or loss statement would include adjustments for tax expense, dividends, certain equity gains or losses and policy disallowed expenses (i.e. expenses that are disallowed because they relate to behaviours that governments regard as undesirable). More detail will be given on policy disallowed expenses in the commentaries to be drafted later.

As the calculation is for the whole group, on the basis of consolidated accounts, the result would not be affected to any great extent by related party transactions.

If the group has made losses, there are provisions for these losses to be carried forward. The rules consider the introduction of time limitations on the use of net losses, which is an issue that is still under discussion.

Segmentation is not covered in the consultation. This would be relevant only in exceptional circumstances where, on the basis of business segments disclosed in the financial accounts, a segment of the business of a multinational is within the scope of the rules. The tax base rules for multinationals subject to segmentation will be released at a later date.

The document also sets out the relevant definitions of terms that are used in the rules as they relate to tax base determinations.

The model rules, when they are finalised, will be the basis for the substantive provisions to be included in the multilateral convention (MLC).

Input from stakeholders is requested by 4 March 2022. The comments received will be used in developing and finalising the rules in relation to tax base determinations.