On 11 October 2023 the OECD’s Inclusive Framework released the finalised text of a multilateral convention in relation to Amount A of Pillar One, to co-ordinate the implementation of the reallocation of taxing rights to market jurisdictions, improve tax certainty, and remove unilateral digital service taxes. To provide clarity and guidance the MLC has been published with an Explanatory Statement and an Understanding on the Application of Certainty of Amount A.
The MLC co-ordinates a reallocation of taxing rights to market jurisdictions in relation to a specified share of the profits of the largest multinationals operating in their countries. This creates a nexus that is not based on physical presence of the multinational in a particular country. The MLC would also enable countries to implement the repeal of unilateral digital services taxes and relevant similar measures. To increase tax certainty the Convention contains provisions to set up mechanisms to avoid double taxation.
The MLC was annexed to the OECD Secretary General’s report to the G20 Finance Ministers and Central Bank Governors for their October 2023 meeting. Several provisions of the MLC are designed to address the circumstances of developing country members of the Inclusive Framework. The Convention provides countries with the means to move ahead with the procedural steps required for signature and ratification.
Part 2 of the MLC provides the definition of a Covered Group, based on a EUR 20 billion global revenue test and a 10% profitability threshold. The section also provides other important definitions and sets out the exclusions for extractives, regulated financial services, defence and autonomous domestic businesses.
In Part 3 the Convention outlines the process for the determination of the Amount A profit for each party and the computation of the tax for a covered group. The process for allocating profit among parties to the Convention is set out, taking into account the marketing and distribution profits safe harbour adjustment. The MLI specifies the rules determining the source of a covered group’s revenues and the revenue-based nexus test which allows the market jurisdiction to tax the multinational regardless of whether the group has a permanent establishment in the jurisdiction.
The Convention also provides for the elimination of double taxation, administrative provisions and certainty. The administrative requirements include the filing requirements, the Amount A tax return and the Common Documentation Package. A request can be made for certainty as to whether the group is a covered group for the purposes of the rules. Also a request for comprehensive certainty can be made, including the issue of whether the group is a covered group for the relevant period; the calculation of the adjusted profit before tax; application of the autonomous domestic business exemption; categorisation of transactions and choice of a reliable method for determining revenue sourcing; identification of parties meeting the applicable nexus threshold; the allocation of Amount A profit to affected parties; the application of the marketing and distribution profits safe harbour adjustment; and the elimination of double taxation.
