On 16 December 2020 the OECD published comments received on the Blueprints outlining the remaining issues involved in finalising the work on Pillar One and Pillar Two of the proposals on tax challenges arising from the digitalisation of the economy.

The Inclusive Framework had released a package of proposals in October 2020 on Pillar One (the new nexus and allocation rules) and Pillar Two (the global minimum tax to combat base erosion known as GloBE). These proposals reflected the consensus reached on some key policy features and principles while identifying the remaining technical and administrative issues and pointing out issues on which members had different views that needed to be taken into account in arriving at a consensus. Comments on the proposals were invited by 14 December 2020 and those comments have now been published.

Proposals

The Blueprint for Pillar One proposed that a new profit allocation rule would apply for taxpayers within the scope of the rules. This would not be related to a permanent establishment, separate subsidiary or sales via unrelated distributors. The approach would retain the current transfer pricing rules based on the arm’s length principle but would add formula-based solutions in some areas.

A three-tier profit allocation mechanism would apply. Amount A would be a new taxing right for jurisdictions in the form of a share of deemed residual profit allocated to market jurisdictions using a formulaic approach, being generally the remainder after allocating deemed routine profit to the countries where the relevant activities are carried out. Amount B would introduce fixed remunerations, reflecting an assumed baseline activity, and Amount C would involve binding dispute prevention and resolution mechanisms.

The issue of scope of Amount B and definition of baseline marketing and distribution activities.

The GloBE proposal in Pillar B aims to develop a co-ordinated set of rules to ensure that international businesses pay a minimum level of tax on a global basis.

Issues for comment

Among the issues proposed for comment were the problem of how to define the scope of Amount A; the design of a revenue threshold for Amount A; and the best approach to defining and identifying the domestic or home market of a multinational group for this purpose. Relevant issues for comment also included discussion of the framework for segmenting the Amount A tax base and the development of a loss carry-forward regime.

Public consultation meeting

A public consultation meeting is to be held on 14 and 15 January 2021. The comments received and the consultation will be considered by the Inclusive Framework in looking at the remaining issues.