An OECD Tax Talk held on 19 July 2023 summarised recent developments on the two-pillar international tax proposals.
Pillar One – MLC
The implementation of Pillar One will require a multilateral convention (MLC) to ensure that the requirements are implemented consistently in tax treaties and to ensure that the relevant provisions of current treaties are superseded by the new rules. The MLC will help to avoid double taxation and set out provisions on the removal and standstill of digital service taxes and similar measures. There will also be an Explanatory Statement on the MLC and an Arrangement of the Parties on the Application of Amount A Certainty (APAAC).
The MLC will enter into force on a date to be decided by the contracting jurisdictions after 30 jurisdictions (accounting for at least 60% of ultimate parent entities of the in-scope multinationals) have ratified it. When the MLC has entered into force there will be a Conference of the Parties to deal with issues around interpretation and implementation of the MLC.
Pillar One – Amount B
Amount B applies to baseline marketing and distribution activities, which represent a large proportion of tax dispute cases. Amount B simplifies the current transfer pricing rules for all taxpayers with transactions within the scope of the rules, such as buy/sell entities, commissionaires and sales agents.
Further work is being done to ensure that there is a balance between a quantitative and qualitative approach when identifying the baseline distribution activities covered by Amount B. Work is also continuing on the appropriateness of the pricing framework; application of the framework to the wholesale distribution of digital goods; country uplifts within geographic markets; and the criteria that will permit the use of a local database in certain jurisdictions.
Pillar Two – STTR
The subject to tax rule (STTR) is a treaty-based rule that protects the right of developing countries to tax certain intra-group payments, where they are taxed at a nominal income tax rate below a minimum rate of 9%. An STTR model treaty provision and commentary have been developed. A binding request can be made by developing countries to include the provision in tax treaties with jurisdictions that have nominal tax rates below 9%. A multilateral instrument is being developed to enable countries to quickly include the provision in their tax treaties and this instrument will be open for signature from 2 October 2023.
GloBE Information Return
The GloBE Information Return is a comprehensive return that eliminates the need for multiple, different information requirements in each jurisdiction. The transitional simplified reporting requirements would permit multinationals to report their GloBE computations at a jurisdictional level. In cases where a top up tax liability may arise, more detailed information would be made available to the implementing jurisdictions.
Next steps
The Inclusive Framework needs to resolve some specific items on the MLC for Amount A of Pillar One and the text will be published when it has been finalised for signature. There will be a signing ceremony before the end of 2023 and the MLC is to enter into force in 2025.
Following the public consultation on Amount B of Pillar One, a final report on Amount B will be prepared by the end of 2023 and important content of the report will be included in the OECD
Transfer Pricing Guidelines by January 2024.
Technical assistance will be provided to jurisdictions implementing the GloBE rules, and information exchange mechanisms will be developed to support the central filing of the GloBE Information Return. A peer review process will be launched.
