Pillar One’s Amount A seeks to create a new taxing right for market jurisdictions, which will be independent of the physical presence requirement and determined using a formulaic approach. In addition, Pillar One’s Amount B aims to introduce simplifications to the transfer pricing approach to “baseline marketing and distribution activities” (BMDA). Pillar One also includes mandatory and binding dispute prevention and resolution mechanisms to mitigate the risk of multiple taxation.
In parallel to the multilateral negotiations on Pillar One, many countries around the globe continue to impose and/or propose unilateral measures to tax digital businesses. These measures show various country’s dissatisfaction with Pillar One and/or their scepticism about its potential success. In general, unilateral measures consist of Digital Service Taxes (DSTs), equalization levies or new nexus based levies in case of a significant economic presence of non-resident businesses in market jurisdictions.
Following the historic Outcome Statement agreed on 11 July 2023 by 138 members of the Inclusive Framework (IF), on 11 October 2023 the Multilateral Convention (MLC) package to implement Amount A was released. The package consists of the text of the MLC, an Explanatory Statement (ES) and an Understanding on the Application of Certainty (UAC). This reflects the consensus achieved so far among IF members on the technical architecture of Amount A with some reservations from certain jurisdictions. In turn, the ES provides clarifications on the provisions of the MLC and the UAC contains further details on how aspects of the Amount A tax certainty framework will operate in practice.
The MLC sets out the substantive features of Amount A, including:
- The scope of the taxing right, which covers MNEs with revenues above EUR 20 billion and profitability above 10%, and applies to 25% of the profit in excess of 10% of revenue (the revenue threshold might be lowered to EUR 10 billion after 7 years). Targeted exclusions apply to enterprises in the extractives, regulated financial services and defence sectors;
- The revenue sourcing rules, which determine the allocation of Amount A between market jurisdictions;
- The mechanisms for relieving double taxation;
- The processes to ensure tax certainty for Amount A and issues related to Amount A;
- The commitment to remove specified measures (listed in Annex A of the MLC), and not to introduce DSTs or relevant similar measures once Amount A is in effect;
- The measures relating to the administration of Amount A, which feature rules for streamlined compliance and rely on a single entity of each covered group to make payments to market jurisdictions;
- The arrangements regarding the MLC’s entry into force, which will occur on a date decided by contracting jurisdictions after at least 30 jurisdictions accounting for at least 60% of the ultimate parent entities (UPEs) of in-scope MNEs have ratified it.
The MLC also includes several provisions designed to address the unique circumstances of developing countries.
Although having come close to a final agreement, a number of countries (e.g., India, Colombia and Brazil) have included reservations to some provisions of the MLC text released on 11 October 2023, which are expressed in footnotes and mainly refer to the marketing and distribution safe harbor (MDSH), including the treatment of withholding taxes. In essence, these countries fear that they may be allocated too few additional taxing rights by applying the MDSH.
Furthermore, it should be noted that, in July 2023, the majority of the IF members agreed to extend a freeze on new DSTs and similar measures for one year beyond its December 2023 expiration date or until the MLC’s entry into force. However, this extension requires the critical mass of jurisdictions indicated in point (vii) above to sign the MLC before the end of 2023. If such critical mass (which, necessarily requires the United States (US) to be on board considering its allocated points) is not reached by 31 December 2023, then the DST freeze will expire.
In addition to the work on Amount A, during 2023 the IF has also made significant progress on Amount B. On 17 July 2023, the OECD released the latest public consultation document on Amount B which followed a previous consultation launched on December 2022 on this same element. The latest consultation ran from July to September 2023 and the document contained several key changes compared to the previous document on Amount B, which concerned qualifying transactions, scope, pricing methodology and tax certainty. Several recommendations made by Loyens & Loeff in the 2022 consultation were incorporated in the latest document. In addition, Loyens & Loeff submitted new input to the latest consultation which provided further comments and suggestions in relation to enhancing tax certainty, reducing resource-intensive disputes between taxpayers and tax administrations while trying to avoid artificial situations.
According to the OECD, the MLC to implement Amount A will be signed by the end of 2023 with the objective of enabling its entry into force in 2025. If signature (not ratification) by the required critical mass of jurisdictions is achieved by the end of 2023, the DST freeze will be extended until the earlier of 31 December 2024, or the entry into force of the MLC. Otherwise, the freeze will expire and unilateral measures (including DSTs, equalization levies, expanded withholding taxes on digital services, non-traditional nexus based levies, etc.) might proliferate.
Several countries (including the US) have indicated that they need additional time for internal processes before they can decide on whether they can sign the MLC or not. Recent statements of the US Treasury Secretary and the US public consultation opened on this matter (which runs until 11 December 2023) confirm that – at least for the US - such process will run into 2024. Since the US alone accounts for 46% of affected MNEs (i.e., 486 points out of the 600 required for the MLC to enter into force), the fate of Amount A and the DST freeze is in this country’s hands. It remains to be seen whether the agreements entered by the US with several countries about the treatment of existing DSTs (which also expire on 1 January 2024) will be extended or not.
Regarding Amount B, the IF is now considering the feedback received to further develop the framework for the simplified and streamlined application of the arm's length principle to BMDA. The work on Amount B should be completed by the IF by the end of 2023 and the final report on this element is expected to be incorporated into the OECD’s Transfer Pricing Guidelines by January 2024.
The Dutch Position
Following the publication of MLC package, on 24 October 2023 the Dutch State Secretary of Finance informed the Senate and House of Representatives of the Netherlands about the latest OECD IF’s developments and the Dutch position on Pillar One.
The explanations of the State Secretary confirm that:
- the text of the MLC is not final and has not yet been opened for signature;
- some countries need additional time before they can decide to sign the MLC;
- because of the above, it seems unlikely that a signing ceremony will be organized in 2023 and that the DST freeze will be extended, which means that countries could introduce a DST as of 1 January 2024;
- developments regarding the MLC may have consequences for Amount B, since a number of countries see the implementation of Amount A and Amount B as part of the same agreement.
Regarding the Dutch position in relation to Pillar One, the letter of the State Secretary notes that, even though the Netherlands remains in favour of an international agreement on Pillar One by means of the MLC, if at some point there is no longer a clear view of a global agreement, alternatives should be considered. In this regard, an European solution would be preferred over an unilateral DST which, in the view of the State Secretary, is also not feasible in the short term for the Netherlands.
Takeaways and tips
- As of October 2023, the envisaged implementation dates for Amount A and the extension of the DST freeze seem unfeasible. This means that, unless further agreements are made, countries could introduce a DST or other unilateral measures as of 1 January 2024
- If Pillar One fails, countries might follow the example of the United Kingdom, Austria, France, Italy, Spain, India, Tunisia, Turkey, Kenia and, more recently, Canada and New Zealand of either adopting and/or proposing unilateral measures to tax MNEs in the digital sector in the form of either DSTs or similar measures. It cannot be ruled out that, following the previous 2018 attempt, a multilateral DST will again be proposed at EU level.
- In any case, MNEs will need to assess the potential impact of Pillar One and other unilateral measures and take them into account when reassessing their tax positions. Loyens & Loeff can assist in preparing a Pillar One Impact Assessment Model to facilitate such assessment.
- Taxpayers can already assess whether the proposed Amount B rules simplify and streamline the pricing of their BMDA. Our Pillar One and Transfer Pricing teams are available to support you in analysing and modelling the impact of these rules on your group and exploring ways to mitigate increased taxation and complexity.