Short-term consultation on the first pillar framework for tax base determination rules

On February 18, 2022, the OECD Secretariat launched a short-term consultation on the second building block of the “first pillar”. This second building block relates to tax base determinations, and specifically how to measure the profit that forms the basis for partial reallocation under the Amount A rules. The Discussion Paper does not reflect the final views of the jurisdictions. of the Inclusive Framework. Reactions to the consultation must be submitted by March 4, 2022. The planned entry into force of the first pillar rules officially remains at the beginning of 2023.


For several years, the inclusive framework has explored the adaptation of international tax rules to an increasingly digitized economy. On October 8, 2021, almost all members of the OECD/G20 Inclusive Framework agreed on certain key parameters to reallocate certain taxing rights to market jurisdictions (“Pillar 1”) and to introduce taxation global minimum workforce (“Pillar 2”). The agreement of October 8, 2021 applies not only to “digital” MNEs but to all MNEs, regardless of their activity.

First pillar

The Inclusive Framework developed Pillar 1 “Amount A” (deemed “residual profit”) as a new right to tax a portion of the profits that large, highly profitable corporations (“Covered Group”) make in the jurisdictions where they operate. provide goods or services, or where consumers or users are located (hereinafter, “market jurisdictions”). Until 2031, only groups with an overall turnover of more than 20 billion euros and a pre-tax profit margin of more than 10% would be “covered groups”.

The implementation of amount A of the first pillar requires the development of:

  • A Multilateral Convention (“MLC”),
  • Explanatory memorandum on the MLC,
  • Model Rules for National Legislation (“Model Rules”) for the implementation of Amount A, and
  • Commentary on Model Rules.

We refer to our article from February 7, 2022 for the first building block on the first pillar for nexus and income source rules.

On February 18, 2022, the OECD Secretariat published for consultation a discussion paper illustrating the Model Rules for determining the tax base (“Draft Rules”). Once there is consensus on the inclusive framework, jurisdictions will still be free to adapt these draft rules to reflect their own constitutional law, legal systems and national considerations and practices (although within European Union, the European Commission plans to issue a directive to ensure coordinated implementation of the first pillar rules).

What does the working document contain?

According to the draft rules, the first pillar tax base is determined by (i) starting with the group’s consolidated result from the financial accounts, (ii) making accounting/tax adjustments, (iii) making restatement adjustments, and (iv ) net of net losses. These steps are described in more detail below.

From the consolidated group result

The starting point is the profit or loss of the consolidated financial statements of the ultimate parent entity. The consolidated financial statements of the ultimate parent entity must be prepared in accordance with IFRS or equivalent accounting standards. The draft rules include as equivalent financial accounting standards the GAAP of Australia, Brazil, Canada, EU and EEA member states, Hong Kong, Japan, Mexico, New Zealand, People’s Republic of China, Republic of India, Republic of Korea, Russia, Singapore, Switzerland, United Kingdom and United States of America.

Make book-tax adjustments

From the amount extracted from the consolidated financial statements of the ultimate parent entity, the following revenue inclusion and expense deduction should be reversed:

  • Expenses/tax revenues,
  • Dividends,
  • Equity gains/losses, and
  • The policy denied the expenses.

The draft rules provide limited guidance on how to interpret these four tax accounting adjustments. However, it is specified that gains/losses on equity include profits or losses resulting from the sale or change in value of a participation. Expenses not permitted by the policy include bribes and fines.

Make restatement adjustments

The draft rules stipulate that restatements of profits or losses would be charged to the tax base of the group during the period in which the restatement is identified and recognised. Restatements will only be taken into account if the amount of attributable profit is affected by such restatement and if this restatement occurs during the period when the restatement is required by the financial accounting standard. A restatement cannot exceed 0.5% of the group’s turnover over the period in question; the rest will be deferred.

Net losses

The draft rules include rules on the allocation of losses. Uncompensated losses of a group incurred in a prior period (“Net Losses”) are carried forward and set off against any subsequent profit of that group, following a “compensation” mechanism. The draft rules indicate that the normal carryforward of losses would be between five and fifteen years and that the carryforward of pre-plan losses would be between two and eight years. Interestingly, the draft rules appear to refer only to losses in the strict sense of the term, i.e. less than zero profit. In the Pillar One Blueprint, the possibility was always envisaged of deferring profit “deficits”, i.e. when the profitability of a group would be below the Pillar 1 threshold (10%): this deficit could also be carried forward to future years.

The draft rules further provide that net losses may be allocated to other entities in a qualifying business combination (merger) and a qualifying business division (spin-off). In a qualifying business combination, the net losses of the transferred entities are allocated to the beneficiary. On an eligible commercial division, the net losses of the divesting entity are distributed proportionally on the basis of the net asset value of the receiving entities. It is only possible to allocate net losses if the transferred entity carried on business in the same line of business for 12 months before the qualifying business combination or division, and when the group operates in the same line of business as the transferred entity. entity for 24 months prior to the qualifying business combination or division. In addition, attribution of net losses would only be possible in the event of a spin-off into two or more separate entities and would not be available for a spin-off.

What are the next steps?

Further building blocks related to Amount A are expected to be released by the OECD Secretariat in the coming months. It was indicated that the OECD still plans to develop the MLC “early 2022” and strive to have enough ratifications in 2022, so that the reallocation of taxing rights on Amount A can take place at from 2023. The MLC would include a removal of, and in the future a waiver of, digital services taxes and similar measures.

For Amount B (arm’s length standardized return for basic marketing and distribution activities), a public consultation document will be published in mid-2022, followed by a public consultation event. Technical work on the B pillar will continue throughout 2022.

What can taxpayers do?

An implementation of the first pillar by 2023 is very ambitious, but the political pressure is strong.

Step 1: Determine if your multinational company is a covered group under the first pillar rules.

Step 2: Determine your first pillar tax base and amount A as calculated according to the draft rules.

Step 3: Determine the source of income rules that apply to your business. For this we refer to our flash article of February 7, 2022.

Step 4: Based on your experience in Steps 2 and 3, determine if your MNE is interested in contributing to the public consultation on Building Block 2 (by March 4, 2022).

Step 5: Include the results of Step 3 in a Pillar 1 impact assessment template.

Step 6: Given that the first pillar could come into force in 2023, the main lessons learned from the modeling exercise should help MNE groups assess the need for restructuring to mitigate the tax compliance burden and increased taxation. This assessment will depend in particular on the national tax reforms that could take place following this global tax overhaul, the cost/benefit analysis of a presence in certain jurisdictions and the mechanisms available to mitigate the risk of double taxation.

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