What is OECD's Inclusive Framework
The OECD's Inclusive Framework is a platform for multilateral cooperation on tax issues, which brings together more than 140 jurisdictions worldwide, including both OECD and non-OECD countries.
The framework was established in 2016 to tackle base erosion and profit shifting (BEPS) and has since expanded its mandate to address the tax challenges arising from the digitalisation of the economy.
The Inclusive Framework operates on a consensus basis.
It provides a forum for members to negotiate and agree on international tax rules and standards, to ensure that profits are taxed where economic activities occur, and value is created.
In January 2019, the OECD began the current project with the release of a Policy Note describing two pillars of work:
Pillar One addresses the tax challenges of the digitalisation of the economy and the allocation of taxing rights to market jurisdictions and
Pillar Two addresses concerns about potential BEPS activity and tax rate competition among countries.
The Inclusive Framework has reached a political agreement on the key components of Pillar One and Pillar Two, designed to reform international tax rules and ensure a fairer distribution of taxing rights among countries.
Overview of Pillar One
Pillar 1 is a component of the OECD's proposed global tax reform, known as BEPS 2.0, which aims to address the challenges posed by the digitalisation of the global economy.
Pillar 1 proposes a new approach to allocating taxing rights between countries based on where multinational enterprises generate their profits (i.e., market jurisdictions) rather than where they have a physical presence (i.e., residence jurisdictions).
This would allow countries to tax a share of the profits from multinational enterprises in their market jurisdictions, even if those enterprises have no physical presence there.
The proposed approach would apply to multinational enterprises with global turnover above a certain threshold. It would prevent double taxation and ensure that profits are allocated fairly and consistently across jurisdictions.
For Amount A of Pillar One, the Inclusive Framework launched a public consultation that will occur in stages by releasing working documents on each building block to remain within the agreed-upon political timetable.
For Amount B of Pillar One, a public consultation document was issued in December 2022, with a public consultation event to follow the comment period.
What should businesses know?
Businesses should be aware that the changes under Pillar One of BEPS 2.0 are complex and multinational in scope.
Although Digital Services Taxes and similar measures will be repealed, the timeline and identification of affected businesses are unclear.
It is important to note that the scope of covered businesses has expanded beyond highly digitalised business models and now includes many other industries.
While extractives and regulated financial services are exempt, most other industries are expected to be in scope.
The Inclusive Framework has provided some certainty despite the uncertainties and outstanding details.
Businesses should monitor developments closely and prepare for potential impacts, as the rules are expected to be finalised in 2023 and take effect starting in 2024.
BEPS 2.0 developments: Pillar One
This post provides an overview of the Pillar One public consultation documents released by the OECD since late May 27, 2022:
Tax certainty framework for Amount A and tax certainty for issues related to Amount A;
Progress report on the administration and tax certainty aspects of Amount A;
Progress report on the operative provisions of Amount A;
Amount B; and
Draft multilateral convention provisions on digital services taxes and other relevant similar measures.
Tax Certainty of Amount A
On May 27, 2022, the OECD released a public consultation document on the tax certainty framework for Amount A.
Tax Certainty Framework for Amount A
The framework aims to provide multinational enterprise groups with certainty regarding Amount A in various aspects, including the following elements:
Scope certainty review provides certainty for a multinational enterprise group outside the scope of Amount A rules for a certain period of time.
Advance certainty review provides certainty for a multinational enterprise group on the specific aspects of Amount A that will apply in future periods.
Comprehensive certainty review to provide an in-scope Group with binding multilateral certainty over its application of all aspects of the new rules for a Period that has ended, building on the outcomes of any advance certainty applicable for the Period
The OECD and the Inclusive Framework aim to establish a binding multilateral procedure that covers these three elements to resolve disputes between tax authorities and multinational enterprises and between different jurisdictional tax authorities.
Tax certainty for issues related to Amount A
The public consultation document sets out draft mechanisms that are mandatory and binding to address transfer pricing and permanent establishment profit allocation disputes that cannot be resolved through mutual agreement procedures by the competent tax authorities.
Progress report on the administration and tax certainty aspects of Amount A
On October 6, 2022, the OECD published a progress report on the administration and tax certainty of Amount A.
In addition to updating the tax certainty-related issues, the report also published regulations related to the administration of Amount A for the first time and sought public consultation.
The report outlines the procedures that multinational enterprise groups should follow to comply with Amount A rules, including reporting relevant information, paying taxes, and timely eliminating double taxation.
Progress report on the operative provisions of Amount A
On July 11, 2022, the OECD published a progress report on Amount A, which included a summary of the implementing provisions of Amount A presented in the form of a domestic law model.
In addition to updating relevant provisions previously open to public consultation, the report also proposed the following draft provisions for the first time:
1. Marketing and distribution safe harbour rule
The marketing and distribution safe harbour rule reduces and may eliminate the allocation of Amount A to market jurisdictions that already have taxing rights over the residual profits of the group.
The rule specifically includes a formula for determining the amount to be deducted for each market jurisdiction and a quantitative standard for measuring residual profit taxed in the market jurisdiction, such as return on depreciation and personnel (RoDP).
Further clarification is needed on specific indicators for identifying residual profits in market jurisdictions, how these profits are used to offset or reduce the allocation of Amount A, and the relationship between this adjustment and the mechanism for eliminating double taxation.
2. Elimination of double taxation (Amount A)
The OECD adopts a quantified approach to allocate the responsibility for resolving double taxation among "relieving jurisdictions," dividing the jurisdictions into several levels based on the profitability of multinational enterprise groups within the scope of application (using RoDP as a reference).
The rules for identifying relieving jurisdictions and allocating the responsibility for eliminating double taxation among these jurisdictions aim to assign the responsibility for eliminating double taxation of Amount A to those jurisdictions that receive residual profits of multinational enterprise groups.
The mechanism for eliminating double taxation uses a "waterfall’ approach", whereby the relief jurisdiction with the highest measure of the metric used (e.g. Elimination Profit) would provide relief first and would provide relief until that metric was reduced to the same level as the next highest entity in the jurisdiction (and so on).
This would limit the number of Group Entities entitled to relief (and, under the multiple taxpayer approach, the number of entities liable to tax) and would ensure that relief is provided first to those entities with the highest profit according to whichever metric is used
Amount B
On December 8, 2022, the OECD released a public consultation document for the rules regarding Amount B.
The document aims to provide standards for measuring the simplified application of the arm's length principle for associated distributors engaged in basic marketing and distribution activities.
It seeks feedback on the following main design elements of Amount B:
Scope of application;
Pricing method;
Documentation requirements;
Tax certainty.
The scope of the application and pricing method is the main contents of the public consultation document:
Scope of Application
Except for certain specific exemption situations, the document suggests that Amount B should apply to the following group internal distribution activities:
Associated purchase and sale transactions, where the group distributor purchases goods from an associated enterprise located in another jurisdiction and mainly wholesales and distributes them to non-associated parties in the local market; and
Associated sales agency and commissionaire arrangements, where the "distributor" does not own the goods but contributes to the distribution of goods for the associated enterprise. The application of Amount B to such arrangements requires further discussion.
When a transaction falls under any of the above categories, it is still necessary to determine whether the relevant enterprises meet the prescribed scope standards.
The public consultation document lists more than ten conditions related to scope standards, such as the necessity of signing a written contract, the distributor mainly carrying out distribution activities in the established market, and restrictions on the distributor's remuneration.
Pricing Method
Currently, the pricing method for Amount B is based on the transaction net profit method (TNMM).
The public consultation document suggests that TNMM can be supplemented by econometric analysis, which aims to determine factors that affect profitability at the macroeconomic and enterprise levels, such as region, domestic gross domestic product (GDP) in related areas, asset density, and operating expense density.
The inclusive framework also considers two exemptions for Amount B.
One is when local comparable analysis supports a transaction's pricing; the Amount B pricing method is no longer applicable.
The second is in certain specific situations where another transfer pricing method, other than the TNMM, is needed as the most appropriate method.
Draft multilateral convention provisions on digital services taxes and other relevant similar measures
The draft provisions of the multilateral convention listed in the public consultation document mainly focus on the issue of unilateral measures in order to reflect the commitment of all jurisdictions to eliminate all existing unilateral measures (such as digital services taxes) in the future.
The document includes two provisions:
to eliminate existing unilateral measures and
to cancel the allocation of amount A to jurisdictions that continue to implement unilateral measures.
The multilateral convention will list the unilateral measures that meet the "digital services taxes or similar measures" criteria in an appendix.
As the OECD and Inclusive Framework members have not yet reached a consensus on the list, it is not included in this public consultation document.
Overall, a measure will be considered a digital services tax or similar measure if it meets the following three criteria:
The establishment of the measure is mainly based on the geographic location of customers or users or other similar market-based criteria;
The measure (substantially or legally) aims at non-resident enterprises or entities mainly owned by non-resident enterprises; and
The measure is not within the scope of domestic income tax laws or tax treaties other than the amount A multilateral convention.
Unilateral measures do not include:
value-added tax,
transaction taxes,
various withholding taxes within the scope of tax treaties, or
provisions aimed at addressing abusive tax practices.
Conclusion
The public consultation documents released by the OECD contain many new conceptual expressions and detailed technical issues of a certain degree of complexity.
It is recommended that everyone download the following document to read the full text:-
Disclaimer:
The articles, templates, and other materials on our website are provided only for your reference.
While we strive to ensure that the information presented is current and accurate, we cannot guarantee the completeness, reliability, suitability, or availability of the website or its content, including any related graphics. Consequently, any reliance on this information is entirely at your own risk.
If you intend to use the content of our videos and publications as a reference, we recommend that you take the following steps:
Verify that the information provided is current, accurate, and complete.
Seek additional professional opinions, as the scope and extent of each issue, may be unique.
免责声明：
我们网站上的文章、模板和其他材料只供参考。
虽然我们努力确保所提供的信息是最新和准确的，但我们不能保证网站或其内容，包括任何相关图形的完整性、可靠性、适用性或可用性。因此，您需要承担使用这些信息所带来的风险。
如果你打算使用我们的视频和出版物的内容作为参考，我们建议你采取以下步骤：
核实所提供的信息是最新的、准确的和完整的。
寻求额外的专业意见，因为每个问题的范围和程度，可能是独特的。
Keep in touch with us so that you can receive timely updates
请与我们保持联系，以获得即时更新。
1. Website ✍️ https://www.ccs-co.com/ 2. Telegram ✍️ http://bit.ly/YourAuditor 3. Facebook ✍
4. Blog ✍ https://lnkd.in/e-Pu8_G 5. Google ✍ https://lnkd.in/ehZE6mxy
6. LinkedIn ✍ https://www.linkedin.com/company/74734209/admin/