June 7, 2022
OECD releases public consultation documents on tax certainty under Amount A for Pillar One
On 27 May 2022, the Secretariat of the Organisation for Economic Co-operation and Development (OECD) released two public consultation documents regarding the Tax Certainty Framework for Amount A and Tax Certainty for Issues Related to Amount A for Pillar One of the OECD/G20 project on Addressing the Tax Challenges Arising from the Digitalisation of the Economy (the BEPS 2.0 project).
The Tax Certainty Framework set out in the first consultation document aims to guarantee certainty to Multinational Enterprise (MNE) Groups in relation to all aspects of the Amount A rules. To achieve this, the document proposes three mechanisms:
Any disagreements that arise during these tax certainty mechanisms are to be resolved by a binding Determination Panel process. In addition, if a Group does not invoke these certainty mechanisms, the Framework includes the potential for tax administrations to agree to work together through a coordinated review.
The second consultation document on Tax Certainty for Issues Related to Amount A contains draft provisions setting out a mandatory binding mechanism to resolve transfer pricing and permanent establishment profit attribution disputes that are unable to be resolved through the Mutual Agreement Procedure (MAP) within two years of the presentation of the MAP case to the Competent Authorities. The document includes three draft provisions:
As was the case with previous working documents released by the OECD Secretariat, both consultation documents are released on a non-consensus basis to obtain input from stakeholders. They have been released on the basis that they are without prejudice as to the final agreement. Also, throughout the documents, key areas that have not been agreed yet are identified, with alternative views that have been expressed during the negotiations footnoted in some cases and proposals still under discussion bracketed in other cases.
The OECD invites written comments on the two documents to be submitted by 10 June 2022.
The OECD has been considering tax issues related to the digitalization of the economy since the outset of the original Base Erosion and Profit Shifting (BEPS) project in 2013. In 2019, the OECD launched the BEPS 2.0 project, which consists of Pillar One on new nexus and profit allocation rules and Pillar Two on global minimum tax rules.1 Currently, there are 141 jurisdictions participating in the BEPS 2.0 project through the Inclusive Framework.
In October 2021, a final political agreement was reached on key parameters of both pillars and an implementation plan.2 Of the 141 participating jurisdictions, 137 members of the Inclusive Framework have joined this agreement. With respect to Pillar One, one of the agreed parameters is that MNEs with global turnover above €20 billion and profitability above 10%, calculated using an averaging mechanism, would be in scope of Amount A.
In December 2021, the OECD announced plans to release a series of Secretariat working documents in the first half of 2022 on the separate building blocks of Amount A in order to obtain stakeholder input, as well as a public consultation document on Amount B in mid-2022. The first of these working documents on Amount A, covering nexus and revenue sourcing rules, was released for public consultation on 4 February 2022.3 The second Amount A working document, on tax base, was released on 18 February 2022.4 The third Amount A working document on scope was released on 4 April 2022.5 The fourth Amount A working document on the Extractives Exclusion was released on 14 April 2022.6 Most recently, a fifth Amount A working document was released on 6 May 2022 on the Regulated Financial Services Exclusion.7
On 27 May 2022, the OECD Secretariat released two consultation documents on tax certainty aspects of Amount A under Pillar One. The first consultation document is the Tax Certainty Framework for Amount A, which aims to guarantee certainty for Groups over all aspects of the Amount A rules including the elimination of double taxation. The second consultation document is the Tax Certainty Process for Issues Related to Amount A, which aims to ensure that in-scope Groups benefit from dispute prevention and resolution mechanisms for all issues related to Amount A in a mandatory and binding manner.
The consultation documents reflect a different format than the previous public consultation documents on Amount A as the operative text is not in the form of Model Rules. The documents indicate that work will begin at a later stage to translate parts of the text into such Model Rules, text for a Multilateral Convention or other agreements or tools as needed.
Tax Certainty Framework for Amount A
The consultation document describing the Tax Certainty Framework for Amount A includes three mechanisms: (i) Scope Certainty Review; (ii) Advance Certainty Review; and (iii) Comprehensive Certainty Review.
Scope Certainty Review
According to the document, there is a risk that during the first years of applying the Amount A rules, Groups that are not within the scope of Amount A could nevertheless be subject to inquiries from multiple tax administrations that believe such Groups may be in-scope Covered Groups. The Scope Certainty Review will allow such a Group to request binding certainty on the matter of scope.
Under the Scope Certainty Review set out in the document, a Group would submit a request to the Lead Tax Administration (i.e., generally the tax administration of the jurisdiction where the Ultimate Parent Entity is resident for tax purposes) for multilateral certainty that it is not a Covered Group for the Period. The request should be in the format and include the content to be specified and be accompanied by a Scope Certainty Documentation Package containing information relevant to the scope determination. The request would include a list of the relevant tax administrations from which the Group seeks certainty (Listed Parties). A tax administration that is not included on the list submitted by the Group may submit a proposal to be added together with an explanation as to why it would be affected by the outcome of the scope review. If the Group does not agree to add a tax administration that makes such a proposal, it is expected to provide an explanation; the Lead Tax Administration may require that the tax administration be added if it considers there to be a reasonable basis for including such administration.
If the determination regarding scope requires the application of the Amount A rules such as excluded revenues or segmentation, a Scope Review Panel of tax administrations, coordinated by the Lead Tax Administration would conduct a review. However, if a Group would be out of scope because its total revenues or profitability is below the applicable threshold, the Lead Tax Administration would conduct the review. The outcomes of the review would be shared with all the Listed Parties for comments. Any disagreements among members of the Scope Review Panel (if there is one) or among the Listed Parties would be sent to a Determination Panel for a final outcome.
If a Scope Review Panel has determined a Group was not in scope for a Period and the Group wants to obtain certainty that it remains out-of-scope, a high-level follow-up review based on simplified documentation, focused on relevant changes to the Group, would be available. If the process results in a determination that the Group remains out of scope, this outcome would be binding on all Listed Parties. If such a determination cannot be made based on the simplified documentation, the Group could provide the full Scope Certainty Documentation Package for review.
Advance Certainty Review
The document stresses the importance of an early determination that a Group's methodology for identifying the source of its revenue is reliable. The document further states that early determination regarding other aspects of the new rules, such as the application of rules on segmentation, could also be beneficial, although it notes that some jurisdictions do not agree on the need for advance certainty on matters of segmentation.
The document notes the challenges that Groups may face to comply with Amount A, in particular with respect to revenue sourcing, and indicates that the Inclusive Framework is considering transitional approaches that would apply for a limited period. One approach under consideration is the provision of a "soft-landing" for purposes of both the Comprehensive Certainty and Advance Certainty processes. Under this approach, if a Group makes reasonable efforts to reflect a correct application of the revenue sourcing rules, the Group's filing would be accepted and no changes would be required. provided certain criteria are met; the Group would also be provided with guidance in the transition period on how it could apply the revenue sourcing rules more accurately in future. A second approach that is being explored is the provision of easier access to Allocation Keys in the short-term, in particular before systems are in place to apply the revenue sourcing rules. In addition, the document indicates that the Inclusive Framework is considering other ways to support Groups in complying with the revenue sourcing rules, including guidance and practical tools.
A Group's first request for Advance Certainty would be made when it files its Common Documentation Package for the first year of Amount A. The Advance Certainty Review Process would involve a review of the Group's proposed methods and controls with respect to revenue sourcing, which would be conducted by a Review Panel consisting of the Lead Tax Administration and other tax administrations of Parties in which the Group has in-scope revenue or which provide relief from double taxation, selected at random from those that expressed interest. The Review Panel also will rely on recommendations from an Expert Advisory Group of tax officials who meet agreed criteria with respect to training and experience in conducting systems reviews and audits.
If the Group's proposed revenue sourcing approach is accepted, certainty will apply for a specified number of future years provided there are no relevant changes. If needed improvements are identified during the review, certainty will apply once the improvements have been implemented and confirmed. If the Review Panel does not reach agreement, or if the panel's proposal is not accepted by affected tax administrations, the disagreement will be referred to a Determination Panel for a final outcome.
Comprehensive Certainty Review
The document states that a key element of the Tax Certainty Framework for Amount A is a structured, comprehensive review of each aspect of an in-scope Group's application of the Amount A rules which results in an outcome that is binding on all Parties to the Multilateral Convention.
The first time a Group requests Comprehensive Certainty, the review would be conducted by a Review Panel, consisting of the Lead Tax Administration and the tax administrations of Parties in which the Group has in-scope revenue or which provide relief from double taxation, selected at random from those that expressed interest. The Lead Tax Administration would conduct subsequent reviews, with a Review Panel established to conduct a review after a specified number of years (five years is noted in the document in brackets but has not yet been agreed) or in specific circumstances. The Review Panel would be supported by an Expert Advisory Group of systems specialists to provide advice on the reliability of the Group's internal control framework. The Parties would be kept informed regarding the review and could provide input, raise concerns and suggest alternative outcomes to address disagreements.
The Comprehensive Certainty Review process includes two phases, which may be conducted sequentially or simultaneously. At the end of the process, or at the end of each phase, the results of the review and a recommendation accepting the rules or suggesting changes would be shared with the Affected Parties. Where one or more Affected Parties do not agree, or if the Review Panel itself did not reach agreement, specific issues where there is disagreement would be referred to a Determination Panel for resolution
Disagreements that arise during any of the tax certainty review processes described above would be referred to a Determination Panel. The Determination Panel is required to resolve issues referred to it by choosing from among the alternative outcomes submitted to it by the Lead Tax Administration and the Scope Review Panel Members, Review Panel Members or Affected Parties, as the case may be. Decisions of the Determination Panel on each issue should be made by consensus that includes all members, but where this is not possible, the outcome that is supported by an overall majority is to be chosen.
The composition of the Determination Panel is still under discussion, but the document includes three options: i) an independent expert only panel; ii) a government official only panel; iii) or a mixed panel of independent experts and government officials. The document also proposes the establishment of a Tax Certainty Secretariat to coordinate the nomination and appointment of experts.
Outcomes of the tax certainty process
Where a Group makes a request for certainty and acts in a cooperative and transparent manner, the framework is intended to ensure that it is offered certainty. Parties to the Multilateral Convention are expected to implement the outcomes of the certainty process and not to undertake any compliance activity that is inconsistent with such outcomes.
Absence of a request for tax certainty
There may be cases where a Group chooses not to request certainty for a particular Period. In such a case, the tax administrations of two or more Parties may choose to conduct a review, in a coordinated manner, of the Group's application of the Amount A rules. If this process is used, the Group will have an opportunity to make a late request for comprehensive certainty, in order to obtain a certainty outcome that is binding on all Parties (and not just those that chose to participate).
Tax Certainty for Issues Related to Amount A
The consultation document on Tax Certainty for Issues Related to Amount A contains draft provisions for inclusion in the Multilateral Convention covering three areas: (i) a MAP for issues related to Amount A; (ii) a mandatory binding dispute resolution mechanism for transfer pricing and permanent establishment (PE) profit allocation issues related to Amount A; and (iii) an elective binding dispute resolution mechanism regarding issues related to Amount A that applies to developing economies that are eligible to request a deferral of their BEPS Action 14 peer review and that have no or a low number of MAP disputes.
The consultation document includes draft provisions for a MAP. The provisions are based on paragraphs 1 and 2 of Article 25 of the 2017 OECD Model Tax Convention with modifications to adapt to the Multilateral Convention context.
The document indicates that this MAP provision will be accompanied by a compatibility provision and explanatory commentary clarifying the relationship of this provision with the MAP provisions of Existing Tax Agreements as well as with the provisions of the mandatory binding dispute resolution mechanism. Provisions accompanying this MAP provision will also make clear which members of a Covered Group are entitled to make requests under this MAP.
Mandatory binding dispute resolution mechanism
The mandatory binding dispute resolution mechanism applies to Related Issues. Pursuant to this definition, the dispute resolution mechanism is available with respect to any MAP case that concerns a transfer pricing adjustment to a transaction between members of a Covered Group or to the profits attributed to a PE of a member of a Covered Group.
The mandatory binding dispute resolution mechanism applies to Related Issues where the Competent Authorities are unable to reach an agreement in a MAP within a period of two years (or such period as the Competent Authorities have agreed prior to the expiration of the two-year period). This mechanism is available when a member of a Covered Group has presented a case to the Competent Authority of a Contracting Jurisdiction on the basis that the actions of one or both of the Contracting Jurisdictions have resulted for that member of a Covered Group in taxation not in accordance with the provisions of an Existing Tax Agreement (or not in accordance with the relevant provisions of the Multilateral Convention where there is not an Existing Tax Agreement).
The consultation document also provides the basic structure of the mandatory binding dispute resolution mechanism and the timing for the steps in the process related to requests for a dispute resolution panel and decision by the dispute resolution panel. A dispute resolution panel is composed of five individual panel members.
With respect to confidentiality, a process for communications between the Competent Authorities and the members of the dispute resolution panel is specified, with a view to ensuring clarity in how information is communicated and by whom. It is envisaged that the dispute resolution panel process itself will, as far as possible, be conducted via tele- and/or videoconferencing, without the need for in-person meetings.
On the decision-making process that will be used, the rules provide that the dispute resolution panels will, by default, apply a last-best offer (also known as final offer) approach to decision-making. Under this approach, the Competent Authorities will each submit to the dispute resolution panel a proposed resolution that addresses all of the unresolved Related Issues in the case in a manner that is consistent with any previous agreements that have been reached in that case by the Competent Authorities. However, the Competent Authorities of the two Contracting Jurisdictions may mutually agree to use an alternative form of decision-making, such as an independent opinion approach, whether in a specific case or in general.
The document specifies how the costs of dispute resolution panel proceedings are to be borne by each Contracting Jurisdiction unless the Competent Authorities mutually agree on different rules. The document provides that the Competent Authorities may in particular mutually agree that the member of the Covered Group that requested the dispute resolution panel shall bear the costs related to a dispute resolution panel proceeding in appropriate circumstances (e.g., where a member of the Covered Group directly affected by the case does not accept, or is considered not to accept, the proposed Competent Authority resolution of the case that reflects the outcome of the dispute resolution panel decision).
The consultation document also addresses the compatibility of this dispute resolution mechanism with other mandatory binding dispute resolution mechanisms (e.g., legal instruments in the European Union with respect to tax dispute resolution).
Elective binding dispute resolution panel mechanism
The elective binding dispute resolution mechanism applies instead of the mandatory binding dispute resolution mechanism for disputes involving a Contracting Jurisdictions that meets four objective criteria.
The first criterion is that the Contracting Jurisdiction is classified by the World Bank as a low-income, lower-middle-income or upper-middle-income jurisdiction by reference to the gross national income per capita. The second criterion is that the Contracting Jurisdiction is not a member of the OECD nor a G20 member country. The third criterion is that the Contracting Jurisdiction has not received from other members of the Forum on Tax Administration MAP Forum feedback that its policies or practices concerning MAP require improvement. The fourth criterion is that the Contracting Jurisdiction has had no or low levels of MAP disputes (i.e., where the [two-year] average number of attribution/allocation MAP cases in its inventory at the end of the year, as determined by the MAP Statistics submitted by it annually, is below [10 cases], noting that the parameters in brackets are not yet agreed).
The eligibility of a jurisdiction for this elective mechanism will be reviewed regularly. The elective binding dispute resolution mechanism generally will apply mutatis mutandis, the process provided for the mandatory mechanism. However, the use of the dispute resolution panel is elective in the sense that both Competent Authorities must agree to it.
Relation to domestic court proceedings
The document indicates that any unresolved Related Issue arising from a MAP case within the scope of the dispute resolution panel will not be submitted to a dispute resolution panel if a decision on the Related Issue has already been rendered by a court or administrative tribunal of either of the Contracting Jurisdictions and the Competent Authority of the jurisdiction of such court or tribunal is legally bound by the decision.
Dispute resolution mechanisms are essential to the operation of the proposed Pillar One rules. Effective processes to prevent and resolve disputes on Amount A and related issues are crucial in providing the certainty that is needed to ensure an environment conducive to cross-border business investment and activity.
Increasing the accessibility, efficiency, and efficacy of cross-border dispute resolution programs is critical to the proper operation of the Pillar One rules. As the Inclusive Framework works to develop the applicable mechanisms and address the many outstanding questions, more material on tax certainty and further proposals for improvement are expected to be produced over the coming months. Affected businesses should follow these developments closely.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP, Rotterdam
Ernst & Young Belastingadviseurs LLP, Amsterdam
Ernst & Young Limited (New Zealand), Auckland
Ernst & Young LLP (United States), New York
Ernst & Young LLP (United States), Washington, DC
1 For additional information, see EY Global Tax Alert, OECD's new insights describe growing support on comprehensive changes to international tax policy, beyond digital, dated 29 January 2019; EY Global Tax Alert, OECD opens public consultation on addressing tax challenges arising from digitalization of the economy: time-sensitive issue impacting all multinational enterprises, dated 14 February 2019; EY Global Tax Alert, OECD hosts public consultation on document proposing significant changes to the international tax system, dated 18 March 2019; EY Global Tax Alert, OECD workplan envisions global agreement on new rules for taxing multinational enterprises, dated 3 June 2019; EY Global Tax Alert, OECD releases BEPS 2.0 Pillar One Blueprint and invites public comments, dated 19 October 2020; and EY Global Tax Alert, OECD releases BEPS 2.0 Pillar Two Blueprint and invites public comments, dated 19 October 2020.
2 See EY Global Tax Alert, OECD releases statement updating July conceptual agreement on BEPS 2.0 project, dated 11 October 2021; and EY Global Tax Alert, OECD announces conceptual agreement in BEPS 2.0 project, dated 1 July 2021.
3 See EY Global Tax Alert, OECD releases Pillar One public consultation document on draft nexus and revenue sourcing rules, dated 11 February 2022.
4 See EY Global Tax Alert, OECD releases Pillar One public consultation document on draft rules for tax base determinations, dated 21 February 2022.
5 See EY Global Tax Alert, OECD releases public consultation document on draft rules regarding scope under Amount A for Pillar One, dated 12 April 2022.
6 See EY Global Tax Alert, OECD releases public consultation document on Extractives Exclusion under Amount A for Pillar One, dated 25 April 2022.
7 See EY Global Tax Alert, OECD releases public consultation document on Regulated Financial Services Exclusion under Amount A for Pillar One, dated 16 May 2022.