OECD releases public consultation document on Pillar One Amount A and Digital Services Taxes

23 December 2022

The Organisation for Economic Co-operation and Development (OECD) has released the draft Multilateral Convention (MLC) provisions on Digital Services Taxes (DSTs) and other relevant similar measures in connection with Amount A of Pillar One.
The rules provide for the withdrawal of certain existing DSTs and other measures that are to be listed in the MLC, and an elimination of Amount A allocations for jurisdictions that impose a DST or other measure as defined in the MLC (or that fail to withdraw a listed measure).
The Inclusive Framework on Base Erosion and Profit Shifting (BEPS) is seeking stakeholder input by 20 January 2023 on the technical design of the draft MLC provisions.

Executive summary

On 20 December 2022, the OECD Secretariat released a consultation document on the MLC provisions on DSTs and other relevant similar measures (the Consultation Document) in connection with Amount A of Pillar One of the ongoing OECD/G20 project on Addressing the Tax Challenges Arising from the Digitalisation of the Economy (the BEPS 2.0 project).

The Consultation Document is intended to illustrate the structure and operation of the provisions on the standstill and withdrawal commitment for DSTs and other relevant similar measures. It does not reflect the final views of the Inclusive Framework regarding the substance of the document.

The Consultation Document has been released by the OECD Secretariat to obtain input from stakeholders to assist the Inclusive Framework in further refining and finalizing the relevant provisions. Written comments are requested by 20 January 2023.

Detailed discussion

Background

In October 2021, a high-level political agreement¹ was reached on key parameters of both Pillar One and Pillar Two of the BEPS 2.0 project, together with an implementation plan. Of the 142 jurisdictions currently participating in the Inclusive Framework, 138 jurisdictions have joined the agreement reflected in the October 2021 statement.

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 of Pillar One to obtain stakeholder input. In this period, the following public consultation documents on Amount A were released:

Nexus and Revenue Sourcing (4 February 2022)²
Tax Base Determinations (18 February 2022)³
Scope (4 April 2022)⁴
Extractives Exclusion (14 April 2022)⁵
Regulated Financial Services Exclusion (6 May 2022)⁶
A Tax Certainty Framework for Amount A and Tax Certainty for Issues Related to Amount A (27 May 2022)⁷

On 11 July 2022, the OECD released the Progress Report on Amount A of Pillar One for public consultation requesting input on the design of the rules. The July 2022 Progress Report covered many of the building blocks of Amount A and reflected some updates addressing comments received on the earlier consultation documents but did not cover tax certainty or administration. A public consultation meeting was held on 12 September 2022 to discuss the comments submitted on the July 2022 Progress Report.⁸

On 6 October 2022, the OECD released a Progress Report on the Administration and Tax Certainty Aspects of Amount A of Pillar One, which covers important building blocks not included in the July 2022 Progress Report.⁹

On 8 December 2022, the OECD released a consultation document on Amount B of Pillar One, which outlines the main design elements of Amount B, focusing on the scope, the pricing methodology, and the status of discussions concerning an appropriate implementation framework.¹⁰

This Consultation Document completes the coverage of the building blocks of Pillar One.

Draft MLC provisions on DSTs and other relevant similar measures

The Consultation Document contains draft MLC provisions implementing the commitments with respect to DSTs and other relevant similar measures, including: (i) an obligation to withdraw the measures listed in an Annex to the MLC and stop applying them to any company; (ii) a definition of the measures that the parties to the MLC will commit not to enact in the future; and (iii) a mechanism that will eliminate Amount A allocations if this commitment is breached.

The Consultation Document includes a statement that it is a working document released by the OECD Secretariat and it does not reflect the final views of the Inclusive Framework member jurisdiction. It further notes that it is intended to illustrate the structure and operation of the provisions on the standstill and withdrawal commitment with respect to DSTs and other measures, but that further changes may be made to the conceptual framework.

The draft MLC provisions are contained in two articles:

Article 37- — Removal of existing measures. This article provides for the withdrawal of all measures to be listed in an Annex A to the MLC for all companies. However, the Consultation Document indicates that consideration will be given as to whether any existing measure could continue to be applied against a multinational enterprise (MNE) with an ultimate parent entity located in a jurisdiction that is not party to the MLC. The withdrawal obligation will take effect in each jurisdiction on the date on which the MLC enters into effect for such jurisdiction. The Consultation Document states that the definitive list of measures in Annex A will be agreed upon as part of the continued negotiation of the MLC and is not included in the Consultation Document.
Article 38: Provision Eliminating Amount A Allocations for Parties Imposing DSTs and Relevant Similar Measures.

Paragraph 1 of Article 38 provides for the elimination of Amount A allocations to jurisdictions that impose a DST or a relevant similar measure, or that fail to withdraw a measure listed in Annex A. Such jurisdictions will also not be allowed to impose domestic taxes under provisions implementing Amount A. The Consultation Document notes that consideration will be given to whether full denial of Amount A allocations is appropriate in all circumstances or whether such denial should be in some respect proportional based on the scale of their offending measures. It also indicates that consideration will be given to whether and how DSTs and other measures imposed by subnational jurisdictions should be addressed.
Paragraph 2 provides a definition of DST or relevant similar measures based on the following three cumulative conditions: (i) the measure imposes taxation based on market-based criteria; (ii) it is ring-fenced to foreign and foreign-owned businesses; and (iii) it is placed outside the jurisdiction's income tax system (and therefore outside the scope of treaty obligations). The Consultation Document indicates that consideration will be given to whether the definition of DST or other measure should cover certain measures even if they are within the scope of existing tax treaties.
Paragraph 3 provides that the definition does not include measures such as rules that address artificial structuring to avoid traditional permanent establishment or similar domestic law nexus requirements that are based on physical presence. The definition also does not include value added taxes, goods and services taxes, sales taxes, or other similar taxes on consumption or generally applicable taxes imposed with respect to transactions on a per-unit or per-transaction basis rather than on an ad valorem basis. The Consultation Document notes that measures not considered DSTs may nevertheless impact Amount A allocations, for example, through the operation of the marketing and distribution safe harbor or the elimination tax base.
Paragraph 4 provides that the assessment of whether a measure falls under the definition of Article 38 will be conducted through the Conference of the Parties of the MLC. The Consultation Document indicates that the procedures for such evaluation by the Conference of the Parties, as well as the overall rules on its operation, will be developed during the course of the negotiation of the MLC.
Paragraph 5 provides that the definition of DST or relevant similar measure in paragraph 2 and any determination under paragraph 4 shall apply solely for purposes of the MLC.

The Consultation Document indicates that, in addition to these articles, the MLC will include a clear commitment not to enact any DSTs or other relevant similar measures as defined in Article 38. It further notes that consideration will be given to the form of the commitment to not enact future DSTs as well as the treatment of measures not included in Annex A but identified as DSTs and other relevant measures by the Conference of the Parties. This consideration will include whether to include such measures in the Annex and how to address existing measures of jurisdiction that the join the MLC after it enters into force.

Stakeholder input is sought on the technical design of these provisions. Written comments are due on 20 January 2023.

Implications

The Consultation Document contains important provisions of the MLC, aimed at implementing the commitments of Inclusive Framework jurisdiction with respect to standstill and withdrawal of DSTs and other relevant similar measures. The Consultation Document does not represent the final or consensus views of the Inclusive Framework jurisdictions, but it does provide an indication of the potential structure and operation of the provisions on these key commitments relating to DSTs and other relevant similar measures.

It will be important to continue to monitor developments with respect to both Pillar One and Pillar Two closely over the coming months. Businesses also may want to consider taking the opportunity to engage with the OECD and country policymakers through the ongoing consultation processes.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Belastingadviseurs LLP (Netherlands)