15 January 2025 Pillar One Update from Co-chairs of Inclusive Framework on BEPS
On 13 January 2025, the OECD released a statement (January 2025 Statement) by the Co-chairs of the Inclusive Framework, providing information regarding the current status of negotiations regarding both Amount A and Amount B of Pillar One. Although consensus has not yet been reached on either the Multilateral Convention (MLC) to implement Amount A or an Amount B Framework that would require jurisdictions to apply Amount B in specified circumstances, the Statement indicates that progress has been made and work is continuing. The Statement sets out some of the outstanding issues that are close to resolution. The Inclusive Framework continues to work on these issues. In October 2021, the Organisation for Economic Co-operation and Development (OECD) released a statement reflecting the high-level agreement of Inclusive Framework member jurisdictions on core design elements of Pillars One and Two of the BEPS 2.0 project.1 Since that agreement was reached, the Inclusive Framework released a series of public consultation documents on Pillar One during 2022, covering core elements of the nexus and profit allocation rules of Amount A and the related commitments to eliminate digital services taxes (DSTs) and relevant similar measures.2 These working drafts did not reflect consensus agreement in the Inclusive Framework. On 12 July 2023, the OECD released a statement reflecting the agreement reached by 138 of the then-143 member jurisdictions of the Inclusive Framework on the remaining elements of the BEPS 2.0 project.3 The July 2023 statement indicated that the Inclusive Framework had developed a text of the MLC for Pillar One Amount A and that efforts were underway to resolve concerns raised by a few jurisdictions about specific items in the MLC, with the aim of preparing the MLC for signature expeditiously. On timing, the statement referenced the intention for the MLC to be opened for signature in the second half of 2023, with a signing ceremony to be arranged by year-end 2023 and the objective of having the MLC enter into force in 2025. On 11 October 2023, the OECD released text of the MLC to implement Amount A, reflecting the current consensus among Inclusive Framework-member jurisdictions on the design of Amount A and approved for publication by the Inclusive Framework. In addition, the OECD also released two accompanying documents also approved for publication by the Inclusive Framework: the Explanatory Statement and the Understanding on the Application of Certainty. The text of the MLC included footnotes reflecting the divergent views of some Inclusive Framework jurisdictions on several specific matters; therefore, it was not yet open for signature.4 On 30 May 2024, the OECD released a statement by the Co-chairs of the Inclusive Framework indicating that negotiations were nearing completion on a final package on Pillar One and referencing the goal of reaching final agreement in time to open the Amount A MLC for signature by the end of June 2024. However, the MLC still has not yet been opened for signature. As described in the October 2021 statement, Amount B of Pillar One was intended to simplify and streamline the application of the arm's-length principle to in-country baseline marketing and distribution activities, with a particular focus on the needs of low-capacity countries. The OECD released public consultation documents on Amount B in December 2022 and July 2023, which reflected the ongoing work on Amount B as well as issues that remained open.5 On 19 February 2024, the OECD published a report on Amount B, which is incorporated in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022 (OECD TPG).6 The OECD TPG indicate that jurisdictions can choose to apply the Amount B approach for in-scope transactions of tested parties in their jurisdictions for fiscal years starting on or after 1 January 2025. On 17 June 2024, the OECD released two documents on Amount B, providing current lists of the jurisdictions that are qualified for specified adjustments to the calculations under the Amount B approach and a current list of the jurisdictions that are covered by the political commitment of Inclusive Framework members to respect the outcome of those jurisdictions' application of Amount B.7 On 20 December 2024, the OECD released a fact sheet with a step-by-step explanation of the application of Amount B and an automated tool for pricing the return on sales for baseline distribution activities under Amount B.8 The January 2025 Statement reporting on the progress made on developing a final package on Pillar One, including both Amount A and Amount B, follows a prior progress statement by the Inclusive Framework Co-chairs in May 2024. Amount A in essence seeks to reallocate taxing rights to market jurisdictions with respect to the largest and most profitable multinational enterprises (MNEs). The January 2025 Statement references the Amount A MLC text and accompanying documents released in October 2023, which included footnotes on specific issues where different views remained between Inclusive Framework member jurisdictions. The Statement indicates that negotiations during the first half of 2024 resolved some issues that had prevented final adoption of the MLC text by the Inclusive Framework, specifically:
The January 2025 Statement indicates that the revised MLC text was submitted to the Inclusive Framework in June 2024 for adoption, a required step before the MLC could be opened for signature. At that time, one Inclusive Framework member jurisdiction objected to adoption, because consensus had not been reached on the Amount B framework and because another Inclusive Framework member jurisdiction's agreement to adoption was subject to a reservation indicating it was not in a position to support certain aspects of the MLC. The Statement further indicates that there have been no further developments with respect to the MLC text since June 2024, with negotiations having focused instead on outstanding Amount B issues. The MLC has not yet been signed or ratified by Inclusive Framework members. The MLC requires ratification by at least 30 jurisdictions accounting for at least 60% of the ultimate parent entities of MNEs expected to be in-scope for Amount A. Once these minimum conditions are met, the jurisdictions that have ratified will determine by agreement when the MLC will enter into force. Amount B is described as a simplified and streamlined approach to applying the arm's-length principle to baseline marketing and distribution activities, with a particular focus on the needs of low-capacity countries. The January 2025 Statement references the optional Amount B that was incorporated in the OECD TPG in February 2024 and indicates that discussions have continued on a framework under which jurisdictions that become parties to the Amount A MLC will be required to apply Amount B to local taxpayers performing in-scope services where the transaction is covered by an income tax treaty in force with another Inclusive Framework jurisdiction that is also a party to the MLC. Under this Amount B Framework, jurisdictions would also be required to respect outcomes determined under Amount B when applied by other parties to the MLC with which an income tax treaty is in force. The Statement indicates that some Inclusive Framework members take the position that this Amount B Framework is an essential part of the Pillar One package. The January 2025 Statement notes that substantial work has been done on the parameters for the Amount B framework, but identifies the following outstanding issues remaining among some jurisdictions:
According to the January 2025 Statement, the discussions of the first three issues above are well-advanced. On the fourth issue, various solutions have been proposed, but no approach that has the support of all Inclusive Framework members has been found yet. The January 2025 Statement concludes by reiterating the Inclusive Framework Co-chairs' continued commitment to working to address the remaining issues related to the Amount B framework to secure agreement on the Pillar One package and ensuring that the Inclusive Framework is prepared to support swift implementation once agreement is reached. Businesses should pay attention to any further developments with respect to the Amount A MLC. In addition, they should monitor developments with respect to jurisdictions unilaterally applying concepts developed in connection with the design of Amount A by jurisdictions outside the context of the Amount A MLC. Unlike Amount A, jurisdictions can choose to apply Amount B now and there is no revenue threshold limiting the businesses that could be in scope of Amount B. It is important for companies to assess how the jurisdictions that are relevant to their operations choose to react to the implementation of Amount B and how this may impact the pricing of in-scope transactions. Companies should also continue to monitor further developments in the Inclusive Framework discussions regarding a mandatory Amount B. Certain governments (in particular, the United States, Ireland, the Netherlands and the United Kingdom) have announced a range of actions in respect of Amount B. Because there are significant hurdles to entry into force of the MLC, such as necessary but unlikely US signature and ratification, companies should also monitor developments with respect to jurisdictions adopting or expanding DSTs and similar measures. Actions that governments might take in the absence of an Amount A MLC are varied, including adoption of digital sales taxes or "significant economic presence" concepts to expand the ambit of source taxation in a jurisdiction. Companies should also monitor the growing number of unilateral changes to transfer pricing regulations, penalty regimes and enforcement efforts in market jurisdictions (such as recent developments in France and the United Kingdom, for example). Companies may also want to follow ongoing developments in the United Nations (UN) regarding market taxation of global business profits, following the December 2024 UN General Assembly's adoption of the Terms of Reference for a UN Framework Convention on International Tax Cooperation and two early protocols. Document ID: 2025-0246 | ||