Outcome statement from the OECD’s Inclusive Framework on BEPS

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An update was published by the OECD on 12 July 2023 in relation to the status of the BEPS 2.0 project following the conclusion of the 15th meeting of the OECD/G20 Inclusive Framework. With so much of the focus seemingly on Pillar Two over the last number of months, the Outcome Statement provides some important, albeit brief, updates in relation to Pillar One as well as the Subject to Tax Rule (STTR) from Pillar Two. We have summarized these below for reference: 

Pillar One – Amount A  

Text has been developed for the multilateral convention (“MLC”) on Pillar One’s Amount A. The objective of the MLC is to allow jurisdictions to exercise a domestic taxing right on a portion of residual profit of in scope MNE’s which have a defined nexus in the respective market jurisdictions, subject to the specified revenue and profitability thresholds. The MLC shall be accompanied by an Explanatory Statement setting out the common understanding and will include key features necessary for it to be prepared for signature including but not limited to:

  • Scope and operation of taxing right, 
  • Mechanism for relief of double taxation, 
  • Process for ensuring tax certainty, 
  • Conditions for the removal of existing DSTs. 

The Outcome Statement outlined that some jurisdictions have raised concerns about specific items in the MLC and efforts are underway to resolve these issues. According to the Outcome Statement, the MLC will be opened for signature in the second half of 2023 and a signing ceremony will be arranged by year-end. The objective is for the MLC to enter into force in 2025.

Additionally, the Outcome Statement announced that IF members have agreed to refrain from introducing new DSTs or similar measures during the period between 1 January 2024 and 31 December 2024. This agreement is subject to the condition that at least 30 jurisdictions accounting for at least 60% of the Ultimate Parent Entities of in-scope MNEs, sign the MLC before the end of 2023. IF members have agreed to extend this pause on DSTs to 31 December 2025 provided “sufficient” progress has been made. Sufficient has not been defined. 

Pillar One – Amount B

Amount B provides a framework for the simplified and streamlined application of the arm’s length principle to in-country baseline marketing and distribution activities. Consensus has been reached on many aspects of Amount B. However, further work will be undertaken on the following aspects: 

  • Ensuring an appropriate balance between a quantitative and qualitative approach in identifying baseline distribution activities; 
  • The appropriateness of: 
    • the pricing framework, including in light of the final agreement on scope, 
    • the application of the framework to the wholesale distribution of digital goods, 
    • country uplifts within geographic markets, and 
    • the criteria to apply Amount B utilising a local database in certain jurisdictions. 

A public consultation will be launched next week (17 July 2023) on these topics, with comments due to be submitted by 01 September 2023. Following this, a final report on Amount B will be published which will then be incorporated in the OECD TP Guidelines by January 2024. The report shall include critical items such as consideration for low-capacity jurisdictions as well as timelines for transitioning to Amount B for all jurisdictions.

Pillar Two – STTR

The OECD have completed work on both an STTR model provision and commentary as well as an MLI and Explanatory Statement to facilitate implementation. These documents will be released next week (17 July 2023) and the MLI will be open for signature from 02 October 2023. 

The STTR shall apply to certain intra-group payments (including interest and royalties) between jurisdictions where the recipient’s jurisdiction of residence imposes tax on such income at a nominal rate of below nine percent and the treaty limits the rate at which the source jurisdiction can tax such income. Subject to satisfying other conditions the STTR allows the source jurisdiction to tax the income at a rate up to the difference between nine percent and the rate imposed at the resident jurisdiction. The STTR is subject to certain exclusions, a materiality threshold, and a mark-up threshold, and is administered through an ex-post annualised charge. 

There should be a G20 meeting next week discussing the same topics, and providing further endorsement of the work so far. The Inclusive Framework meanwhile notes that over 50 jurisdictions have already taken steps towards the implementation of Pillar Two. 

Read our previous analysis on the impact of Pillar Two on the GCC here: https://aurifer.tax/pillar-two-and-the-gcc-important-consequences-for-tax-havens-and-exemptions-for-nationals/