The Chinese version of “Pillar One Amount A: Tax Base Determination Legislative Template Public Discussion Draft”
After years of intensive negotiations to update and fundamentally reform international tax rules, 137 jurisdictions within the G20/OECD Inclusive Framework for Base Erosion and Profit Shifting (the “Inclusive Framework”) have reached consensus on the reform of the international tax system. In October 2021, the “Statement on the “Dual Pillar” Plan to Address the Tax Challenges of the Digital Economy” (hereinafter referred to as the “Statement”) was issued. The statement sets out the political agreement on key components of Pillars 1 and 2.
As part of our solution to the tax challenge of digitizing the economy, we have developed Amount A for Pillar One. It introduces a new taxing power on part of the profits of large, high-margin businesses (the “Applicable Groups”) that sell goods or provide services or are located in the location of consumers (the “Market Jurisdiction”).
The Inclusive Framework has empowered its subsidiary body, the Task Force on the Digital Economy (TFDE), to advance the work needed to implement Amount. In particular, TFDE is responsible for the development of the Multilateral Convention (MLC) and its interpretative declarations, as well as a model of domestic legislative rules implementing Amount A (hereinafter referred to as the “Legislative Template”) and related annotations.
The legislative template, once finalized, will reflect the substantive agreement reached by members of the Inclusive Framework on the operation of Amount A and will serve as the basis for inclusion in the substantive provisions of the MLC. A legislative template is being developed to provide a template upon which jurisdictions can implement the new taxing power on Amount A in their domestic legislation, and the legislative template will be annotated accordingly. Jurisdictions are free to adapt this legislative template as needed to reflect their own constitutions, legal systems, and domestic considerations and practices in legislative structure and wording, while ensuring that their implementation is substantially consistent with the agreed technical provisions applying the new taxing powers. The legislative templates will cover all aspects of conversion into domestic law amount A, and they will be composed of different headings. This document contains the Tax Basis Determination Section (currently Title 5) and the relevant definitions referenced in the Tax Basis Determination Section (currently Title 9).
Tax Base Determination Legislative Template
This document contains a draft legislative template for tax base determination, which will be included in Title 5 of the above-mentioned legislative template. It also contains the relevant definitions (currently Title 9) referenced in the Tax Basis Determination chapter. Legislative templates and associated definitions for tax base determination will be translated into MLCs and interpretative declarations. The Tax Basis Determination Legislative Template is designed to determine the profit (or loss) of the applicable group that will be used to calculate the amount by which a portion of its profit will be reallocated to market jurisdictions. Thus, the tax base is a measure of profit and forms the basis for a partial redistribution of profits under Amount Rule A. This approach also has the advantage that Amount A’s tax base is less affected by controlled transactions. The draft legislative template in this document does not include the tax base rules required to subdivide the business of the applicable group segment for Amount A, which will be published at a later date. Under the legislative template, the applicable group will be required to calculate its profits using qualified financial accounting principles (as defined in the legislative template) to ensure that profits used for Amount A purposes are not affected by accounting practices that are not in line with normal practice. Given that the scope of Amount A covers only a limited number of large, high-margin businesses, it is expected that most such applicable groups currently use this standard to prepare financial accounts for commercial or regulatory purposes. In addition, the applicable group’s financial accounts must be externally audited, thereby providing tax authorities with a readily available and reliable source of information. Subject to the stated exceptions, all items in the consolidated income statement will be considered to determine the tax base of the applicable group. This means that the calculation of the Amount A tax base will start from the bottom line figure of the income statement (i.e. the total profit and loss). From this point, certain accounts are subject to tax adjustments (such as the deduction of certain income items and the addition of certain expenses) to obtain a normalized adjusted pre-tax profit. The adjustments adopted reflect situations in which the objective of the accounting standard and Amount A may differ in some respects, including situations in which adjustments are required to prevent potential double counting of revenue or to prevent deductions of certain expenses for policy reasons. To facilitate tax administration and applicable group compliance, these adjustments will be kept to a minimum to limit complexity and, where possible, consistent with adjustments under Pillar II. The tax base is also restated based on prior period profits (or losses). Subject to certain restrictions, restatement adjustments to accounting rules are required to be attributable to the restatement of the applicable group’s tax base for the determination and recognition period, rather than retrospective and recalculation of the tax base for previously ended periods. This is expected to be consistent with the approach taken for the other elements of the Amount A calculation. In order to limit any redistribution under Amount A to economic profit, the determination of the tax base is also subject to loss carry-forward rules. These rules require that unrecovered losses incurred by the applicable group in prior periods (“net losses”) are carried forward under a “profit” mechanism and set off against any subsequent profits of the group. Specific rules apply in many situations, such as (a) pre-implementation losses (i.e. net losses incurred before the introduction of amount A), and (b) losses transferred after a particular type of business restructuring. The base setting legislative template also considers the introduction of a time limit for net losses, although this is still under discussion within the TFDE.
Public Consultation Instructions
This is a working paper published by the OECD Secretariat for stakeholder input and does not reflect the final views of Inclusive Framework members. This working paper presents the work undertaken to date, which has reached a level of detail and stability that is now appropriate for public comment. TFDE agreed that the working version could be released without prejudice to the final agreement. Therefore, while these rules are intended to illustrate the framework for tax base determination and the ongoing approach to many of the rules, further revisions may be made. Once the scope of exclusions for regulated financial services and extractive industries is agreed, further changes may be required to ensure that the tax base determination rules appropriately address the specificities of certain unregulated financial services. Therefore, the publication of this document reflects the consensus within TFDE on procedural issues that public comments should be sought at this time, but does not reflect the consensus within TFDE on the substance of the document. Comments are sought on the legislative template for tax base determination in this document. If possible, the feedback should indicate the relevant section covered by the rule. While comments can be made on any aspect of the rule, feedback will be most helpful if it can explain further guidance needed to apply the rule to a particular business type situation, as well as whether there is something missing or incomplete in the rule.
Interested parties are invited to provide feedback on this Discussion Draft by March 4, 2022. This feedback will be reviewed at the next meeting of the TFDE. Feedback on this Discussion Draft should be emailed electronically (Word format) to firstname.lastname@example.org and may be sent to: OECD/CTPA Tax Treaties, Transfer Pricing and Financial Transactions Department. Feedback submitted in response to this invitation will be posted on the OECD website unless otherwise requested at the time of submission. Comments submitted on behalf of a collective “group” or “coalition”, or by anyone submitting comments on behalf of another person or group, should identify all businesses or individuals that belong to that collective group, or whom the commenter represents.