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Tax
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(ii) a fixed return for defined ‘baseline marketing and distribution functions’ (Amount B);
(iii) processes to improve tax certainty through effective dispute prevention and resolution mechanisms.
(i) Amount A
The OECD Blueprint identified two main groups of businesses which can participate in an ‘active and sustained’ manner in the economy of a market jurisdiction, irrespective of local physical operational presence – these two groups would be in scope of Amount A.
1. Automated digital services (ADS): these businesses generate income from remote services to a global customer base. The Blueprint on Pillar One sets out an indicative non-exhaustive list of in-scope services, which includes but is not limited to online advertising services, digital content services, online gaming and cloud computing services.
2. Consumer-facing businesses (CFB): these businesses (including those operating through third-party intermediaries) generate revenue from the sale of good/services commonly sold to individual consumers and/or businesses that license or otherwise exploit intangible property connected to such goods/services.
A jurisdiction will be entitled to an allocation of Amount A if either an ADS or CFB nexus exists in that jurisdiction.
Some activities however are excluded in
the Blueprint and therefore, if agreed, would fall out of scope of Amount A, including but not limited to certain natural resources, certain financial services and the construction, sale and leasing of residential property. There are also thresholds (the quantum of which is yet to be confirmed) applicable to multinational groups for Amount A to apply. It remains to be seen whether the Blueprint scope, which has been difficult to define and agree, is ultimately agreed by governments. The US Administration, in particular, is keen for the scope to be less targeted to types of activity and instead focussed on revenues and profitability of a smaller number of the very largest global multinationals.
The Blueprint sets out detailed rules on revenue sourcing to market jurisdictions and tax base determination.
(ii) Amount B
Amount B seeks to standardise the remuneration of related party distributors that perform ‘baseline marketing and distribution activities’ to simplify transfer pricing administration. Amount B potentially applies to all business sectors and is not subject to scope limitations. A fixed return commensurate with the arm’s length principle is proposed, the quantum of which is likely to be based on a comparable company benchmarking analysis.
For administrative ease and to limit disputes of what is in scope of Amount B, the
Blueprint assumes that Amount B would apply to a number of in-scope activities as defined in a ‘positive list’ of typical functions performed, assets owned and risks assumed.
(iii) Tax certainty
For the purpose of increasing tax certainty for businesses and tax authorities, several measures are proposed. For Amount A, a binding dispute prevention process would be made available to businesses – this process will include a review panel as well as a determination panel to provide mandatory and binding outcomes.
Rules in respect of Amount B will be designed to limit potential for disputes, nevertheless mandatory binding dispute resolution mechanism will be available.
Conclusion
World economies are becoming ever more digitalised and businesses continue to transcend international borders. Accordingly, the proposals in respect of Pillar One heralds significant changes to the global tax landscape and its effects are expected to be far reaching. It is therefore important for businesses to monitor these developments to assess the potential impact of these proposals.
Whilst the Blueprints have been subjected to a public consultation process, there continues to be areas where the Inclusive Framework countries are not yet aligned, and substantial continued efforts are envisaged for a high level agreement to be reached in 2021.
In the absence of consensus, countries may still introduce elements of the OECD Pillars into domestic legislation, which, in the absence of a treaty between relevant jurisdictions, could result in a rise in double taxation and additional administrative burdens for tax authorities globally.
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