Our Global Tax Team has undertaken an in-depth analysis of the 'Blueprint' for the Pillar One proposal to provide a digestible summary of everything you need to know.
Introduction to Pillar One
The Report on the Pillar One Blueprint ("the Blueprint") regarding tax challenges arising from digitalisation was approved by the member jurisdictions of the OECD/G20 Inclusive Framework on BEPS on 12 October 2020. It reflects extensive technical work that has been done to define a sustainable taxation framework to reflect the increasingly digitalised economy. However, no agreement has been reached by the members at this point, and further significant work will be required to gain any consensus on many of the fundamental potential principles covered.
A public consultation was also announced based upon the Blueprint which will conclude on 14 December 2020. The stated aim is to then to bring the process of addressing issues and coming to a successful conclusion by mid-2021. This includes resolving technical issues, developing model draft legislation, guidelines, international rules and processes as necessary. Many would see this is an incredibly tight timeline given the complexities and issues still to be addressed. However, there is significant pressure to come to conclusions, as demonstrated by the European Commission's recent comments that the EU bloc will go it alone if the mid-2021 date is not met.
In summary, Pillar One seeks to expand the taxing rights of market/user jurisdictions where there is an "active and sustained participation of a business in the economy of that jurisdiction through activities in, or remotely directed at, that jurisdiction". It also seeks to improve tax certainty through dispute prevention and resolution measures. The three basic elements of Pillar One are a new taxing right for market/user jurisdictions based upon a share of a businesses' residual profits ("Amount A"), a fixed return for certain distribution and marketing activities physically in a market/user jurisdiction ("Amount B"), and dispute prevention and resolution processes to improve tax certainty.
Some of the particular issues that will need to be focused on at a political and technical level before Pillar One can be finalised and implemented include:
- what businesses should be in scope - the Blueprint proposes that certain automated digital services and consumer-facing businesses would be potentially impacted
- what size thresholds should businesses meet before they are impacted
- should Pillar One apply on a mandatory basis based upon activities tests, or should it be elective
- what portion of residual profit should be allocated to market/user jurisdictions as Amount A, and based upon what measures should it be calculated
- how to deal with businesses that have segments some of which are targeted by the new taxing rights, but other segments that are not
- how to eliminate double taxation in a multi-lateral setting
- how to take into account and simply deal with taxation of businesses that also have a physical or legal presence in market/user jurisdictions under Amount B
- how to achieve tax certainty over acceptance of Amount A in a simple and coordinated way
- how to implement the Pillar One solution, for example potentially through a multilateral convention process that would supersede all bilateral treaties on the points covered in the convention.
This client alert summarises how the Pillar One Blueprint currently proposes to deal with these issues, and highlights what still needs to be concluded.