OECD publishes Amount A Multilateral Convention

The OECD has published the text of a Multilateral Convention to give effect to the Amount A aspects of Pillar One. Amount A is designed to reallocate taxing rights to market jurisdictions in relation to a share of the profits of the largest MNEs, regardless of their physical presence. The complexity and scope of the challenge is highlighted, however, by the fact that the Multilateral Convention (MLC) runs to over 200 pages and has Explanatory Notes which run to over 600 pages.

Nevertheless, the publication of the MLC represents significant progress towards practical implementation of the Pillar One agreement. Despite this, there remain different views on a number of specific items by a number of jurisdictions and which are noted in footnotes and challenges as to its implementation remain.

Background

Following several years of discussions at the OECD concerning fundamental changes to the international tax landscape to deal with problems created by the digital economy, political agreement was reached in June 2021 on a two pillar approach, involving: revised profit allocation and nexus rules (Pillar One); and a global anti-base erosion proposal for a minimum level of taxation (Pillar Two).

The Pillar One rules will apply to multinational enterprises (MNEs) with global turnover above €20bn and profitability (profits before tax) above 10%. Regulated financial services will be excluded, as will extractives. Amount A of Pillar One has been developed to provide jurisdictions in which consumers and users are located (market jurisdictions) a new taxing right over a portion of the residual profits of these largest and most profitable MNEs. Very broadly, it reallocates 25% of the MNE's profits in excess of 10% of its revenues to market jurisdictions in which the MNE satisfies the quantitative nexus test. These profits will be allocated in proportion to the amount of revenues the MNE derives from those jurisdictions as determined by revenue sourcing rules. This allocation is adjusted or eliminated to the extent that the market jurisdiction already taxes the excess profit of the MNE outside the MLC and comes with a corresponding obligation on a jurisdiction to grant relief for double taxation.

The ambition is that the revenue threshold for Amount A will fall to €10bn, contingent on successful implementation determined by a 7-year review of the operation of Pillar One.

Because Amount A rules will apply as an overlay to the existing profit allocation rules, it requires implementation via treaty provisions which allocate taxing rights and prevent double taxation. Following a consultation in December 2022, the OECD has now published the Multilateral Convention (MLC) based on the current consensus amongst members of the Inclusive Framework.  

The Multilateral Convention

The MLC consists of 7 parts, 53 Articles, and 9 Annexes, running to over 200 pages. To clarify the approach taken in each provision of the MLC, an Explanatory Statement (running to over 600 pages) and an Understanding on the Application of Certainty provide further details.

One of the most important aspects of the MLC is that it includes provisions to provide MNEs with access to a binding multilateral certainty over whether they are within the MLC's scope and on their application of the MLC's provisions. There is also a tax certainty process (including mandatory and binding dispute resolution) for certain disputes on existing tax rules, to the extent that they relate to Amount A.

The Amount A Tax Certainty Framework contains three mechanisms to provide certainty over all aspects of Amount A. In each case, outstanding disagreements will be referred to a determination panel for a final resolution. This is designed to ensure that any MNE that submits a request for certainty obtains a binding certainty outcome unless it is considered to have withdrawn that request, or it is persistently late in providing information without explanation or acts in an uncooperative or non-transparent manner.

Since Amount A will co-exist with the existing international tax rules, the MLC goes beyond the tax certainty framework for Amount A and provides in-scope MNEs with an enhanced tax certainty process for a broad range of disputes on existing tax treaty rules (especially transfer pricing and business profit attribution disputes that potentially affect Amount A calculations), termed "Related Issues". This is delivered through a mandatory binding dispute resolution (MBDR) process for any "Related Issues" that are unresolved in a Mutual Agreement Procedure (MAP). This framework is designed to create clear incentives for dispute prevention approaches while also guaranteeing that double taxation is eventually avoided, where dispute resolution becomes necessary.

Existing bilateral tax treaties between parties to the MLC will continue to apply, but will be superseded by the MLC to the extent needed to permit the application of Amount A. Tax treaties with jurisdictions which are not parties to the MLC will not be affected.

In addition to containing the provisions for implementing Amount A, the MLC will require all parties to remove all Digital Services Taxes and other relevant similar measures, and to commit not to introduce such measures in the future (whether or not on entities within the scope of Amount A). A list of existing measures which must be removed is in Annex A of the MLC.

The MLC requires ratification by at least 30 States accounting for at least 60% of the ultimate parent entities of MNEs initially expected to be in-scope for Amount A. Once these minimum conditions are met, the States that have ratified can decide when the MLC will enter into force.