OECD releases draft Pillar One model rules, opens public consultation

The OECD has released draft model rules for Pillar One of the new global tax rules, specifically the so-called nexus and revenue sourcing for Amount A. The rules are open to public consultation.

The OECD’s tax rules say that very large companies will have to pay taxes on 25% of the profit they make above a 10% threshold of revenue (this is called Amount A), and will need to pay it in those countries where they are the most economically active. Countries will therefore have the right to pocket some of the taxes (on Amount A) based on a complex formula for claiming it, and tied to economic activity and the country’s own GDP (the nexus rule).

Consultations close on 18 February 2022.

The implementation of Pillar Two is ahead of Pillar One; the OECD released the model rules for Pillar Two in December 2021.

EU Finance Ministers skeptical of Pillar Two implementation timing

The EU’s plans to swiftly adopt the new tax directive, proposed in December 2021, to implement part of the OECD’s global tax rules was met with skepticism from Estonia, Poland, Hungary, Lithuania, and Malta.

Speaking during an Economic and Financial Affairs Council (ECOFIN) meeting, the foreign ministers of the four countries expressed concerns with the process and speed for adopting the directive, even though they showed support for the global minimum tax rules:

  • Hungary and Poland said that the implementation of Pillar One and Pillar Two has to be done in parallel; otherwise, the EU loses leverage in negotiations with third countries over Pillar One.
  • Malta said it had concerns of its own, which so far went unanswered.
  • Estonia said it had issues with the mandatory application of the rules for national companies (which it said was not part of the deal; with the progress with Pillar One (which it also thinks should be implemented with Pillar Two); with other technical matters.

The OECD’s new global tax rules are composed of two Pillars:

  • Pillar One establishes new rules for the allocation of profits
  • Pillar Two ensures that companies pay a minimum level of corporate tax on foreign income

EU issues draft directive to implement Pillar Two of OECD’s global tax rules 

The European Commission has proposed a directive to implement the OECD’s new global tax rules, including the 15% minimum tax rate for corporations. The directive ‘reflects the global OECD agreement, with some necessary adjustments, to guarantee conformity with EU law’, the text states.

The proposal is based on the OECD’s Model Rules, released in December 2021, for the introduction of Global anti-Base Erosion (GloBE) rules into national domestic tax laws, as part of the OECD’s Two-Pillar solution. Domestic laws need to be operational by 1 January 2023.

Tax rules in the EU must be agreed to unanimously. Some countries, however, have already expressed concern that the timeline to implement the rules is too short.

OECD releases Pillar Two model rules

The OECD has released the Pillar Two Model Rules (explained also in a nutshell by the OECD), which provide a template for jurisdictions to translate the Pillar Two rules into domestic law in a coordinated and timely way.   

The OECD’s Two-Pillar Solution, agreed to in July 2021 by over 131 countries, addresses the global taxation issues arising from the digitalisation of the economy. The finalised framework, including details on how to implement the rules, was agreed to in October 2021.

Pillar Two consists of two rules intended for introduction in national domestic tax laws – together known as the Global anti-Base Erosion (GloBE) rules – as well as a treaty-based rule. The OECD Model Rules contain provisions in respect of the GloBE Model Rules only.

Canada proposes digital tax (if OECD rules not yet in place)

Canada’s Finance Minister Chrystia Freeland has proposed a digital tax: if enacted, the draft law would impose a 3% digital sales tax as of 1 January 2024, on revenues earned from 2022 onwards, but only if the OECD global tax rules are not yet in force by that time.

In the statement, the spokesperson of the Office of the United States Trade Representative (USTR), Adam Hodge, said that Canada’s proposed tax rules ‘would create the possibility of significant retroactive tax liabilities with immediate consequences for US companies. If Canada adopts a DST, USTR would examine all options, including under our trade agreements and domestic statutes.’