Two consultations were launched by the Organisation for Economic Co-operation and Development (OECD) in April. Each forms part of the ‘pillar 1’ aspect of the proposals for global tax reform, first announced in Summer 2021 and subsequently agreed by 137 members of the OECD, designed to address challenges arising from the digitalisation of the economy. The current tax rules have been dismissed as no longer being fit for purpose, in particular in a world where business is increasingly digitalised such that it is no longer necessary for multinationals to have a physical presence in the jurisdictions in which they do business.

By way of recap, pilar 1 concerns the reform of the international tax regime so that certain multinational companies will be required to pay tax where they do business3.

Pillar 1 ‘scope’ consultation

The first consultation, launched on 4 April 2022, seeks views on draft rules that specify the groups and entities within the scope of the new jurisdictional taxing right that lies at the heart of the pillar 1 proposals. Broadly, the draft rules are aimed at capturing only the largest and most profitable businesses. Under the proposals, global firms with at least:

  •  a 10% profit margin, and 
  • total revenues above EUR20bn

would have 20% of any profit above the 10% margin reallocated and subjected to tax in the countries in which they operate. 

The draft rules provide that the 10% profit threshold would need to be met (i) in the period of assessment, (ii) in 2 of the 4 previous periods, and (iii) on average across all 5 periods.

Whether the EUR20bn test should also be subject to equivalent past period and average tests (rather than just for the period of assessment) remains an open issue – views are specifically sought on this. Also an open item is whether these tests should be a permanent feature of the scope rules or, in the alternative, as an entry test (so that once a group first becomes subject to the new rules it remains so as long as the profit margin and revenue thresholds are met in respect of the period of assessment only).

The draft rules also include an anti-abuse provision to deter the artificial fragmentation of groups with a view to falling outside the new rules.

The consultation can be viewed here.