International - OECD issues progress report on Two-Pillar plan

The OECD on July 12 released a progress report on its two-pillar tax reform program. The outcome statement, approved by 138 members of the 143 members of the Inclusive Framework on Base Erosion and Profit Shifting at its July 10-12 meeting, states that the group has delivered the text of a multilateral convention (MLC) that would allow signatories to exercise a domestic taxing right known as Amount A of Pillar One.

The outcome statement summarises the Inclusive Framework’s progress in tackling the remaining elements of the two‐pillar solution to address the tax challenges arising from the digitalisation of the economy that was originally agreed to in October 2021.

Digital services taxes

The statement also revealed that 138 jurisdictions in the Inclusive Framework agreed to extend the moratorium on imposing or collecting digital services taxes or similar measures before December 31, 2024, or the entry into force of the MLC, if earlier. This agreement extends the original moratorium on DSTs that had been previously set to expire on December 31, 2023. However, three countries -- Canada, Pakistan and Sri Lanka -- did not support the extension, and two additional countries, Belarus and Russia, have been suspended from participation in OECD bodies because of the invasion of Ukraine.

The extended freeze on digital services taxes is subject to the requirement that at least 30 jurisdictions accounting for at least 60% of the ultimate parent entities (UPEs) of Pillar One in-scope MNEs sign the MLC before the end of 2023.

Amount B

The outcome statement announced that the Inclusive Framework has reached consensus on many aspects of Amount B of Pillar One, which provides a framework for the simplified and streamlined application of the arm’s length principle to in-country baseline marketing and distribution activities. However, work continues in the following areas:

  • Ensuring an appropriate balance between a quantitative and qualitative approach in identifying baseline distribution activities; and
  • The appropriateness of
    • The pricing framework, including in light of the final agreement on scope;
    • The application of the framework to the wholesale distribution of digital goods;
    • Country uplifts within geographic markets; and
  • The criteria to apply Amount B utilizing a local database in certain jurisdictions.

Next steps

To continue the work on Amount B, the OECD plans to launch a second consultation next week that will be open for comments through September 1. The Inclusive Framework plans to approve a final report on Amount B and incorporate key content into the OECD transfer pricing guidelines by January 2024.

Technical work will also continue so that the MLC can be opened for signature in the second half of 2023.

Laurie Dicker
BDO in United States

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