The Pillar One revenue sourcing rules determine the revenue that would be treated as deriving from a particular market jurisdiction. The rules would be relevant in applying the scope rules, the nexus rules and the Amount A formula. The sourcing rules are reflective of particularities of Automated Digital Services (ADS) and Consumer Facing Businesses (CFB) and more broadly were designed to balance the need for accuracy with the ability of in-scope MNEs to comply, without incurring disproportionate compliance costs. This is proposed to be achieved through the articulation of sourcing principles, supported by a range of specific indicators, subject to a defined hierarchy (likely to be of particular importance in connection with third party distribution). This approach of providing a range of possible indicators within the hierarchy recognizes the different ways MNEs currently collect information in the context of their business model, while still providing certainty to MNEs and tax administrations that the defined set of acceptable specified indicators can be relied upon to provide acceptable outcomes.

To source the relevant in-scope revenue to a market jurisdiction, a sourcing principle would be identified for each type of in-scope revenue, accompanied by a list of acceptable specific indicators an MNE will use to apply the principle and identify the jurisdiction of source. For example, for the direct sale of consumer goods, the principle would be to source the revenue based on the jurisdiction of final delivery of the goods to the consumer, and the acceptable indicator would be the jurisdiction of the retail store front where the consumer good is sold or shipping address.

The acceptable indicators would be organized in a hierarchy. The MNE should generally use the indicator that is first in the hierarchy, as this will be the most accurate. However, an MNE may use an alternative indicator that appears second in the hierarchy, if the first indicator was not reasonably available or if the MNE can justify that the first indicator was unreliable, and so on with the remaining indicators. This approach is intended to ensure that there is sufficient flexibility to accommodate the different ways that MNEs collect information. Information would be considered unreliable if it is not within the MNE's possession, and reasonable steps have been taken to obtain it but have been unsuccessful. Information would be considered unreliable if the MNE can justify that the indicator is not a true representation of the principle in the source rule.

The MNE would need to justify and document its approach and include it in the standardized documentation package to be developed as part of the broader work on tax certainty. It is expected that an in-scope MNE would need to retain documentation describing the functioning of its internal control framework related to revenue sourcing, containing aggregate and periodic information on results of applying the indicators for each type of revenue and in each jurisdiction, and explaining the indicator used and, if relevant, why a secondary indicator was applied instead (such as the steps taken to obtain information or why a primary indicator was considered unreliable).

Revenue Sourcing Rules. An MNE must apply the revenue sourcing rules that are relevant to each type of revenue it generates. An MNE will apply the indicator that appears first in the hierarchy of indicators, unless this information is unavailable or unreliable as noted within each rule. Information is only considered unavailable if it is not within the MNE's possession, and reasonable steps have been taken to obtain the information but these have not been successful. Information is considered unreliable if the MNE can justify that the indicator is not a true representation of the principle in the source rule. If an indicator is unavailable or unreliable, the MNE should seek to apply the next indicator in the hierarchy. In the event that all of the indicators in the hierarchy are unavailable or unreliable, the MNE must apply the sourcing rule based on alternative available information and document the approach taken. An MNE must retain documentation set out in the rules.

With respect to ADS, the rules first set out a non-exhaustive, indicative list of the type of revenues that ADS businesses typically earn and the revenue sourcing rules they would apply for each separately identifiable revenue stream. Then it sets out the relevant indicator per type of revenue.

For some online advertising services, where the targeting of the advertisement is linked to the real-time location of the viewer, the sourcing rule is the jurisdiction of the real-time location of the viewer of the advertisement. The relevant indicators are (1) the jurisdiction of the geolocation of the device of the viewer at the time of the display; or (2) the jurisdiction of the IP address of the device of the viewer at the time of display; or (3) other available information that can be used to determine the jurisdiction of the real-time location of the viewer.

For other online advertising services, where the targeting of the advertisement is based on anything other than the real-time location of the viewer, the sourcing rule is the jurisdiction of the ordinary residence of the viewer of the advertisement. The first relevant indicator is the jurisdiction of the ordinary residence of the viewer, based on user profile information such as (1) information on residence obtained from recurring data on geolocation or IP address of the viewer's device; or (2) billing address of the viewer; or (3) mobile country code of the phone number of the viewer; or (4) information on residence inputted by the viewer; or (5) other available information that can be used to determine the jurisdiction of the ordinary residence of the viewer. The second relevant indicator is the jurisdiction of the geolocation of the device of the viewer at the time of display. The third relevant indicator is the jurisdiction of the IP address of the device of the viewer at the time of display.

For some sales or alienation of user data, where the data that is being transmitted reflects a dataset that is primarily about the real-time location of the user, the sourcing rule is the jurisdiction of the real-time location of the user that is the subject of the data being transmitted at the time the data was collected. The relevant indicators are (1) the jurisdiction of the geolocation of the device of the user at the time of collection; or (2) the jurisdiction of the IP address of the device of the user at the time of collection; or (3) other available information that can be used to determine the jurisdiction of the real-time location of the user.

For other sales or alienation of user data, where the data in question is about anything other than the real-time location of the user, the sourcing rule is the jurisdiction of the ordinary residence of the user that is the subject of the data being transmitted. The first relevant indicator is the jurisdiction of the ordinary residence of the user, based on user profile information such as (1) information on residence obtained from recurring data on geolocation or IP address of the user's device; or (2) billing address of the user; or (3) mobile country code of the phone number of the user; or (4) information on residence inputted by the user; or (5) other available information that can be used to determine the jurisdiction of the ordinary residence of the user. The second relevant indicator is the jurisdiction of the geolocation device of the user at the time of collection. The third relevant indicator is the IP address of the device of the user at the time of collection.

Revenue from online search engines generates revenue including (1) revenue from online advertising services; and (2) revenue from the sale or other alienation of user data.

Revenue from social media platforms generates revenue including (1) revenue from online advertising services; (2) revenue from the sale or other alienation of user data; and (3) revenue from digital content services.

Revenue from online intermediation platform services generates revenue including (1) revenue from online advertising services; (2) revenue from the sale or other alienation of user data; (3) revenue from online intermediation platform services; and (4) revenue from digital content services.

The rule on online intermediation platform services is designed according to the nature of the goods/services being intermediated, which may be intermediation of tangible goods, intermediation of tangible services and intermediation of intangible goods and services.

For intermediation of tangible goods, the revenue is sourced based on a 50:50 split between the purchaser and the seller. The sourcing rule with respect to the purchaser is the jurisdiction of the ordinary residence of the purchaser. The first relevant indicator is the jurisdiction of the delivery address of the purchaser. The second relevant indicator is billing address of the purchaser. The third relevant indicator is the ordinary residence of the purchaser based on user profile information such as (1) information on residence obtained from recurring data on geolocation or IP address of the purchaser's device; or (2) billing address of the purchaser; or (3) mobile country code of the phone number of the purchaser; or (4) information on residence inputted by the purchaser; or (5) other available information that can be used to determine the jurisdiction of the ordinary residence of the purchaser. The fourth relevant indicator is the jurisdiction of the geolocation device of the purchaser. The fifth relevant indicator is the jurisdiction of the IP address of the device purchaser. The sourcing rule with respect to the seller is the jurisdiction of the ordinary residence of the seller. The first relevant indicator is the jurisdiction of the principal place of business of the seller. The second relevant indicator is jurisdiction of the ordinary residence of the seller based on user profile information such as (1) information on residence obtained from recurring data on geolocation or IP address of the seller's device; or (2) billing address of the seller; or (3) mobile country code of the phone number of the seller; or (4) information on residence inputted by the seller; or (5) other available information that can be used to determine the jurisdiction of the ordinary residence of the seller.

For intermediation of tangible services, the revenue is sourced based on a 50:50 split between the purchaser and the seller. The sourcing rule with respect to the purchaser is the jurisdiction of the location of the purchaser at the time of purchase. The first relevant indicator is the jurisdiction of the geolocation of the device of the purchaser. The second relevant indicator is the jurisdiction of the delivery address of the purchaser. The third relevant indicator is the IP address of the device of the purchaser. The fourth relevant indicator is the jurisdiction of the ordinary residence of the purchaser based on user profile information such as (1) information on residence obtained from recurring data on geolocation or IP address of the purchaser's device; or (2) billing address of the purchaser; or (3) mobile country code of the phone number of the purchaser; or (4) information on residence inputted by the purchaser; or (5) other available information that can be used to determine the jurisdiction of the ordinary residence of the purchaser. The sourcing rule with respect to the seller is the jurisdiction where the services are performed. The first relevant indicator is the jurisdiction of the address/location where the service is performed. The second relevant indicator is ordinary residence of the seller based on user profile information such as (1) information on residence obtained from recurring data on geolocation or IP address of the seller's device; or (2) billing address of the seller; or (3) mobile country code of the phone number of the seller; or (4) information on residence inputted by the seller; or (5) other available information that can be used to determine the jurisdiction of the ordinary residence of the seller.

Revenue from intermediation of intangible goods/services is based on a 50:50 split between the purchaser and the seller. The sourcing rule with respect to the purchaser is the jurisdiction of the ordinary residence of the purchaser. The first relevant indicator is the jurisdiction of the ordinary residence of the purchaser based on user profile information such as (1) information on residence obtained from recurring data on geolocation or IP address of the purchaser's device; or (2) billing address of the purchaser; or (3) mobile country code of the phone number of the purchaser; or (4) information on residence inputted by the purchaser; or (5) other available information that can be used to determine the jurisdiction of the ordinary residence of the purchaser. The second relevant indicator is the jurisdiction of the billing address of the purchaser. The third relevant indicator is jurisdiction of the geolocation of the device of the purchaser. The fourth relevant indicator is the jurisdiction of the IP address of the device of the purchaser. The sourcing rule with respect to the seller is the ordinary jurisdiction of the seller. The first relevant indicator is the jurisdiction of the principal place of business of the seller. The second relevant indicator is ordinary residence of the seller based on user profile information such as (1) information on residence obtained from recurring data on geolocation or IP address of the seller's device; or (2) billing address of the seller; or (3) mobile country code of the phone number of the seller; or (4) information on residence inputted by the seller; or (5) other available information that can be used to determine the jurisdiction of the ordinary residence of the seller.

The sourcing rule for digital content services is the jurisdiction of the ordinary residence of the purchaser. The first relevant indicator is the jurisdiction of the ordinary residence based on user profile information such as (1) information on residence obtained from recurring data on geolocation or IP address of the purchaser's device; or (2) billing address of the purchaser; or (3) mobile country code of the phone number of the purchaser; or (4) information on residence inputted by the purchaser; or (5) other available information that can be used to determine the jurisdiction of the ordinary residence of the purchaser. The second relevant indicator is the jurisdiction of the billing address of the purchaser. The third relevant indicator is jurisdiction of the geolocation of the device of the purchaser. The fourth relevant indicator is the jurisdiction of the IP address of the device of the purchaser.

The ADS business of online gaming services generates revenue including (1) revenue from online advertising services; (2) revenue from the sale or other alienation of user data; and (3) revenue from digital content services.

The ADS business of standardized online teaching services generates revenue including (1) revenue from online advertising services; (2) revenue from the sale or other alienation of user data; and (3) revenue from digital content services.

The ADS business of cloud computing services generates revenue including (1) revenue from online advertising services; and (2) revenue from cloud computing services. The sourcing rule for cloud computing is designed according to the nature of the customer, which may be an individual or a business. The sourcing rule for cloud computing services sold to an individual customer is the jurisdiction of the ordinary residence of the purchaser. The first relevant indicator is the jurisdiction of the ordinary residence of the purchaser based on profile information such as (1) information on residence obtained from recurring data on geolocation or IP address of the purchaser's device; or (2) billing address of the purchaser; or (3) mobile country code of the phone number of the purchaser; or (4) information on residence inputted by the purchaser; or (5) other available information that can be used to determine the jurisdiction of the ordinary residence of the purchaser. The second relevant indicator is the billing address of the purchaser. The third relevant indicator is the jurisdiction of the geolocation of the device of the purchaser. The fourth relevant indicator is the IP address of the device of the purchaser. The sourcing rule for a service intended for internal use by a business customer is the jurisdiction of the location where the business uses the service. The relevant indicators are (1) the jurisdiction(s) of the business' employees benefiting from the service as reported to the cloud computing service provided by the customer; (2) the jurisdiction(s) in which the business has operations, determined by the offices and address details contained in the business agreement and/or records collected for tax purposes; or (3) other available information that can be used to determine the jurisdiction of the location of the business' employees that use the service.

With respect to CFB, the rules again set out a non-exhaustive, indicative list of the type of revenues that CFB businesses typically earn and the revenue sourcing rules they would apply for each separately identifiable revenue stream. Then it sets out the relevant indicator per type of revenue.

The sourcing rule for revenue from consumer-facing goods sold directly to consumer is the jurisdiction of the place of final delivery of the good to the consumer. The relevant indicators are (1) the jurisdiction of the retail storefront directly selling to consumers; or (2) the jurisdiction of the final delivery address of the goods to the consumer.

The sourcing rule for revenue from consumer-facing goods sold through independent distributors is the jurisdiction of the place of final delivery of the goods to the consumer as reported by the independent distributor. The relevant indicators are (1) the jurisdiction of the place of final delivery to the consumer as reported by the independent distributor based upon either the jurisdiction of the retail storefront directly selling to consumers or the jurisdiction of the final delivery address of the goods to the consumer; or (2) the jurisdiction of the place of final delivery of the good to the consumer as indicated by other information already available to the MNE.

The sourcing rule for revenue from consumer-facing services is the jurisdiction of the place of enjoyment or use of the service. For services delivered in person, the relevant indicator is the jurisdiction of the address where the service is performed. For services delivered online, the first relevant indicator is the jurisdiction of the ordinary residence of the purchaser based on user profile information such as (1) information on residence obtained from recurring data on geolocation or IP address of the purchaser's device; or (2) billing address of the purchaser; or (3) mobile country code of the phone number of the purchaser; or (4) information on residence inputted by the purchaser; or (5) other available information that can be used to determine the jurisdiction of the ordinary residence of the purchaser. The second relevant indicator is the jurisdiction of the billing address of the purchaser. The third relevant indicator is the jurisdiction of the geolocation of the device of the purchaser. The fourth relevant indicator is the jurisdiction of the IP address of the device of the purchase.

The sourcing rule for franchising and licensing of consumer-facing goods or an intangible that is attached to goods is the jurisdiction of the place of final delivery of the good to the consumer. The first relevant indicator is the jurisdiction of the place of delivery or enjoyment as reported by the franchisee based on (1) the jurisdiction of the retail storefront directly selling to consumers; or (2) the jurisdiction of the final delivery address of the goods. The second relevant indicator is the jurisdiction of the place of final delivery of the good to the consumer as indicated by other information already available to the franchisor/licensor.

The sourcing rule for revenue from franchising or licensing of consumer-facing services or licensing an intangible that is used to support the provision of a service to consumers is the jurisdiction of the place of enjoyment or use of the service. The relevant indicators are (1) the jurisdiction of the place of delivery or enjoyment of the service as reported by the franchisee or licensee, based upon the jurisdiction of the address where the service is performed; or (2) the jurisdiction of the place of enjoyment or use of the service as indicated by other information already available to the franchisor/licensor.

Documentation. The MNE must retain documentation explaining (1) the functioning of its internal control framework related to revenue sourcing; (2) aggregate and periodic information on results of applying the indicators, for each type of revenue and in each jurisdiction; (3) the specific indicator used for a given category of revenue; and (4) the circumstances when an indicator lower in the hierarchy was used, including why the indicator higher in the hierarchy was not available or not reliable.

Originally Published by Mayer Brown, February 2021

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