The OECD/Group of 20 (G20) Inclusive Framework on Base Erosion and Profit Shifting (Inclusive Framework) released a multilateral convention (MLC) to implement Pillar One's Amount A, as well as a voluminous Explanatory Statement and other accompanying documents, on October 11, 2023. The goal of Pillar One's Amount A is to reallocate taxing rights to market jurisdictions over a portion of the excess profits of the largest and most profitable multinational enterprises (MNEs).

The MLC is not yet open for signature and cannot take effect until at least 30 jurisdictions, including the headquarters jurisdictions of at least 60 percent of MNEs currently expected to be in scope, have ratified the agreement. As a practical matter, the MLC cannot take effect without ratification by the U.S., which is home to more than 40 percent of in-scope MNEs. Treasury has requested public input on the MLC and accompanying documents by December 11, 2023.

The framework of the MLC consists of a five-step process. First, a group revenue and profitability test must be applied to determine whether the MNE is in scope. Amount A applies only to MNEs with annual revenues exceeding €20 billion and pre-tax profitability exceeding 10 percent of revenues. Second, the eligible market jurisdictions must be identified by using a sourced revenue-based nexus test. Third, 25 percent of profit in excess of 10 percent of revenue (Amount A) is calculated and apportioned to eligible market jurisdictions using a revenue-based allocation key. To prevent double counting, the allocated profit is adjusted downwards to account for excess profits already taxed in market jurisdictions on a net basis or through withholding taxes. Fourth, relief from double taxation of allocated profits is required to be provided by jurisdictions under a tiered approach, drawing profits first from jurisdictions with relatively high returns on depreciation and payroll. The fifth and final step is to file and pay the Amount A tax. Mechanisms are proposed with the objective of providing multilateral certainty to MNEs.

The MLC contains multiple footnotes denoting reservations lodged by Brazil, Colombia, and India. The vast majority of their contentions relate to the allocation of Amount A to market jurisdictions and the rules that limit double counting of income.

The MLC is intended to enhance the stability of the international tax system by providing market jurisdictions an alternative to digital services taxes (DSTs) and other gross-basis taxes. Inclusive Framework members generally have agreed to extend a moratorium on DSTs through the end of 2024 if at least 30 jurisdictions accounting for at least 60 percent of the headquarters jurisdictions of in-scope MNEs sign the MLC before the end of 2023. Treasury Secretary Janet Yellen has commented that the process is likely to run into 2024. Pillar One has been the subject of considerable criticism by members of Congress, which will have to approve any changes to U.S. law necessary to implement the MLC. Meanwhile, not all countries are holding to the current moratorium on DSTs (e.g., Canada). Finally, Treasury and the IRS have confirmed that DSTs are not creditable taxes under the U.S. foreign tax credit rules, meaning that U.S. MNEs paying DSTs will be subject to unrelieved double taxation. See Notice 2023-55; 2023-32 IRB 427 (July 21, 2023).

In-scope MNEs should review the MLC and accompanying documents and continue to monitor and engage in the policy discussions regarding Pillar One at the OECD as well as on a jurisdictional level. It is unusual for Treasury to request public comments on the work of the OECD. MNEs with concerns regarding the MLC should consider registering those concerns through the comment process to ensure appropriate consideration.

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