OECD launches public consultation on Pillar One draft model rules for tax base determination

By Nyasha Nigel Machiri, Senior Manager, HLB Zambia, Lusaka

Following the public consultation regarding draft model rules on revenue sourcing and nexus, the OECD on February 18 released draft model rules for tax base determinations under Amount A of Pillar One. The OECD is seeking public comments on these draft rules and has invited interested parties to send their written responses no later than March 4. Comments on this discussion draft should be sent electronically (in Word format) by email to: [email protected].

The purpose of the tax base determinations rules is to establish the profit (or loss) of an in-scope MNE that will be used for the Amount A calculations to reallocate a portion of its profits to market jurisdictions. The rules determine that profit (or loss) will be calculated on the basis of the consolidated group financial accounts instead of a separate entity basis, while making a limited number of adjustments.

Model rules on tax base determination

The model rules on tax base are designed to calculate the profit (or loss) of a covered group (large and highly profitable enterprises) that will be used for Amount A calculation purposes. The tax base is, therefore, the measure of profit that forms the basis for partial reallocation under Amount A rules.

Under the model rules, covered groups would be required to calculate their profits using qualifying financial accounting standards to ensure that the profit that is applied for Amount A purposes is not impacted by accounting practices that do not align with common practice. The financial statements of covered groups would have to be liable to external audit.

Subject to specified exclusions, all items within the consolidated profit and loss statement will be taken into consideration to determine the tax base of the covered group. This means the computation of the Amount A tax base will start from the total profit or loss. From this point, certain book-to-tax adjustments will be made (such as the deduction of certain items of income and the adding back of certain expenses) to arrive at a standardized adjusted profit before tax figure. The adjustments will reflect instances where the goals of accounting standards and Amount A may differ.

Tax base also is subject to adjustment with respect to profit (or loss) restatements in relation to prior periods. Subject to certain limitations, restatements required under accounting rules are attributed to the tax base of the covered group in the period that the restatement is identified and recognized, rather than going back and recalculating tax base for prior closed periods. This is expected to be consistent with the approach taken in relation to other elements of the Amount A calculation.

• Nyasha Nigel Machiri is a senior manager at HLB Zambia in Lusaka.