OECD launches public consultation on Pillar One draft model rules on revenue sourcing and nexus

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

On February 4, 2022, the OECD released draft model rules with respect to nexus and revenue sourcing under Amount A of Pillar One. As part of the ongoing work of the OECD/G20 Inclusive Framework on BEPS to implement the two-pillar solution to address the tax challenges arising from the digitalisation of the economy, the OECD is seeking public comments on these draft rules and has invited interested parties to send their written comments no later than February 18, 2022.

Amount A of Pillar One has been developed as part of the solution for addressing tax challenges emanating from the digital economy. It introduces a new taxing right over a portion of the profit of large and highly profitable enterprises for jurisdictions in which goods or services are supplied or consumers are located.

Model rules

The rules are yet to be finalized and they are being developed to provide a template that jurisdictions could use as the basis to give effect to the new taxing rights over Amount A in their domestic legislation. Jurisdictions will be free to adapt these model rules to reflect their own constitutional law, legal systems, and domestic considerations and practices for structure and wording of legislation as required, while ensuring implementation is consistent in substance with the agreed technical provisions governing the application of the new taxing rights.

Nexus test

The nexus rule applies solely to determine whether a jurisdiction qualifies for profit reallocation under Amount A. To satisfy the nexus test for Amount A in a jurisdiction, a multinational entity will have to apply the revenue sourcing rules, which identify the jurisdiction in which revenue arises for purposes of Amount A. The nexus threshold will be EUR 1 million for jurisdictions with annual gross domestic product equal to or greater than EUR 40 billion and EUR 250,000 for jurisdictions with annual GDP of less than EUR 40 billion.

Revenue sourcing

These rules identify the jurisdiction in which revenue arises for the purposes of Amount A. It does this by identifying the market jurisdiction for a given type of revenue (finished goods, components, services, intangible property, real property, government grants, and non-customer revenues). Revenues must be sourced on a transaction-by-transaction basis.

Pillar 2 and Amount B of Pillar 1

For Amount B of Pillar One, a public consultation document will be issued in mid-2022, with a public consultation event to follow the comment period and for the subject to tax rule (STTR) of Pillar Two, the draft model provision and its commentary will be released in March 2022 with a defined set of questions set for input. A public discussion draft on the development of a multilateral instrument to facilitate the implementation of the STTR also would be released for comment at the same time.

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