NASSCOM feedback to OECD on Draft Model Rules for Tax Base Determination under Pillar One.

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NASSCOM feedback to OECD on Draft Model Rules for Tax Base Determination under Pillar One.

Jayakumar Selvaraj

@Jayakumar

March 7, 2022

Public Policy

236

On 18^th Feb 2022, the Organisation for Economic Co-operation and Development (OECD) has released a public consultation document consisting of Draft Model Rules for Tax Base Determination under Pillar One.

To provide soe context, Amount A of Pillar One has been developed as part of the solution for addressing the tax challenges arising from the digitalisation of the economy. It introduces a new taxing right over a portion of the profit of large and highly profitable enterprises (Covered Groups) for jurisdictions in which goods or services are supplied or consumers are located (market jurisdictions).

The Model Rules on Tax Base are designed to calculate the profit (or loss) of a Covered Group 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.

The last date to respond to OECD was March 4, 2022.

Based on discussion with industry, we provided our below feedback. Key suggestions captured below.

As anticipated, the draft Rules measure relevant profit and loss using the consolidated financial statements of the ultimate parent entity, with minimal adjustments to account for book-to-tax differences and restatements. There are still a few unresolved issues and policy decisions that will need to be addressed as noted by footnotes throughout the consultation paper. We requested that an opportunity be provided to stakeholders to provide inputs on unresolved issues / policy decisions/component which will be clarified in commentary once consensus has been reached at TFDE.

Article 5(2)(a)(iv) of the Consultation Paper seeks to reverse Policy Disallowed Expenses under Book to tax adjustments. In this regard, Footnote 4 provides that “commentaries will elaborate on the practical applications of the exclusion of policy disallowed expenses. It further states that such items are excluded as it related to behaviours that government regard as undesirable but are treated as expenses under financial accounting rules.”

We recommended that instead of providing a definition describing the nature of expenses, we request OECD to provide an exhaustive list of all such expenses that will be disallowed while calculating the financial accounting profit (or loss). This will address issues which may arise due to varied interpretations of the term “undesirable” by countries.

The draft rules include rules on attribution of losses. Under Article 5(1) of the Consultation paper, unrelieved losses of a group incurred in a prior period (Net Losses) [under Article 5(3)] are allowed to be carried forward and offset against any subsequent profit of that group, following an ‘earn-out’ mechanism.

The draft rules seem to refer only to losses in the strict sense of the word, i.e., less than zero profit. As a result, profit shortfalls (i.e., less than threshold profit) are not addressed in the proposed rules.

We suggested that the underlying context for Amount A allocation is that the market countries should be able to tax a portion of the profits of a Multi – National Enterprise (MNE) Group because of the market access that it provides to the MNE Group. By corollary, any lower profits that an MNE Group earns from the jurisdiction should also be attributed to the specific markets for Amount A purposes. Hence, our recommendation was the following:

Also include ‘profit shortfalls’ for carry forward purposes.
‘Net Losses’ or ‘profit shortfalls’ should be allowed to be carry forward for an infinite period and not be restricted to the aforesaid proposed period.

Transferred losses for ‘Eligible Division’ is proposed to be allocated on the divided entities based on the net value of assets. While this ratio considers direct relation for sale of manufacturing concerns or asset heavy businesses, it would not capture economic reality of losses for service companies or companies with asset-light models. Such companies under eligible division may transfer either contracts or assembled workforce where the net asset value will not be a fit proxy for allocation of transferrer losses.

We suggested that flexibility should be provided for use of other allocation keys for division of transferable losses. Such keys could include value of intangible assets, value of contracts, composition of workforce transferred (number of personnel X compensation).

OECD

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Jayakumar Selvaraj

Jayakumar