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Submission on OECD Pillar One Amount A : Nexus and Revenue Sourcing Rules
Submission on OECD Pillar One Amount A : Nexus and Revenue Sourcing Rules

February 21, 2022

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The OECD/G20 Inclusive Framework on BEPS (Inclusive Framework) has been working to develop a consensus based solution to address tax challenges arising out of digitalisation of the economy.

Amount A of Pillar One has been developed as part of the solution. 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. In this regard, the OECD has released the a public consultation document consisting of draft Model Rules for nexus and revenue sourcing for Amount A.

We welcome the step taken by the OECD to eliminate the use of hierarchy-based indicators while applying the draft Model Rules (which were prescribed in the Pillar One Blueprint released by the OECD in October 2020) and has allowed businesses to align with/ use reliable indicators that are closer to their respective business realities. Based on inputs from Industry, NASSCOM made a detailed submission to the OECD and MoF on February 18, 2022 on revenue sourcing rules for services.

  1. Part 1(B) of the draft Model Rules provide that the Covered Group may source all revenues arising from supplementary transactions with the sourcing rule that applies to the Main Transaction. The applicability of this rule should also be supported by a commentary, that may discuss the following:
  • Examples of application of supplementary transaction rule; and
  • Reasonable steps expected from Covered Group for application of supplementary transaction rule.
  1. Part 2 para 6(b) provides that suitable allocation keys be used for revenue sourcing where reliable indicators are not available despite reasonable steps taken by the Covered Group. Clear guidelines should be provided as to what would construe as “reasonable steps” for the application of allocation keys. It is recommended to allow use of suitable statistical indicators, if it can be substantiated by the Covered Group to be a Reliable Indicator.
  1. In case of services connected to tangible property as well services performed at the location of the customer under Part 5-A (Revenues from location-specific services), the place of performance of service may not always be the place of customer. Further, users of these servers may be in a different location of the customer. A case in point could be remote access of a server by a set of data analysts distributed across two or three jurisdictions. The customers that access the servers for content could be in other jurisdictions. If the use of these services are for various jurisdiction of customers, then ideally the sourcing rules applicable under Rule 5 H should apply.
  1. Rules should be identical across all customers, as it would become administratively difficult to track list of large business customers separately. In addition, the financial information of private companies is not available in the public domain (e.g. in databases), making this requirement onerous.
  1. Computer programs covered by the World Intellectual Property Organisation (WIPO) Copyright treaty has been excluded from coverage under the definition of Intellectual Property. It is recommended to align definitions of Digital Goods and Components by including computer programs not covered by the WIPO Copyright treaty.
  1. Software service providers may use patents, knowhow, designs, etc. while providing B2B services. These patents, knowhows, designs, etc. may not be covered by the WIPO Copyright treaty. However, these intangibles are sold to customers as a bundled service (akin to components for finished goods) and may not be tracked separately, as these are essential to the delivery of the main service. Para 5 Part H does not discuss use of such patents, knowhows, designs, etc. for provision of services. Rather, patents, knowhows, designs, etc. are discussed in definition of intangibles which is mentioned in Part 6. Keeping in view the principle discussed in Part 1 Para A (1), income sourced from services delivered by use of such patents, knowhows, designs, etc. should also be included in Part 5 Para H relevant to B2B services and not in Part 6 relevant to intangibles.
  1. Under Part 5-H (Revenues from Business to Business services), it may be difficult to obtain information where services will benefit the business customer. The contracts or other commercial documentation generally do not provide such information. It is practically impossible to determine the place of use of these services by the customer.  Billing location cannot be a reliable indicator in case of software services, even if billing is done to the parent entity office which is not a procurement hub. 
  1. Location of users identified in contract or commercial document has been kept as a reliable indicator as per draft document.
  1. For the Covered Group to identify its large business customers based on their country-by-country reporting obligation is administratively difficult. It is recommended that large business customers should be defined as customers contributing above X% of the Covered Group’s consolidated revenue.

Our detailed submission to OECD as well as MoF is attached for your reference. For more information, reach out to tejasvi@nasscom.in and jayakumar@nasscom.in


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Tejasvi

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