The tax world has been abuzz over the past two years due to the Organisation for Economic Co-operation and Development (“OECD”)’s announcement of a “Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy”. See our previous newsletter here.

Earlier this month, the public weighed in with comments on the OECD newly released (July 2022) progress report on Amount A of Pillar One. As a recap, Pillar One focuses on the reallocation of profits to the jurisdictions where sales arise, and it introduced the innocuously titled Amount A. This is essentially a new taxing right, whereby a share of residual profit is allocated to market countries using a formulaic approach. Everybody had quite a lot to say, mostly about how confusing and complex it is. We have summarised key stakeholder input below:

Trade associations

  • Industry specifics are not accounted for, and Pillar 1 needs to be carefully tailored to account for glaring differences across sectors.

Auditing firms

  • Considerable work remains to be done for the Inclusive Framework to finalise and reach an agreement on the technical aspects of Pillar One.
  • Further engagement with stakeholders (particularly with in-scope businesses) will be necessary to ensure these rules are administrable, consistent with initial policy objectives, and do not create unintended distortions.

Multinational enterprises (“MNEs”)

  • The rules remain very complex and will be challenging for taxpayers to implement and for tax administrations to administer.
  • The rules present a communication challenge in terms of public understanding of the tax system and, with that, the risk that continued public distrust in the international tax system and the tax affairs of multinationals remains.
  • Some doubts as to whether the changes proposed really address the fundamental issues that are causing stress within the international tax system, and therefore whether these reforms will have only a temporary impact.
  • Deeply worried about double taxation implications of proposed model.
  • Demanding a mechanism to address anomalies and potential disparities between countries signing on for Pillar 1 and those not.

Jurisdictions/Tax Administrations

  • Amount A is a new taxing right and should therefore not include withholding taxes, which are existing taxing rights. The issue of double counting should not arise.
  • The carry-forward period for post-implementation losses should be as small as possible.
  • Many developing countries rely on other Model Tax Conventions (e.g., the United Nations and the African Tax Administration Forum) therefore reference to profits attributed should not be restricted to the OECD Model’s provisions.

As it is evident from the above, the OECD still has a long way to go in finalising this “solution”. If any of these comments hit home for you and you would like to discuss further, please contact us.

Associated enterprises

How can we help?

How you structure your business is a critical question as you expand globally.  The right structure will protect your assets, improve your currency position, support your business operations, facilitate future business expansion and changes, and optimise your overall tax rate. Trying to unscramble a sub-optimal structure entered into in haste or without full consideration of relevant facts is complex and expensive, so it’s important to plan upfront.

Structuring an international business is both a science and an art – this is our specialist area of expertise. Regan van Rooy is an international tax and structuring advisory firm focussing on Africa. We have offices in South Africa, Mauritius and Ireland and we can help you with any international tax or structuring query.