OECD Pillar One Amount A: Digital services taxes and relevant similar measures

On 20 December 2022, the OECD published a consultation document including draft multilateral convention (MLC) provisions on the removal of digital services taxes (DSTs) and other relevant similar measures.

This follows the statement on the components of global tax reform, agreed by more than 135 members of the OECD/G20 Inclusive Framework on BEPS ("OECD inclusive framework") in October 2021. Since 2017, the member countries of the OECD inclusive framework have developed a "two-pillar" approach.

The introduction of Amount A of Pillar One will be coordinated with the removal of all DSTs and other relevant similar measures on all companies.

Removal of existing measures

Once the multilateral convention is in force within a country, specified taxes no longer will be able to be applied. (Annex A, which will include the list of taxes, is not included in the consultation document).

Elimination of Amount A allocations where DSTs and other relevant similar measures continue to apply

Countries which impose a DST or similar, or which do not withdraw a tax listed within annex A, will not receive Amount A tax allocations of taxable profit, even where they are market countries and would otherwise be entitled to them.

General definition of a DST or relevant similar measure

Further to the progress report released in July 2022, a digital services tax is defined as a tax which meets all three of the following conditions:

• The application of the tax is determined by reference to the location of customers or users;
  
• The tax is applicable in practice "exclusively or almost exclusively" to nonresidents or foreign-owned businesses as a result of revenue thresholds, exemptions for businesses subject to domestic corporate tax, or other restrictions of scope; and
• The tax is not treated as an income tax under domestic law.

DSTs or relevant similar measures do not include VAT or other similar taxes on consumption, taxes imposed on a per-unit or per-transaction basis rather than on an ad valorem basis, or anti-avoidance rules in relation to permanent establishments.

Next steps

Comments on the consultation draft are invited by 20 January 2023. The rules are intended to come into effect at the start of 2024, aligned with the implementation of the Amount A rules reallocating profits to market countries.

Deloitte comments

DSTs and other "relevant similar" measures will be withdrawn, contingent upon the implementation of rules reallocating taxing rights to market/sales countries (Amount A of Pillar One). The US has agreed terms for this with a number of countries that have implemented DSTs or digital equalization levies, including Austria, France, India, Italy, Spain, Turkey, and the UK. In the meantime, the OECD inclusive framework continues to work on a definition of a DST tax and what would constitute a "relevant similar" measure. A key point likely will be clarification of taxes that are applicable in practice "exclusively or almost exclusively" to nonresidents or foreign-owned businesses. The OECD also will publish a list of existing taxes that are subject to removal as part of this work. The removal will apply to all businesses within the scope of DSTs and other relevant similar taxes, regardless of whether they are sufficiently large to be in the scope of Amount A.

The rules for removal of DSTs will, along with the rules for implementing Amount A, be included in a new multilateral convention to be made available for countries to sign and ratify. This multilateral convention will enter into force once it has been ratified by a "critical mass" of countries—including countries of the parent entities of a substantial majority of in-scope groups (e.g., China, France, Germany, Japan, UK, and US) as well as key additional countries that will have the obligation to provide double tax relief (e.g., those countries with high profits compared to payroll and depreciation costs).

The most important remaining political challenge is the US domestic approval of the Amount A reallocation rules, and this will be an area that businesses will want to monitor closely.