The OECD has published the first draft of a multilateral convention to implement the rules for the reallocation of a portion of profits (Amount A) of large multinational groups to countries where their end customers or service users are located (the market jurisdictions).
The obligation to allocate a portion of profits to market jurisdictions applies to multinational enterprises with global revenue of more than €20 billion and a pre-tax profit margin above 10%.
Amount A, to be allocated to market jurisdictions, shall be determined as 25% of the group's total profit above a 10% profitability. The allocation shall be made based on the proportion of revenue generated by customers or end-users in the jurisdiction to the group's total revenue.
The amount of the reallocation shall be adjusted if the group already taxes a portion of profits from marketing or distribution activities in the jurisdiction. The amount of this profit (Amount B) shall be determined based on uniform safe harbour rules for determining the profitability of marketing and distribution activities, so as to minimise disputes between jurisdictions.
The convention will also include a mechanism for determining the countries from which profits will be distributed, and the rules to eliminate double taxation if they have already been taxed there.
A group should be filing a single tax return through an appointed entity that would pay the tax for the entire group. The tax administration of the country where the tax is being paid would then reallocate the relevant portions of the tax to the tax administrations of the market jurisdiction countries.
As the reallocation of a portion of profits to market jurisdictions is a certain alternative to digital taxes, the convention also includes an overview of these taxes, and obligates the countries acceding to the convention not to introduce such taxes.
Once the areas of dispute (as indicated in the current wording of the convention) have been resolved, the convention will be open for signing by the members of the OECD Inclusive Framework (more than 130 countries) and will enter into effect after having been ratified by at least 30 countries together representing at least 60 percent of the ultimate parent companies falling within the scope of Amount A. More information can be found here.