OECD Releases Pillar One Model Rules for Public Consultation

The OECD on February 4 issued draft model rules on “Amount A,” the share of a business’s residual profits that will be subject to the new taxing right created under Pillar One of the October 2021 two-pillar agreement endorsed by 137 members of the OECD/G-20 Inclusive Framework on BEPS to address the issues brought about by the digitalization of the economy.

The OECD’s introduction of the draft model rules represents the next step in the process of implementing the two-pillar framework’s plan to reallocate some taxing rights to market jurisdictions into domestic legislation. (For prior coverage, see BDO’s alert “OECD Announces Agreement on International Tax Overhaul.”)

The model rules, which address two aspects of Amount A -- nexus and revenue sourcing – do not represent a consensus view among Inclusive Framework members; rather, the rules are a “working version” issued for public comment. Input on the discussion draft must be submitted to the Inclusive Framework’s Task Force on the Digital Economy before February 18, 2022.


Nexus and Revenue Sourcing Rules

Under the October 2021 agreement, an in-scope multinational entity (MNE) -- one with global turnover above EUR 20 billion and profitability above 10% -- would be deemed to have sufficient nexus in a market jurisdiction if it derives at least EUR 1 million in revenue from that jurisdiction, or EUR 250,000 for smaller jurisdictions with GDP lower than EUR 40 billion. For an in-scope MNE, 25% of residual profit --defined as profit in excess of 10% of revenue -- would be allocated to market jurisdictions with nexus using an allocation key.

To determine whether an MNE meets the nexus test, it will have to apply the revenue sourcing rules provided in the OECD draft to identify the jurisdiction in which revenue arises for purposes of Amount A. The newly released model rules create a special-purpose nexus rule that applies solely for this purpose

The public consultation document’s proposed revenue sourcing rules provide that revenues must be sourced on a transaction-by-transaction basis, a concept that will be explained in more detail in the commentary the OECD plans to release soon.  In principle, MNEs will be required to determine the source of revenue for each item that generates revenue -- for example, each individual item of inventory, or each “click” on an online advertisement.

To determine the source of revenue, covered MNEs must use a “reliable method,” defined as a method that identifies where revenues arise using a “reliable indicator” or, in some specific instances, an allocation key. An “indicator” is in turn defined as information that identifies the source of revenue.  


Categorizing Transactions

In-scope MNEs will have to source all revenue according to the category of revenue earned from each transaction. The draft rules provide guidance on seven specific types of transactions:

  • Sales of finished goods
  • Sales of components
  • Provision of services
  • Licensing, sale or other alienation of intangible property
  • Real property transactions
  • Government grants
  • Non-customer revenue

For each of these categories, the model rules then provide the reliable indicators that can be used to determine where revenue is sourced. For example, the reliable indicators for sourcing revenue from the sale of finished goods include the final customer’s delivery address and the place of the retail storefront selling to the final customer. In the case of transactions involving the sale of components, the draft rules provide that reliable indicators include the delivery address to the final customer and the place of the retail storefront selling to the final customer.

Unlike prior OECD blueprints, the draft model rules do not provide a strict hierarchy for the use of indicators; rather, the model rules allow MNEs to use any of the listed indicators or unlisted indicators that meet a reliability test.

If, after taking “reasonable steps” a covered MNE is unable to identify a reliable indicator for sourcing a transaction, it may be able to use an allocation key. The draft model rules state in a footnote that additional guidance on what constitutes “reasonable steps” will be provided in the upcoming commentary.

Allocation keys represent an acknowledgement that, in some circumstances, commercial realities may make it challenging, if not impossible, for taxpayers to source revenues using reliable indicators. In those instances, allocation keys are expected to provide rules that “reasonably approximate the source jurisdiction, are administrable, and avoid disputes,” according to the introductory statement to the draft model rules. 

The draft model rules list a number of specific allocation keys under some of the transaction types for which it provides revenue sourcing guidance. For example, the guidance for transactions involving revenues from finished goods sold to final customers through an independent distributor provides that, to the extent a reliable indicator is not available, the Regional Allocation Key, the Low Income Allocation Key, and the Global Allocation Key may be used.



The OECD draft rules state that, in order to limit taxpayer compliance costs, they are not intended to require the collection of new information in order for covered MNEs to allocate Amount A to market jurisdictions. On the other hand, the rules stress the need for accuracy and completeness in the Amount A allocations. To balance these goals, the introduction to the model rules states that, notwithstanding the transaction-by-transaction sourcing requirement, the sourcing rules will be based on a “systemic-level review of the approach taken to revenue sourcing, rather than a requirement to retain and supply information from every transaction to tax administrations.” More specifically, covered MNEs will be expected to demonstrate “a clear, intelligent internal control framework” that demonstrates the MNE’s conceptual approach to revenue sourcing and explains how it obtains the necessary data and monitors its accuracy.


Next Steps

Comments on the proposed revenue and nexus rules will be reviewed at an upcoming meeting of the Task Force on the Digital Economy. As the OECD makes clear in the introductory statement to the rules, the proposed rules are strictly a working document, and changes to those rules may be made in response to the comments received.