Legal development

Global Tax Reform OECD publishes draft nexus and revenue sourcing rules

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    The OECD has published draft rules to determine the relevant market jurisdictions for reallocation of taxing rights under Pillar One of the global tax reform project.

    Pillar One aims to ensure that a proportion of "excess" profits of the largest multinationals may be taxed in countries in which they operate and earn significant revenue, but in which they are not considered under existing rules to have sufficient presence to be taxable.

    There is an extremely tight timeframe for comment on these draft rules, with responses requested by 18 February. This reflects the OECD's ambitious timetable to have the rules come into effect next year. Further 'building blocks' of Pillar One will be released for feedback in due course.

    Pillar One

    The OECD's Base Erosion and Profit Shifting (BEPS) project resulted in massive changes worldwide to domestic tax systems, ensuring minimum standards in areas such as interest deductions, hybrid mismatches and minimising tax treaty abuse. However, concerns remained that the global tax system has not kept pace with today's digitalised economy, and that the current meaning of "permanent establishment" allows companies to have a significant (non-physical) presence in a market jurisdiction without necessarily becoming liable to tax there.

    The OECD's two pillar solution is designed to ensure that multinational enterprises pay a "fair share" of tax wherever they operate and generate profits. Together with Pillar Two's 15% global minimum tax rate for large multinationals, Pillar One of the rules provides for a new taxing right for market jurisdictions over certain profits of the largest multinationals.

    Businesses within the scope of Pillar One (namely, the largest multinationals with global turnover of at least €20bn and where profit is at least 10% of total revenue) will see 25% of profits above that 10% profit margin (so called "Amount A") reallocated and then subjected to tax in the countries in which they operate and earn revenue of at least €1m per year (or €250,000 for smaller jurisdictions), rather than all taxing rights sitting where the business has physical presence.

    Nexus and sourcing rules

    The thresholds of €1m/€250,000 ensure that the nexus test is only satisfied when the amount of revenue derived from a jurisdiction is material. However, determining where revenues are sourced – i.e. where goods or services are supplied or consumers are located – is not always straightforward to determine. Comprehensive sourcing rules for specific categories of products and services must be developed and agreed.

    The OECD has now released a document containing detailed draft rules, in the form of "reliable indicators" of source, to identify the end market in various different categories of revenue: finished goods, digital goods, components, services (including specific rules on advertising services and online intermediation services), transport, customer reward programmes, provision of financing, intangible property and user data, real property, government grants, and non-customer revenues.

    However, it has been made clear that the draft is still very much a work-in-progress which does not, as yet, reflect consensus on the substance of the rules. Pillar One is due to come into effect from next year and, to meet that tight timetable, it is important to obtain public input early in order to help in further refining and finalising the rules.

    As well as the general legislative article setting out the sourcing principles, and the detailed rules and indicators for specific types of revenue, there will be a Commentary to further flesh out the operation of the sourcing rules. Unsurprisingly, the Commentary has not yet been developed, although there are some notes in this document to indicate where matters have already been identified for inclusion in the Commentary.

    Balancing accuracy with compliance burdens

    The OECD is hoping for input to ensure that the market jurisdiction can be correctly identified for the various types of transaction, while alleviating compliance burdens as much as possible e.g. by making use of information that is already collected by businesses for other purposes, by allowing proxies (including allocation keys) where it would be disproportionately difficult to obtain transactional information, and by taking a pragmatic approach to materiality and the predominant nature of supplies.

    Businesses within scope of Pillar One should consider responding to this consultation to ensure that a workable balance is struck between accuracy in establishing where revenues are sources, and the associated compliance costs. Comments should be sent electronically (in Word format) by email to

    You can find a full list of our global tax partners here.

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.


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