We welcome the efforts made to simplify the tax base determination rules under Pillar One. We believe there are valid and appropriate reasons for even further simplification.
In the spirit of transparency that underpins our collaborative efforts, we note that the proposed rules should be aligned with, and calibrated towards, the ordinary course of business as conducted by MNEs in scope as opposed to rarely occurring events. As such, we do not believe that there is a need for such complex rules addressing restatements of Consolidated Financial Statements of a Covered Group or for the, somewhat anti-abuse directed, rules addressing treatment of tax losses in case of Business Combinations.
Business alignment and simplification
All MNEs in scope are exposed to cyclicality both in terms of macro-economic impacts and capital expenditures. As such, we would strongly encourage to make no differentiation for losses to be car- ried forward and not to restrict such right in time.
Similarly, we believe that residual/excess profit shortfall, should be reintroduced and be allowed to be carried forward indefinitely.
When it comes to adjustments to the tax base for purposes of Amount A, it is critical to have a strong and clear policy, and principles, to determine the tax base for the Amount A in line with Pillar 1 objectives of reallocating profits to countries based on where the customers, consumers and users are, in line with the scope of the sourcing rules.
The objective would be to determine what is the on-going underlying operating and trading profit generated by the sales to those customers and consumers, in the ordinary course of the business. This would require excluding any exceptional and one-offs items or events, whether generating a profit or a loss at group level, that have no economic and business, and even geographic, connection and no nexus with those sales, such as:
- Divestitures, such as sale of equity stakes and sales of assets, that could be specific to one country, or one line of business in several countries (that could include both entities and assets), the sale of a JV interest, or intellectual properties owned and developed centrally
- Asset impairment and revaluation
Let’s illustrate this by a real-life example: a parent company (PC) of a MNC in country A owns for decades (with insignificant basis) a minority interest of 30% in another MNC that operates inde- pendently. For strategic reasons, or for portfolio management to reinvest in its own businesses through M&A, the PC sells that minority interest and generates a one-off substantial gain that would increase its profitability from average yearly 12% to 25% for that given year. That increase in profit- ability is exceptional and has nothing to do with the sales to consumers under Pillar 1, and the value provided by those sales. The same should apply if the value of that interest has substantially de- creased and PC make a loss.
Furthermore, duly classified one-off and exceptional items – whether related to sale of equity stakes or sale of assets – should systematically be excluded from the tax base because the purpose of the tax base determination is to identify residual and excess profit. Determination of profit should as mentioned be focused on ordinary course of MNEs’ business where losses generally are an unde- sirable product of adverse business conditions. This is also important in case the tax base is used to determine the threshold of 10% for “highly profitable” MNEs. Taking into account such one-off events would distort the scoping for the application of Amount A and would bring such MNEs into scope which cannot be considered as “highly profitable” because the profit resulting from the ordinary course of MNEs’ business may substantially be below the threshold.
It is assumed that various accounting standards, which may even be expanded, are sufficiently alike – now and in the future – so as present a level playing field for the determination of the tax base. We respectfully question this assumption.
We would welcome the inclusion of a catalogue of numerical examples in the later issued documents so as to provide guidance on the interpretation and application of the tax base determination rules.
As the consultation on Pillar One components happens according to a rushed and staggered ap- proach, we reserve the right to revert with further comments on the Tax Base Determinations Rules once all components and the related commentaries are published.
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