International: Pillar One - Draft model rules for Tax Base Determinations published

OECD releases the next public consultation document on one of the building blocks of Amount A

In brief

On 18 February 2022, the OECD released a new public consultation document with respect to the draft model rules for Amount A. This time, the draft model rules cover the Tax Base Determinations building block which deals with enabling an MNE group in scope of Amount A to determine the taxable profit which will be partially reallocated to so-called market jurisdictions. This document comes only two weeks after the OECD issued its first extensive publication on Amount A covering the two components Nexus and Revenue Sourcing, which we discussed in our previous client alert. It should be noted that the latest draft model rules are a work-in-progress and subject to changes. The OECD welcomes comments from the public before 4 March 2022, following which more detailed commentary on a number of technical items is expected to be released.


  • Amount A is proposed to come into effect in 2023 and will apply to MNE groups with a global turnover above EUR 20 billion (or local equivalent) and profitability above 10%, subject to some exceptions (hereafter referred to as "Covered Groups"). The newly published draft model rules on Tax Base Determination outline the approach as to how to calculate the Covered Group's relevant adjusted profit before tax that will be partially reallocated under Amount A.

  • The starting point for the tax base calculation is the Covered Group's consolidated profit (or loss) as shown in the audited consolidated financial statements. To arrive at the adjusted profit before tax the draft rules provide for certain book-to-tax adjustments, restatement adjustments, as well as loss deductions (see "In depth" section below for details). Comparing this approach with the OECD's model rules for determining the GloBE income under Pillar Two, it becomes evident that Pillar One and Pillar Two generally follow the same logic. The OECD highlights its aim to align Pillar One and Pillar Two to the extent possible, however some differences do prevail, e.g., in the use of terminology and definitions. It remains to be seen if and to what extent the Pillar One and Pillar Two rules will become more closely aligned as the model rules and (yet to be published) commentary progress.

  • At first sight, the draft model rules on the determination of the adjusted profit before tax for purposes of Pillar One appear generally less complex than the equivalent articles in the Pillar Two model rules. The OECD stresses that it sought to keep adjustments to the consolidated profit (loss) to a minimum to reduce complexity. However, the draft model rules as presented in the public consultation document are a work-in-progress with several open items that require further elaboration. For example, it is stated that there will be separate, yet to be published, tax base rules for Covered Groups whose business must be segmented for purposes of Amount A.

  • It is not clear whether the adjusted profit before tax is also the relevant figure for determining the profitability scope threshold. As stated above, Amount A only applies to Covered Groups that exhibit a profitability of more than 10%. The political agreement on Pillar One as outlined in the Inclusive Framework's statement dated 8 October 2021 defined profitability as a broad "profit before tax/revenue" term.

  • MNE groups in scope of Amount A are well-advised to start familiarizing themselves with the new Amount A tax base determination rules. A more detailed analysis will be required once the model rules have been finalized and complemented by explanatory commentary. Any remaining differences between the Amount A calculation compared to the Pillar Two calculation will require detailed diligence on the taxpayer's side.

In depth 

The Model Rules will serve as the basis for the substantive provisions that will be included in the Multilateral Convention, which is intended to implement Amount A, as well as provide a template that jurisdictions could use as the basis to give effect to the new taxing rights over Amount A in their domestic legislation.

The draft model rules subject to consultation cover one building block of Amount A, namely Tax Base Determination. The current draft does not reflect the final views of the Inclusive Framework members at this stage and is a working document released by the OECD Secretariat for the purpose of obtaining input from stakeholders.

The Tax Base Determination draft model rules aim to calculate the Amount A taxable profit that will be partially reallocated to so-called market jurisdictions. Explanatory commentary is yet to be released to further complement the model rules.

The Tax Base Determination rules can be summarized as follows:

  • The starting point for the tax base calculation is the Covered Group's consolidated profit (or loss) as shown in the audited consolidated financial statements. It is worth noting that the consolidated financial statements must be prepared under specific financial accounting standards to ensure that differences in local accounting rules do not lead to material distortions. So far, IFRS and local GAAP rules in the following jurisdictions are accepted for purposes of the Amount A calculation: Australia, Brazil, Canada, Members States of the European Union, Member States of the European Economic Area, Hong Kong (China), Japan, Mexico, New Zealand, the People's Republic of China, the Republic of India, the Republic of Korea, Russia, Singapore, Switzerland, the United Kingdom, and the United States of America. The local GAAP of other jurisdictions may be added at a later stage. It is also still being discussed whether the use of any GAAP should be permitted as long as the resulting Amount A tax base is adjusted for any material competitive distortions that may arise in comparison to the equivalent Amount A tax base when applying IFRS.

  • The consolidated profit (or loss) is then subject to certain adjustments, such as the book-to-tax adjustments, to arrive at the adjusted profit before tax. The underlying rationale is the aim to bring the financial accounting profit (or loss) more closely aligned with the tax profit (or loss). The necessary book-to-tax-adjustments to the consolidated profit (or loss) are limited to the following four items, while it is mentioned that more detailed commentary on this will be provided:

(i) Any Tax Expense is added back as it is generally not deductible for tax purposes in Inclusive Framework jurisdictions (likewise, any Tax Income is deducted). In this regard, the Pillar One draft model rules are more straight-forward compared to the equivalent adjustment of "Net Taxes Expense" under the Pillar Two rules.

(ii) Dividends are deducted since they are generally (fully or partially) tax exempt in Inclusive Framework jurisdictions. In this regard, the Pillar One draft model rules apply a wider definition of relevant dividends than the equivalent Pillar Two rules, as in the latter case dividends derived from a short-term portfolio shareholding cannot be deducted.

(iii) Any Equity Gain arising, inter alia, from the disposition of an ownership interest or from changes in the fair value of an ownership interest under fair value accounting rules is deducted (likewise, any Equity Loss is added back). The rationale behind this adjustment is that the underlying gain (or loss) is generated by another entity and, thus, should not be included in the tax base of the Covered Group in question. Similar to the rules for dividends as described above, Pillar One applies a wider definition of relevant equity gains (losses) in this regard compared to Pillar Two as the latter rules do not adjust for gains (losses) deriving from portfolio shareholdings. However, a footnote later in the draft model document reveals that it is still being discussed whether gains (or losses) from the disposal of a controlling equity interest should be excluded from the book-to-tax adjustments.

(iv) Any Policy Disallowed Expenses, e.g., expenses for illegal or undesired payments such as bribes or expenses for fines and penalties, are added back to prevent any financial benefits from politically undesirable behaviour. In this regard, the Pillar One rules are slightly more strict than the equivalent Pillar Two rules as in the latter case expenses for fines and penalties are only added back if they are equal to or exceed EUR 50,000 (or equivalent amount in local currency).

  • Another adjustment to the consolidated profit (or loss) is a restatement adjustment that applies when a Covered Group is required to prepare restated financial accounts and such restatement would have had an impact on the calculation of the adjusted profit before tax in the restated period. For example, IAS 8 prescribes a restatement of financial accounts in case material errors have occurred in prior periods. For ease of administration, any restatement shall be taken into account in the Amount A tax base calculation for the period in which the restatement is identified and recognized. In other words, it is not required to recalculate the Amount A tax base of the prior period that is subject to restatement. The amount of prior periods that need to be considered for this Amount A tax base adjustment will be limited to some extent. Moreover, the restatement adjustment amount is limited to a cap of 0.5% of the Covered Group's revenues. Any amounts exceeding this cap will be carried forward in order to smooth out the – potentially excessive – impact of an extraordinary one-time restatement adjustment. The Pillar Two model rules provide for a similar adjustment for "prior period errors and changes in accounting principles" when calculating the GloBE income, however, Pillar One appears to be more nuanced.

  • Lastly, the final calculation element to arrive at the adjusted profit before tax is a deduction for certain losses. On the one hand, this includes loss carry forwards. The amount of periods that are to be considered for the loss carry forwards will be limited to some extent. The draft rules capture losses that arise prior to, as well as after, the implementation of Amount A. On the other hand, transferred losses related to a business reorganization are also deductible, subject to certain business continuity conditions. These conditions prescribe that, for example, an entity that is transferred as part of a reorganization does not forfeit its unrelieved losses if it carries on the same or similar business(es) throughout a period of 12 months prior to as well as 24 months after the reorganization. Currently, this applies only to business combinations and business divisions. It is still subject to discussion whether further types of reorganizations may be added at a later stage. The underlying rationale behind the loss deduction is that the Amount A tax base should reflect the economic profit of the Covered Group. Without special rules on business reorganizations, an entity that joins a different Covered Group as part of the reorganization would forfeit any of its unrelieved losses even though it may continue to engage in the same business activity.


The OECD will be collecting public comments on the Tax Base Determinations draft model rules until 4 March 2022. It is then expected that more detailed commentary on a number of technical items will be released. Comments received by the OECD on its first Amount A public consultation on Nexus and Revenue Sourcing are already accessible online here: Tax challenges arising from digitalisation: Public comments received on the draft rules for nexus and revenue sourcing under Pillar One Amount A - OECD.

Furthermore, the OECD has announced that it will release more details on the remaining building blocks of Amount A over the coming months. The next public consultation document is likely to cover the draft model rules with respect to the scope of Amount A including the scope exclusions for extractives and regulated financial services. We will continue to closely monitor and provide client alerts on these future developments around Pillar One, but if you have questions in the meantime please do not hesitate to contact our Baker McKenzie tax policy experts.

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