Key takeaways

The issuing of the MLC was a significant step in the ongoing process of bringing the Pillar One rules to fruition. Although there still remain formal objections to some provisions in the MLC by certain jurisdictions, and other jurisdictions have made it clear that there are still some open issues to be resolved from their own perspectives, there appears to be a very high level of agreement to the overall design of the rules, and a significant amount of consensus on individual provisions. However, as the MLC is not final, there is an increasingly high likelihood that the MLC will not be in place by the end of 2023. This will, therefore, lead to significant questions regarding the expiration of the stand-still agreement for jurisdictions not to impose new Digital Services Taxes (DSTs) and whether certain jurisdictions that signed joint statements with the US will extend their commitments to provide credit for historical DSTs against Amount A tax.

Other key takeaways:

1. Lower GDP jurisdictions - there are an increased number of provisions that affect jurisdictions only where profits for a Covered Group meet a "de minimis" level, for example, in determining when the marketing and distribution safe harbor applies, in determining whether a jurisdiction must give Amount A double tax relief, and in allocating "tail-end" revenues. Along with provisions such as nexus, which have a smaller threshold for lower GDP jurisdictions, this will allow lower GDP jurisdictions to retain a greater proportion of their direct tax take.
2. Impact for investment hubs – a number of sources have stated that it is expected, therefore, that investment hub jurisdictions will be by far the most significantly impacted by Amount A implementation. For example, the October 2023 Update to the economic impact assessment of Pillar One estimates that investment hubs will provide approximately 81% of total global double tax relief.
3. Double counting of profits – business has argued strongly against effective double counting of profits for tax purposes, once as residual profits recognized in a jurisdiction and secondly as further allocation of Amount A. The marketing and distribution safe harbor (MDSH) provisions have now been finalized in this respect and take an approach to calculation and relief based on profit indicators under this measure. However, Brazil, Colombia, and India have formally expressed objection to these provisions.
4. Withholding taxes – the MLC also now contains provisions that may effectively allow some relief for withholding taxes in jurisdictions where that has occurred. This is done by allowing a measure of profits on which withholding tax has been levied to be recognized as residual profits when assessing the marketing and distribution safe harbor adjustment. However, the level of effective relief is very restricted, and although it increases over time, it starts at zero in the first two years. Again, as stated above, Brazil, Colombia, and India have formally expressed objections to these provisions.
5. Complexity of certainty provisions – the provisions relating to administration, obtaining certainty over Amount A outcomes, and resolution of disputes with respect to related issues remain extremely complex and resource-intensive for all parties. Even with certainty provisions, many practical difficulties can still be envisaged in implementing the Amount A rules alongside multiple domestic tax regimes, for example, in terms of dealing with the impacts of historical domestic disputes on Amount A.

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