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OECD Pillar 1: Loss treatment in the context of Amount A

Amount A under Pillar One of the OECD’s two-pillared proposal for international tax reform would constitute a new taxing right for market jurisdictions. Granting new taxing rights should imply the attribution of either higher profits or higher losses (depending on economic performance). There are no doubts in case of profits, but there seems to be less clarity in case of losses.


The OECD published blueprints for its two-pillared proposal on 12 October 2020, but has not yet been able to find a consensus on either pillar and decided to launch a third public consultation on the alternative approaches emerging from the blueprints (see Tanja Velling’s post for an overview).

The Pillar One Blueprint details relevant aspects of a new framework that deviates from many consolidated international tax principles on nexus and income allocation. Paragraph 6 of the Blueprint states that “Pillar One seeks to adapt the international income tax system to new business models through changes to the profit allocation and nexus applicable to business profits. Within this context, it expands the taxing rights of market jurisdictions” (our emphasis).

Loss carry-forward rules

Amount A would constitute the new taxing right, being the portion of group residual profit to be attributed, based on the formula developed in the Pillar One, to market jurisdictions. However, several MNEs who incurred significant start-up losses claimed that it is unfair and inconsistent with sound economic principles to attribute extra profits to market jurisdictions without taking into account current or pre-existing losses. Therefore, the Blueprint includes a loss carry-forward regime to ensure that there is no Amount A allocation where the relevant business is not profitable over time. In this respect, instead of attributing a loss to market jurisdictions, the approach suggested in the Blueprint provides for an earn-out mechanism to enable offsetting past losses against future profits. This will be achieved by storing the losses in a single account without allocating them directly to any market jurisdiction.

This means that a low profitability at group level cannot lead to a loss/low taxation in the market jurisdiction; it will only reduce the extra profit to be granted in the future as Amount A. This is a sort of a compromise confirming that Amount A is more an extra right to tax profits for the market jurisdictions than an increase of taxing rights.

In addition, Amount A is calculated based on consolidated accounts. As such, it does not take into account that the MNE operates different businesses in several markets, each of which would normally show different margins. This is especially true in the digital industry, where margins depend also on the level of digitalization of the market. The different level of penetration of any single market (start up phase vs. mature market) is equally neglected. Therefore, if the calculation of Amount A on consolidated accounts led to a loss, then also markets generating significant profits would not be entitled to any additional profit due to the impact of the accounting consolidation with other markets where margins are low (or negative).

Temporary double taxation?

Paragraph 472 of the Blueprint states that “Amount A losses will be reported and administered through a single account for the relevant group or segment, and kept separate from any existing domestic carry-forward regime” (our emphasis).

In this respect, it is not clear whether this is also intended to prevent the headquarter jurisdiction from deducting such losses in the year in which they accrue. The expression highlighted in the above quotation creates some confusion. If the right interpretation was that a deduction at headquarter level should be denied (which we doubt), the Pillar One approach would lead to an unreasonable double taxation in the first year.

Pre-regime losses

Finally, in order to take properly into account investments made before the implementation of Pillar One, certain pre-regime losses are allowed to be offset against profits earned after the new regime comes into effect.

This solution causes several concerns, including:

  • What length of pre-regime period should be to be taken into account? Should it be a certain number of years or tied to the domestic statute of limitations?
  • How will the rules deal with pre-regime profits or to situations where both profits and losses occurred?
  • How would the rules address losses arising as a result of Covid-19 that are not related to start-up investments?

Planning points

When effective, Pillar One would attribute additional taxing rights to market jurisdictions. In determining the width of expansion, investments made and the level of profitability in each market jurisdiction should be carefully considered.

Taking into account pre- and post-Pillar One losses is an important step forward. However, we strongly believe that the OECD should further work on looking for an approach to attribute taxing rights (or losses) with Amount A where value is created.

Finally, any double taxation – even if merely temporary – must be avoided. Hence, current losses should also be symmetrically attributed to market jurisdictions, particularly when other kinds of income (e.g., Amount B) are taxable there.

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amanzitti, fscandone, bonellierede, oecd, oecd tax, pillar one, carried forward losses