Business Infrastructure Bureau, Keidanren
1. General comments
We thank you for the opportunity to submit our comments.
This document is submitted by the Keidanren's Business Infrastructure Bureau on the basis of discussions held by the "Corporate Liaison Group on Pillar 1 - Amount A#1".
2. Elements Already Subject to Public Consultation
We welcome the inclusion of stakeholder views on the elements already subject to consultation. We would like to provide the following comments aimed at further reducing the administrative burden of complying with the Amount A requirements.
2.1 Scope
2.1.1 General Comments
We welcome the conclusion that the revenue test should be applied on a single-year basis.
It should be clarified that if an MNE is clearly outside the scope, it is not necessary to carry out the processes stipulated for the calculation of Amount A, such as calculating the tax base and sourcing revenue.
In-scope MNEs should be able to use the revenue figures in their consolidated financial statements as the revenue figures for Amount A without modification.
2.1.2 Exclusion of Revenues and Profits from Regulated Financial Services
The principal of a deposit (as per the definition of "deposit" in the progress report) should be presented in the currency of the account into which the funds are deposited. In other words, the effect of exchange rate fluctuations during the deposit period should be excluded.
Also, in order to reduce administrative burden, even if there is a small constituent entity within a financial service segment that does not operate a Regulated Financial Services business, a consolidated financial segment should be excluded from Amount A if it meets certain conditions. For example, these conditions could be:
- - The MNE submits its financial statements on a consolidated financial service segment basis to a competent supervisory authority and is under the control of that authority
- - The majority (90%) of the income in the financial service segment concerned is derived from Regulated Financial Services.
In addition, as with the Extractives businesses, there should be a transition period for Regulated Financial Services businesses sufficient to allow time for their exclusion from scope of Amount A to be confirmed through Advance Certainty Review.
2.2 Revenue Sourcing Rules
We welcome the removal of the transaction-by-transaction approach and the expanded use of the pro-rata calculations based on the allocation keys. However, some items remain difficult to implement. The following change should be considered to improve tax certainty and reduce administrative burden.
Seven years after the introduction of Amount A, the revenue threshold for inclusion in scope is due to be reviewed, with a view to reducing it from EUR 20 billion to EUR 10 billion. Similarly, it would be desirable to set a transition period for the revenue sourcing rules at seven years, or at least a sufficient period of more than three years. The difficulty of implementing revenue sourcing rules varies significantly from company to company, and the difficulties of companies newly in scope need to be carefully considered.
2.2.1 Revenue from Finished Goods sold to a Final Customer through an Independent Distributor
We welcome the three-year transition period for the revenue from finished goods sold to a final customer through an independent distributor. However, it is still very difficult to obtain information on the final sales destination, as it has historically not been requested. The supplementary transaction rules will also require independent distributors to identify supplementary transactions.
Therefore, as stated above, at least a sufficient transition period of more than three years should be set, and the relevant revenue sourcing rules should be re-examined in conjunction with the scope issues.
In relation to the knock-out rule, it is commercially difficult to prove that there is no revenue in a given jurisdiction. Therefore, even if the rule is applied, it should be limited to extremely rare cases, such as the existence of legal restrictions that clearly identify the country or region in advance (e.g., embargoes).
The threshold for Tail End Revenue (TER) should not be discussed in isolation. Rather it should be carefully considered in conjunction with the level of compliance required two years after exceeding the TER threshold.
In addition, in determining the application of the knock-out rule, information on tax payments relating to indirect taxes such as VAT could be used at the discretion of MNEs.
2.2.2 Components
We appreciate the acceptance of an allocation key for the three-year transition period when sourcing revenue from the sale of components. However, even after the transition period, it is still extremely difficult to determine the location of the Final Customer into which the components are incorporated. The conditions for using an allocation key, for instance what process or steps need to be taken to prove the absence of reliable indicators, are also unclear. The use of allocation keys should always be permitted immediately upon self-declaration by the MNEs that no alternative measures are available. Also, it should be stipulated in the MLC that the use of such allocation keys is permissible.
2.2.3 Other Services
The criteria for the sourcing of international mobility and cloud computing revenue should be clarified in the Commentary#2.
Revenue sourcing for Large Customers requires manual collection of information on the place of use of the service and commercial documentation. Also, the Aggregate Headcount Allocation Key requires information on the country of residence of the parent company of each Large Customer and statistics from the CbCR, which involves a significant amount of manual work. Therefore, unless multiple customer accounts that are known to the same (parent) company of an MNE are interlinked in an existing commercial system, the sourcing rule for Large Customers should be applied at an individual account level, which can be managed in the commercial system. Consideration should also be given to allowing the use of billing addresses in the same way as for Smaller Customers.
As an alternative, it should be permissible for the covered group to use regional sales information when obtaining data on revenue arising from Large Customers. It should also be clarified how to demonstrate that alternative options to the applicable Reliable Indicators need to be used following the initial transition phase for Large Customers (Paragraphs 7 and 8(c) of Section 2 of Schedule E).
2.2.4 Online Intermediation Services
The difference between online intermediation and online distribution of digital content is not clear. The revenue sourcing rules applicable to each category are significantly different and should be clarified with specific examples.
2.2.5 Government Grants
Only government grants classified as revenue under accounting principles should be subject to revenue sourcing rules. For example, a grant should not be reclassified as revenue for the purposes of Amount A if it is recorded as a negative expense in the income statement.
2.2.6 Reasonable Steps
We welcome the clarification that changes to contractual agreements are not required as part of "Reasonable Steps". Detailed information on 'reasonable steps', which form the basis for the application of allocation keys, should be clarified through the Multilateral Convention, not in the commentary. It is not desirable to allow different interpretations of reasonable steps in multiple countries, and it is preferable to define such steps clearly and in detail in a binding multilateral agreement.
2.2.7 Internal Control Framework
As for the verification process to confirm the correctness of the calculations in the internal control framework, it should be clarified what similarities or differences there are with the existing internal control system required under financial reporting. When verifying the internal control framework, existing Enterprise Resource Planning (ERP) systems and audit processes should be respected as far as possible, rather than requiring entirely new systems and processes solely for the purposes of Amount A.
2.3 Determination of the Adjusted Profit Before Tax of a Group
2.3.1 Non-controlling Interests
Profits arising from non-controlling interests cannot be regarded as profits of the covered group. Therefore profits and losses arising from non-controlling interests should be excluded from the tax base, and the calculation of tax base and profit margin should be based on net profit after tax attributable to owners of the interest, not profit after tax reported on a gross basis. .
2.3.2 Joint Venture
It is desirable that profits and losses from joint ventures be excluded from the tax base. If it were to be included, the treatment of profits and losses from joint ventures should be aligned with that of the non-controlling interests. Thus, profits and losses from joint ventures attributable to a JV partner should be excluded from the tax base, and calculation of tax base and profit margin should be based on net profit after tax attributable to owners of the JV, not profit after tax reported on a gross basis.
2.3.3 Asset Fair Value Adjustment
The book-to-tax adjustments in Schedule F require that the book value before and after mark-to-market valuation be identified and managed for each individual asset and that adjustments for depreciation, gain or loss on disposal of assets, etc., be calculated. These requirements constitute an enormous administrative burden.
Therefore, it is desirable that either IFRS and other generally accepted accounting principles can be used as-is, or that these adjustments are made optional.
2.3.4 Acquired Equity Basis Adjustments
The book-to-tax adjustments in Schedule G require that the pre-restructuring book value of the restructured entity and the consolidated book value of the restructured entity both at the time of and following the acquisition should be identified and managed in relation to each individual asset and that adjustments for depreciation, impairment losses, gains or losses on disposal of assets, etc. should be calculated. These requirements constitute an enormous administrative burden.
Therefore, it is desirable that either IFRS and other generally accepted accounting principles can be used as-is, or that these adjustments are made optional.
Even if this adjustment is to be required, it should be clarified which forms of corporate reorganizations, such as share acquisitions, share exchanges, share transfers, and mergers, fall within the scope of book-to-tax adjustment items.
3. New Elements Presented in the Progress Report
We welcome the early presentation of concepts on the marketing and distribution profits safe harbour (MDSH) and the elimination of double taxation. The use of quantitative rather than qualitative criteria for these elements is appropriate. However, the mechanism for calculating MDSH and elimination of double taxation by reference to depreciation and payroll figures is new, differs significantly from the concepts outlined in the 2020 Blueprint, and appears complex. We would like to provide the following comments.
3.1 Marketing and Distribution Profits Safe Harbour
The figures used in the calculation of MDSH in each jurisdiction should be aligned with those in Pillar 2. It is not desirable to compile separate figures for Pillar 1 and Pillar 2. In addition, consideration should be given to using the CbCR figures and making the application of MDSH optional in order to reduce administrative burden.
The definitions of Eligible Assets, Eligible Payroll, and Eligible Employees should be clarified to avoid inconsistencies in interpretation between countries.
Clarification is needed where an Eligible Asset and the entity holding it are located in different jurisdictions or where the asset is located in more than one jurisdiction, such as aircraft. Consideration should also be given to including loss on retirement of assets in the calculation of depreciation on Eligible Assets.
The Progress Report states that Eligible Employees include ‘outsourced personnel engaged through independent contractors and acting under the direction and control of a Group Entity that is a member of the Covered Group,’ but specific examples of such employees should be provided for clarification.
3.2 Elimination of Double Taxation with Respect to Amount A
3.2.1 General Comments
There are some points in relation to the elimination of double taxation that are not yet clear, such as which entity among the MNE group will be the filing and paying entity, and the treatment of withholding tax. These points need to be explained as part of the overall picture at an early stage. We have the overall impression that the process to eliminate double taxation is highly complex.
Consideration should be given to simplifying the tiers and to replacing the combination of waterfall and pro rata methods with a simple pro rata method.
It is our understanding that the calculation of profits in each jurisdiction should be based on aggregated results of the constituent entities in that jurisdiction, similar to the calculation method in Pillar 2. However, MNEs should also be able to elect to calculate per jurisdiction profit on a consolidated basis.
The method of eliminating double taxation in cases where the PE is taxed in a market jurisdiction should be clarified.
In addition, the timing of the elimination of double taxation and the method of calculating the elimination of double taxation in the event of a correction need to be explained.
3.2.2 Method of Eliminating Double Taxation
Rather than allowing each jurisdiction to select their method of eliminating double taxation, adopting a globally uniform system would reduce the risk of double taxation that cannot be eliminated and reduce administrative burden. Assuming the proposed approach of multiple jurisdictions eliminating double taxation based on RODP (similar to the concept of profits) is implemented, the income exemption method would be simpler and clearer.
The foreign tax credit method has credit ceilings and carry forward period limitations in many countries. If these restrictions are to be respected in each country, double taxation cannot be completely eliminated. Formulaic apportionment under Amount A is a matter of inter-state allocation of profits, and the obligation to eliminate double taxation does not necessarily align with the business conditions, income, withholding tax and tax payment in each country. However, it is inappropriate that, as a result of this allocation, double taxation may arise which cannot be eliminated. A credit system should be established through a Multilateral Convention with no restrictions on the maximum credit limit and carry forward period.
Further consideration should be given to the elimination of double taxation and its interaction with Pillar 2 and withholding tax, once the overall structure is clear.
4. Other Elements
Although consultation documents on Administration of Amount A were not provided in this Progress Report, we request that tax return filing and payment be carried out under a one-stop shop system to reduce administrative burden.
As with Pillar 2, specific case studies should be prepared on the key points of each component.
- Please see footnote 1 of our comments on the revenue sourcing rules:
(https://www.keidanren.or.jp/en/policy/2022/018.html) - Please see Section 2.3.1 and 2.3.3 of our previous comments.