In October 2021, over 135 members of OECD/G20 Inclusive Framework reached an agreement on BEPS to a two-pillar solution addressing the tax challenges arising from the imminent digitalization and globalization of the world economy. The work on the two-pillar plan is well underway now with the OECD launching public consultation with the release of the first building block under pillar one.
The OECD/G20 Inclusive Framework is launching a stage-wise public consultation. The secretariat working documents would be released on each building block to obtain quick feedback before the work is finalized. The organization has decided to take this approach instead of taking the long-drawn approach of waiting for the comprehensive document to be ready before any stakeholder consultation. This will allow the organization to work in parallel with the consultation and adhere to the tight political timetable agreed to on October 2021.
On fourth February 2022, the first building block was released for public comment. While the Draft Rules for Nexus and Revenue Sourcing have been agreed for the release to obtain public comments, the draft rules do not reflect the consensus over the substance of the document. Interested stakeholders can send their written comments by 18th February 2022.
The purpose of revenue sourcing rules is to allow in scope MNEs to identify relevant market jurisdictions from which revenue is derived and to apply the revenue-based allocation key since revenue is sourced to the end market jurisdictions where the goods and services are consumed. The revenue sourcing rules will help identify the end market for these transactions and seek to take relevant commercial context into account when applying rules to MNEs in their relevant categories. The revenue sourcing rules will help fulfill the policy of identifying the market jurisdiction and its associated revenue, thus simplifying and eliminating compliance burdens as much as possible.
First, the rules used to evaluate market jurisdiction (as defined for that category) are intended to enable MNEs to draw on information that they are already collecting and use it to prevent the need to change information collection practices or create new reporting obligations as much as possible. While the guidelines give a uniform identification of the end market, they are flexible in terms of how the MNE implements the rule and are not prescriptive in terms of which data point must be utilized. This acknowledges that various business models will demand separate sorts of data.
MNEs with a lack of transactional information or having a lot of trouble obtaining the data have been acknowledged. In such cases, the rules allow the use of proxies like allocation keys rather than investing in a new and highly complex reporting system. The allocation keys would use macroeconomic and industry-specific data to come up with a simple way to approximate the end market. This will help reduce the compliance burden on even the toughest revenue sourcing cases.
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