Thank you for this segment, Doug & Giorgia. I conclude that there is an important relationship between Pillar 1 and Pillar 2. I view Pillar 1 (Pil 1A and Pil 1B) as a pre-step to getting to an accurate and fair Pillar two top-up tax calculation by jurisdictions. And, who says accuracy in law interpretation and application, and in tax accounting calculation, says client value (i.e. low to no audit risks). In this new era, when handling a Pillar two project, I would do the following: A. If for example, I am dealing with the "P2 Top-up tax calculation exercise" for an MNE group of the specific type of MNE group(s) that are keenly targeted and thereby concerned by the many, if not all, of the "Taxation of The Digital Economy" report(s) and important discussion(s) and consensus that have either been published, discussed, or agreed upon, I would do the following: 1.a Identify & confirm the MNE type being dealt with. Confirming whether Pillar 1 implications exist. One does so by: 1.b. Analysing the F/S B/S & P&L for types of assets held and types of intraMNE group income and payments. 1.c. Requesting, obtaining, analysing, and understanding the identity of legal, beneficial, and tax owners of major IP. 1.d. Analysing, understanding, and tracing intraMNE cross border payments and revenues related to the major IPs of the MNE (see point 1.b above) to their respective final market jurisdiction (jurisdiction of final third party client). 2. Related to point 1.c above, properly re-allocating IP payment deduction expenses from jurisdiction of intraMNE recipient member to jurisdiction of third party (market based jurisdiction). 3. Determining whether the new approach to global revenue distribution and its taxation (new taxing rights to market based jur) is important enough to intentionally create substance in those new jurisdiction(s). 4. We have assumed that the newly determined allocation of revenues under pillar 1a impacts the said MNE group. Therefore, changes in the revenue and expense reporting for financial statements' P&L reporting purposes driven by agreed-upon market based approach may significantly (revenues especially for groups with regional distributing entities) affect the transfer pricing reporting of the MNE group on an onward basis. This, not only impacts the third party revenues and exp correlated to those intraMNE group IP-related revenues and payments transfers; but it also importantly impacts the FIN 48 (and their non-US equivalent) position and disclosure of the group. Thereby, impacting the final amount of covered taxes allowable under Pillar two calculation. Additionally, the deferred tax accounting impact of the non-pillar-two-adhering FIN 48 tax should be analysed and addressed. That is: adhering to these new regulations ensures greater comfort with the intraMNE and 3rd cross border revenues and allocated expenses reported to each jurisdiction. 5. As such, if involved on a pillar two project of an MNE group deemed both "in-scope" and to be digital company (IP-heavy and internet-based heavy servicing company), it is important to ensure that pillar one regulation, as it relates to revenue and expense reporting and allocation, has been followed. In our case, confirming that amount A's formula was applied when allocating intraMNE cross border revenues and payments (applying same to related third party revenues and expenses).
In essence, ensuring that intra MNE cross border revenues and expenses are properly allocated to jurisdictions (adhering to Pillar one regs) provides for an easier tracing of correlated third party revenues and expenses; thereby, allowing for compliance with this new era of revenue taxing rights allocations, and thus avoidance of excessive costs and penalties related to non compliance. I explain. If under the new revenue and expense allocation, an MNE finds that it now has foot prints in 25 countries: 15 of which are new and significant in amount. And, Pillar one's revenue allocation regulations were not followed. Then, the financial statements being used for the Pillar two top-up tax calculation exercise would not be accurate. Meaning that the MNE may end up paying excessive top up tax in certain jurisdictions than it would have had to if the FIN 48 TP revenues and expense payments had been properly adjusted by the impact of the new regs. Plus, if the 15 new jurisdictions are jurisdictions implementing Pillar 2, the MNE would likely not have access to either safe (no qualifications for and time period elapsed) harbours, then the liabilities owed under pillar two (in addition to the regular domestic tax liability) would be incurring penalties and interest. Or, if MNE group could have benefited from the safe harbours in these new jurisdictions; if we assume they are emerging jurisdictions adhering to Pillar two, and MNE group would have been able to avail themselves of those safe harbours. Whereas, the 10 main jurisdictions of strong presence of the MNE are LTCE jurisdictions with Qual IIR, UTPR, and QDMTT regimes. My conclusion: in some well-calculated circumstances where all numerical facts have been analyzed, important discussions with key client stakeholders have been had, and the law interpretation and application is favourable, Pillar One may be used to ease the blow of Pillar two's tax and compliance!!
Thank you for this segment, Doug & Giorgia. I conclude that there is an important relationship between Pillar 1 and Pillar 2. I view Pillar 1 (Pil 1A and Pil 1B) as a pre-step to getting to an accurate and fair Pillar two top-up tax calculation by jurisdictions. And, who says accuracy in law interpretation and application, and in tax accounting calculation, says client value (i.e. low to no audit risks). In this new era, when handling a Pillar two project, I would do the following:
A. If for example, I am dealing with the "P2 Top-up tax calculation exercise" for an MNE group of the specific type of MNE group(s) that are keenly targeted and thereby concerned by the many, if not all, of the "Taxation of The Digital Economy" report(s) and important discussion(s) and consensus that have either been published, discussed, or agreed upon, I would do the following:
1.a Identify & confirm the MNE type being dealt with. Confirming whether Pillar 1 implications exist. One does so by:
1.b. Analysing the F/S B/S & P&L for types of assets held and types of intraMNE group income and payments.
1.c. Requesting, obtaining, analysing, and understanding the identity of legal, beneficial, and tax owners of major IP.
1.d. Analysing, understanding, and tracing intraMNE cross border payments and revenues related to the major IPs of the MNE (see point 1.b above) to their respective final market jurisdiction (jurisdiction of final third party client).
2. Related to point 1.c above, properly re-allocating IP payment deduction expenses from jurisdiction of intraMNE recipient member to jurisdiction of third party (market based jurisdiction).
3. Determining whether the new approach to global revenue distribution and its taxation (new taxing rights to market based jur) is important enough to intentionally create substance in those new jurisdiction(s).
4. We have assumed that the newly determined allocation of revenues under pillar 1a impacts the said MNE group. Therefore, changes in the revenue and expense reporting for financial statements' P&L reporting purposes driven by agreed-upon market based approach may significantly (revenues especially for groups with regional distributing entities) affect the transfer pricing reporting of the MNE group on an onward basis. This, not only impacts the third party revenues and exp correlated to those intraMNE group IP-related revenues and payments transfers; but it also importantly impacts the FIN 48 (and their non-US equivalent) position and disclosure of the group. Thereby, impacting the final amount of covered taxes allowable under Pillar two calculation. Additionally, the deferred tax accounting impact of the non-pillar-two-adhering FIN 48 tax should be analysed and addressed. That is: adhering to these new regulations ensures greater comfort with the intraMNE and 3rd cross border revenues and allocated expenses reported to each jurisdiction.
5. As such, if involved on a pillar two project of an MNE group deemed both "in-scope" and to be digital company (IP-heavy and internet-based heavy servicing company), it is important to ensure that pillar one regulation, as it relates to revenue and expense reporting and allocation, has been followed. In our case, confirming that amount A's formula was applied when allocating intraMNE cross border revenues and payments (applying same to related third party revenues and expenses).
In essence, ensuring that intra MNE cross border revenues and expenses are properly allocated to jurisdictions (adhering to Pillar one regs) provides for an easier tracing of correlated third party revenues and expenses; thereby, allowing for compliance with this new era of revenue taxing rights allocations, and thus avoidance of excessive costs and penalties related to non compliance. I explain.
If under the new revenue and expense allocation, an MNE finds that it now has foot prints in 25 countries: 15 of which are new and significant in amount. And, Pillar one's revenue allocation regulations were not followed. Then, the financial statements being used for the Pillar two top-up tax calculation exercise would not be accurate. Meaning that the MNE may end up paying excessive top up tax in certain jurisdictions than it would have had to if the FIN 48 TP revenues and expense payments had been properly adjusted by the impact of the new regs. Plus, if the 15 new jurisdictions are jurisdictions implementing Pillar 2, the MNE would likely not have access to either safe (no qualifications for and time period elapsed) harbours, then the liabilities owed under pillar two (in addition to the regular domestic tax liability) would be incurring penalties and interest. Or, if MNE group could have benefited from the safe harbours in these new jurisdictions; if we assume they are emerging jurisdictions adhering to Pillar two, and MNE group would have been able to avail themselves of those safe harbours. Whereas, the 10 main jurisdictions of strong presence of the MNE are LTCE jurisdictions with Qual IIR, UTPR, and QDMTT regimes.
My conclusion: in some well-calculated circumstances where all numerical facts have been analyzed, important discussions with key client stakeholders have been had, and the law interpretation and application is favourable, Pillar One may be used to ease the blow of Pillar two's tax and compliance!!