Following the Autumn Budget and the subsequent release of the Corporate Tax Roadmap, the UK has demonstrated its continued support of the Pillar One regime. Here, we look at how businesses can prepare for the future.

In 2023, the OECD released further guidance on Pillar 1 and its proposed approach to addressing the challenges arising from the taxation of the digital economy. A statement was issued, calling for a finalisation of the text of the Pillar 1 multilateral convention by the end of March 2024 with a view to holding a signing ceremony by the end of June 2024.

Unfortunately, the timing for the introduction of Pillar 1 remains unknown and very much depends on its acceptance by a critical mass of jurisdictions. In particular, the agreement of the United States would be essential for successful implementation of the current proposals.

The UK has demonstrated its continued support of the Pillar One regime following the Autumn Budget and the subsequent release of the Corporate Tax Roadmap. A year on, we take a look at what has changed in the guidance.

Background to Pillar 1

Pillar 1 was introduced as a key part of the OECD's BEPS (Base Erosion and Profit Shifting project) and the ‘two pillar’ solution. As a result of an increasing digital economy multinational enterprises (“MNEs”) generate profits in countries where they have little or no physical presence. The concern of many countries is that this creates a mismatch between where profits are taxed and where the profits are generated.

The objective of Pillar 1 is reallocating taxing rights jurisdictions where products are consumed. It has changed significantly since the first OECD Blueprint.

Originally it was planned to only apply to multinationals providing automated digital services or where they were consumer facing businesses. This no longer applies and it could apply to any multinational that was within its scope.

Amount A & Amount B

In-scope companies are multinational enterprises (MNEs) with global turnover above 20 billion euros and profitability above 10% (i.e. profit before tax/revenue) calculated using an averaging mechanism with the turnover threshold to be reduced to 10 billion euros, contingent on successful implementation including of tax certainty on Amount A, with the relevant review beginning seven years after the agreement comes into force, and the review being completed in no more than one year.

Extractives and Regulated Financial Services are excluded.

Amount B is separate from Amount A and relates to the application of the arm’s length basis to in-country baseline marketing and distribution activities. The purpose is to simplify transfer pricing rules for both tax authorities and multinational groups.

In particular, it will provide a fixed return for baseline marketing and distribution activities that is intended to deliver a similar outcome to the arm’s length basis.

Impact on Digital Services Tax

Once a global solution is in place, the government intends to remove the UK Digital Services Tax. However, uncertainty remains as to the likelihood of a Pillar 1 solution being adopted globally. The Republican controlled congress have to date been vocal in their opposition to an introduction of Pillar 1 and the incoming Trump presidency seems highly unlikely to support Pillar 1.

Accordingly, unilateral measures like the UK’s DST are likely to remain.

How we can help

Pillar 1, which applies to large multinationals, will reallocate certain amounts of taxable income to market jurisdictions, resulting in a change in effective tax rate and cash tax obligations, as well as an impact on current transfer pricing arrangements.

Businesses should assess the long-term impact of these changes, as the OECD intends to increase the number of entities subject to Pillar 1 over time. We can help determine whether your group is within the scope and support with the compliance.