#BEPSTalkSeries 2/5 - BEPS 2.0 : Pillar 1 - Nexus Rules

In the era of globalized and digital economy, the OECD’s BEPS 2.0 initiative is a game-changer for international tax rules. BEPS 2.0 comprises of Pillar One and Pillar Two –both of them are independent of each other in terms of the approach and calculation.

Pillar one is a forefront of this transformation and consists of majorly 3 components i.e., Amount A, Amount B and Tax certainty.

Today’s post of the #BEPSTalkSeries covers one of the building blocks of ?BEPS 2.0 i.e, the introduction of new Nexus Rules under Pillar One.

Understanding Nexus Rules: ?Nexus Rules are transforming the taxation landscape for MNEs. Traditionally, tax obligations were based on physical presence; However, these new rules acknowledge the digital economy’s influence, enabling market jurisdictions to tax profits even without a physical presence.

Key Insights:

? Revenue Thresholds: The nexus test is met if a Covered Group’s revenue in a jurisdiction exceeds €1 million for countries with a GDP of €40 billion or more, and €250,000 for smaller economies.

? Market Allocation: These rules aim to allocate a portion of residual profits to market jurisdictions where goods or services are consumed. This is done through Amount A which uses a formula driven approach to determine profit share that is subject to reallocation (Detailed post on Amount A and Amount B calculations to be covered in a separate post).

? Global Impact: With 140+ jurisdictions participating, these changes will significantly impact how MNEs manage their tax strategies. These reforms target the tax issues posed by the digital economy, ensuring that MNEs contribute their fair share of taxes in countries with substantial consumer bases, even if they lack a physical presence there. This fosters equity and curbs tax avoidance.

Current Status of Nexus Rule (Pillar One)

• The deadline of implementing Pillar One was originally extended to 30th June 2024; however, the OECD has not received consensus on Pillar One yet.
• The reallocation of taxing rights has been a contentious issue. Countries differ on how much tax revenue should be shifted from the home jurisdictions of MNEs to the jurisdictions where these companies have significant consumer interactions.
• There also has been varying opinions on the technical details of the profit allocation and nexus rules, making it difficult to reach a unified agreement.

While the above post has briefly covered the concept of Nexus rules and Profit allocation, the future posts shall cover in depth details on other aspects of Pillar One.

Feel free to share your thoughts or suggestions and stay tuned for another post due tomorrow!

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The facts/ information mentioned in the above article stands as per the publications by OECD as on 2nd October 2024. Any further developments would require revisiting of the above. The views above are?personal. Any act of copying content/ opinion requires prior approval.

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