Following the US company’s push for simplicity and recommendation that both the income inclusion provision (IIP) and the deduction denial provision (DDP), as raised in the OECD’s consultationdocument, should only apply to companies who are not subject to an effective white-listed controlled foreign company (CFC) or minimum tax regime, an approach must then address three key points:
(1) Defining the operations subject to the provisions and the level at which they are applied;
(2) Determining how to measure tax burden; and
(3) Determining how and when to apply the ’top-up tax’.
In determining the level of granularity at which the GloBE provisions should be applied, Amazon believes that the worldwide consolidated basis is the only approach that could be more realistically broadly adopted.
“Any alternate approaches which require bespoke country or legal entity level calculations would in practice be incredibly burdensome, if not impossible, both for taxpayers and tax authorities, and is highly likely to lead to disputes between tax authorities,” said the technology company.
With regards to threshold the company noted that multinational enterprises (MNEs) should be allowed to apply the rules in the context of their overall worldwide group.
Amazon suggested that MNEs should first test whether their consolidated operations are subject to tax at a sufficiently high effective rate based on their consolidated financials.
“Such a worldwide ‘safe harbour’ would ensure that GloBE provisions were effectively targeted at MNE groups who may be engaging in profit shifting and other problematic tax practices, which result in an overall low effective tax rate,” the company said.
Adopting a simple global approach hold the advantage that it could work for both developed and developing countries. The company pushed for using consolidated financial results that are already available and audited to reduce compliance burdens.
“Measuring a group’s tax burden on a worldwide basis may also provide more equitable results, as it may remove jurisdiction-by-jurisdiction distortions that arise for genuine commercial reasons,” said Amazon.
For groups that are not already subject to an effective CFC or minimum tax regime, and do not meet the ‘safe harbour’ criteria, guidelines should establish a common starting point for measuring taxable income and any permitted adjustments, according to the company.
This is required for the IIP rule, to assess whether the level of tax is high enough for any given MNE group, and the DDP rule to assess if the recipient of the payment is subject to a sufficient level of tax.
Amazon believes the using the accounting rules applicable to the jurisdiction of the ultimate parent entity (UPE) to calculate net income is the most straightforward and easily administrable approach. Companies will generally have this information for reporting their financials, and tax authorities will be familiar with their home country accounting rules. Using financial reporting data as a starting point would promote uniformity among jurisdictions applying an IIP.
“Applying different accounting rules on a jurisdiction-by-jurisdiction basis, by contrast, could lead to widely divergent results and would greatly increase compliance burdens on taxpayers and audit burdens on tax authorities,” said Amazon.
Furthermore, applying domestic tax laws as the basis of an IIP would be difficult to implement because of the variation between jurisdictions of domestic tax laws and, if used for the basis of the income inclusion rule, taxpayers would have to maintain multiple sets of financial records for a single entity. This would create a large compliance burden and it would be difficult for tax authorities to audit, even those with highly developed tax administrations.
Given the shortcomings of other approaches, Amazon argues that applying the generally accepted accounting principle (GAAP) of the UPE would appear to be the most proportionate and practical approach in measuring taxable income.
Once consolidated pre-tax income has been calculated in accordance with the relevant jurisdictional accounting rules, adjustments may be made to reflect consensus determinations as to necessary book-tax adjustments, creating an adjusted income result.
Amazon noted that any adjustments made to arrive at adjusted net income should be kept to a short and simple list to facilitate administration.
“Using consolidated accounting profit will aid simplicity and reduce the number of adjustments required. For example, using consolidated accounts will mean that intercompany dividends do not need to be adjusted for given they would be eliminated upon consolidation. Adjustments should not include any timing differences, but be reserved to certain limited permanent items,” said the company.
The company noted that timing differences, such as those from the depreciation of assets used in a trade or business, should not result in any adjustments in arriving at adjusted net income under the GloBE provisions, given they do not impact the amount of taxes, only the timing when paid.
The treatment of timing differences could be simplified by using consolidated accounting. This is because accounting rules generally look to ensure the appropriate matching of income and expenses and this is achieved for tax through deferred tax accounting.
“…therefore using the consolidated accounting profit and the tax accrued per the accounts, including movements in deferred tax balances, will alleviate concerns that timing differences could lead to unjust outcomes under the GloBE provisions,” said Amazon.
After adjusted net income has been calculated, the amount of tax attributable to that income will also need to be determined. Amazon highlights that the corporation tax charge in the accounts, can be the effective starting point for this.
“It is also important that pillar two calculations should be made subsequent to and reflect any additional pillar one allocations,” said the company.
Amazon has also pushed for maximum simplicity in pillar one noting that scope should apply to all businesses with explicit exemptions for specific sectors and existing VATprinciples could be leveraged to simplify the compliance and administration of the OECD’s digital tax proposals.
The company also stated that if an MNE is subject to less than the established minimum tax, then additional tax should be paid such that the aggregate tax burden in the MNE Group is at least equal to the target rate applied at a consolidated level. This target rate should be determined by international consensus.
Amazon’s response to the OECD’s pillar two proposals has stressed the need for simplification. However, the difficult task of limiting profit-shifting and base erosion could call for more complexity and not less.
