• Caroline Chua, Senior Manager |
  • Shimeng Lan, Expert |


The Organization for Economic Cooperation and Development (“OECD”) published the Draft Rules for Nexus and Revenue Sourcing (“Draft Model Rules”) on 4 February 2022 for public consultation. Upon finalization, the Draft Model Rules will impact how profit is allocated among market jurisdictions for large Multinational Entities (“MNEs”). 

On October 2021, 137 members of the OECD/G20 Inclusive Framework on BEPS (“IF”) reached an agreement on a two-pillar solution to address the tax challenges arising from the digitalization and globalization of the economy. Following this political agreement, the OECD announced a schedule for public consultations on various aspects of its two-pillar solution in December 2021. The newly released Draft Model Rules is the first building block of Amount A open for public discussion. 

To recap, Pillar One consists of three key elements:

  • Amount A: a new taxing right over a portion of the (deemed) residual profit of large and highly profitable enterprises (“Covered Groups”) for jurisdictions in which goods or services are supplied or consumers are located (“market jurisdictions”), which may not necessarily be in line with the arm's length principle ("ALP"). The OECD is envisaging a timeline of 2023 for Amount A to come into effect. While the focus of this blog is the first building block of Amount A, the OECD is expected to release working documents on other building blocks of Amount A in the upcoming months.  
  • Amount B: the remuneration of related-party distributors that perform 'baseline marketing and distribution activities', aligned with the ALP. The OECD will release a public consultation document in mid-2022, with a view to finalize the work of Amount B by the end of 2022. 
  • Tax certainty: a dispute prevention/resolution mechanism, likely to require an 'innovative solution' to ensure agreement between tax administrations as to how Amount A applies to a group.

The Draft Rules for Nexus and Revenue Sourcing

The Draft Model Rules are a working document released by the OECD Secretariat for the purposes of obtaining input from stakeholders. As such, comments are sought with respect to the nexus and revenue sourcing rule. Stakeholders and other interested parties may send their comments before 18 February 2022 and participate in the live OECD webinar on 21 February 2022. Upon finalization, the Draft Model Rules will provide a basis for jurisdictions to draft the new taxing rights over Amount A in their domestic legislation. 

The Draft Model Rules contain the following key components: 

The nexus rule 
The nexus rule has been designed as a stand-alone provision that applies solely to determine whether a jurisdiction is entitled to profit re-allocation under Amount A and will not alter the nexus for any other tax or non-tax purpose. The nexus test is satisfied for a period if the revenues of a covered group arising in a jurisdiction for the period are equal to or greater than EUR 1 million (for jurisdictions with annual GDP equal to or greater than EUR 40 billion) or EUR 250 thousand (for jurisdictions with an annual GDP of less than EUR 40 billion). The threshold amount is adjusted proportionally where the period is shorter or longer than twelve months. 

The revenue sourcing rule
The revenue sourcing rule determines the jurisdiction where the revenues arise for the purposes of Amount A. It is structured by having distinctive sourcing principles for different types of revenue on a high-level, supported by a schedule setting out the detailed guidance for application. Specifically, the revenues are categorized based on the following types of transactions:

  • Sales of finished goods
  • Sales of components
  • Provision of services
  • Transactions for the licensing, sale, or other alienation of intangible property or user data
  • Transaction involving real property
  • Government grants
  • Non-customer revenues

The revenue sourcing rules will be supported by detailed record-keeping requirements. It is to be noted that the Covered Group is not required to retain that data from every single transaction. Instead, a systemic-level approach demonstrating the conceptual framework of the Covered Group’s revenue sourcing approach, sourcing and monitoring of data would be sufficient based on the Draft Rules. Further details on the administrative aspects of the record-keeping requirements are yet to be defined. However, it is worthwhile for the in-scope MNEs to start thinking about the data sources available to comply with the revenue sourcing rules, as well as any potential changes of their business processes. 

Challenges and responses to BEPS 2.0

Despite the guidance from the Draft Model Rules, there are still many challenging issues on Pillar One pending further update from the OECD and the IF, including the:

  • Definition of exclusions: i.e.: whether extractives are constrained to mining or also include trading activities
  • Tax base determination
  • Marketing and distribution safe harbor definition
  • Details on the double taxation elimination mechanism
  • Process for simplification / streamlining

Given the rapidly evolving landscape and challenges, MNEs should stay informed about developments in BEPS 2.0 to determine how they are affected. In the meantime, the following steps could already be considered:

  • Assess which hubs and markets are affected
  • Determine which industries and products are affected
  • Determine which payments are affected
  • Review ability to track source revenues
  • Demonstrate clear management of internal controls, particularly for revenue sourcing
  • Track local ETR and highlight lower-taxed jurisdictions
  • Review operating model 
  • Determine the tax impact and contribute to the ongoing discussion

KPMG able to assist in providing both a high-level qualitative risk assessment and a detailed “readiness” analysis based on an in-depth review on the potential tax risk impact of BEPS 2.0 per jurisdiction. Our value chain analysis methodology could help MNEs maintain a sustainable business model in line with BEPS 2.0 and business requirements.

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