POLICY NOTE

Taxing the Digital Economy: A Case Study on the Unified

Approach

Stefan Greil* & Thomas Eisgruber**

In October 2020, the OECD Secretariat published the ‘Report on Pillar One Blueprint’ approved by the Inclusive Framework on BEPS as a result
of the work on the tax challenges arising from digitization. This contribution attempts to explain the application of the Unified Approach,
especially Amount A using a case study. The case study reveals a considerable complexity of the proposed new system. Therefore a simplification
potential is to be pointed out at the same time, in order to make Amount A practicable. The possibility is not precluded that certain aspects could be
interpreted or regarded differently. Therefore, this case study intends to contribute to the development of a common understanding, too. It is
important that all participants in a multilateral system have a common understanding. Otherwise, this results in double taxation and enormous
administrative challenges for taxpayers and tax administrations. There is still the opportunity to make changes. This should be used now, since
multilateral systems are difficult to change once they have been implemented. Finally, the application of the proposed draft of the new Article 12B
of the UN Tax Treaty Model is also considered.
Keywords: Digital economy, digitalization, arm’s length principle, pillar one blueprint, unified approach, reallocation of taxing rights, Amount A, tax certainty,
Article 12B UN model.

1 INTRODUCTION of taxation rights and measures in order to ensure effective

The taxation of the digital economy has been a particular
area of interest for years. In May 2019, the discussions
culminated into the ‘Programme of Work to Develop a
Consensus Solution to the Tax Challenges Arising from
the Digitalization of the Economy’1 that is to be consid-
ered in the context of Base Erosion and Profit Shifting
(BEPS) Action Point 1 ‘Taxation of the Digital Economy’2
and the public consultation paper dated 13 February
2019.3 The latter contained proposals for the reallocation
minimum taxation, which are also reflected in the work
programme. At the beginning of October 2019, the
OECD Secretariat then presented the concept of a so-
called Unified Approach (UA),4 which was welcomed by
the Inclusive Framework5 in January 2020 and forms the
basis for further work.6 The declared aim was to prepare
recommendations for the taxation of the digital economy
by the end of 2020. In the meantime, two unofficial drafts
of the Blueprint for Pillar 1 were leaked7 in August and

Notes
*
M.Sc., is lecturer in international taxation, post-doctoral fellow at the Department of Business Taxation of the University of Hamburg, and responsible for international
taxation issues in the German tax administration. Email: StefanGreil@gmx.net.
**
Head of the Department for national and international tax audit of the German Ministry of Finance. He lectures at the Ludwig-Maximilians-Universität, Munich, and at the
Cologne University. He is editor of a commentary on Taxation of restructuring and coeditor of the ISR tax journal, founder of the International Tax Centre in Munich,
chairman of the International Tax Audit Forum and member of the board of German IFA branch. Email: thomas.eisgruber@bmf.bund.de.
1
OECD, Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy, OECD/G20 Inclusive Framework on BEPS (OECD
Publishing 2019).
2
OECD, Addressing the Tax Challenges of the Digital Economy, Action 1 – 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project (OECD Publishing 2015).
3
OECD, Tax Challenges of the Digitalisation of the Economy, Public Consultation Document 13 Feb. – 6 Mar. 2019 (OECD Publishing 2019).
4
OECD, Secretariat Proposal for a ‘Unified Approach’ Under Pillar One, Public Consultation Document 9 Oct. – 12 Nov. 2019 (OECD Publishing 2019).
5
Flyer OECD/G20 Inclusive Framework on BEPS, https://www.oecd.org/tax/beps/flyer-inclusive-framework-on-beps.pdf (accessed 13 Oct. 2020).
6
OECD, Statement by the OECD/G20 Inclusive Framework on BEPS on the Two-Pillar Approach to Address the Tax Challenges Arising from the Digitalisation of the Economy – Jan.
2020, OECD/G20 Inclusive Framework on BEPS, (OECD Publishing 2020), www.oecd.org/tax/beps/statement-by-the-oecd-g20-inclusive-framework-on-beps-january-
2020.pdf (accessed 13 Oct. 2020), para. 1.
7
MNE Tax, Leaked OECD Draft Pillar One and Pillar Two Digital Tax Blueprints Available (3 Sept. 2020), https://mnetax.com/leaked-oecd-draft-blueprints-on-pillar-one-and-
two-available-40033 (accessed 13 Oct. 2020); MNE Tax, Revised (Sept 16) Draft Pillar One and Pillar Two Digital Tax Blueprints Now Available (23 Sept. 2020), https://
mnetax.com/revised-sept-16-draft-pillar-one-and-two-digital-tax-plan-blueprints-available-40328 (accessed 13 Oct. 2020); Allison Christians, Pillar 1 & 2 Blueprints—Sept
16 Version (22 Sept. 2020), https://www.allisonchristians.com/blog/pillar-1-amp-2-blueprintssept-16-version (accessed 13 Oct. 2020).

INTERTAX, Volume 49, Issue 1

53
© 2021 Kluwer Law International BV, The Netherlands
 Intertax
September 2020, and an official one was published in
October 2020 for public consultation.8 The objective is
to now overcome remaining political and technical chal-
lenges in order to approve a solution based on the
Blueprint in 2021.
The UA, which is the basis of the Blueprint, is
intended to complement the existing system of corporate
income taxation. At the time of this writing, the essence
of the UA is to grant market countries the right to tax a
portion of the profits of companies – regardless of whether
they have a physical presence in the market country in the
form of an affiliated company or a permanent establish-
ment. To this end, the profits of multinational
enterprise (MNE) groups are to be divided between their
countries of residence and sales. This UA consists of three
‘amounts’:
– Amount A allocates the right to tax profits of an
MNE group partially to market countries regardless
of whether the MNE group has a physical presence in
the market country. Amount A merely defines taxa-
tion rights on deemed residual profits.
– Amount B is to intervene in the current system to
allocate the profits of an MNE group to distribution
companies with so-called baseline marketing and dis-
tribution activities. Thus, the approach particularly
aims at distribution companies with a low level of
functionality and risk. The UA provides that such
companies are attributed to a minimum income or a
safe harbour income for the exercise of this function.
– Amount C is intended to provide effective procedures
for the avoidance and resolution of disputes over the
allocation of taxing rights, for the allocation of profits
beyond Amount B on the basis of the arm’s length
principle, and for the application of Amount A.
This contribution attempts to explain the application of
Amount A using a case study and, at the same time, to
show simplification potential. Amount B and Amount C
are not subjects of this article.
There are several ongoing discussions about Amount A,
therefore, not all could be covered in a single case study. The
case study is also based on the general understanding of the
current considerations regarding the UA. The possibility is
not precluded that certain aspects could be interpreted or
regarded differently. Therefore, this case study intends to
contribute to the development of a common understanding
and to show simplification possibilities. Alternatively, the
application of the proposed draft of the new Article 12B of
the UN Tax Treaty Model is also considered.
However, before beginning on the subject, the authors
would like to emphasize three issues that are thought to be
the most important. This may help to clarify the focus of this
Notes
8
OECD, Tax Challenges Arising from Digitalisation – Report on Pillar One Blueprint: Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project (OECD
Publishing 2020).
54
study and the reasons why the existing thought and considera-
tions formulate a solution that may retain all of the ideas but
make them assimilate in a more administrable environment:
1. Scope: What types of MNE groups should be within the
scope of Amount A? Should it cover only MNE groups
performing automated digital services (ADS), and/or
should it focus on so-called consumer facing business
(CFB), or should the scope be even wider to address the
challenges of the digital economy in a comprehensive
manner? Especially from the organizational perspective,
the solution that is most effectively managed adminis-
tratively should be pursued. Therefore, the final solution
should only depend on facts that are easy to identify, that
are transparent for all parties involved – MNE groups
and all tax administrations – and on which everyone can
agree with little difficulty. In a world where all busi-
nesses become digital almost daily, a formal description
of which businesses are digital may not accord with these
objectives.
2. Interaction between existing and new systems: mixing
up the existing rules that are based on the arm’s
length principle (ALP) with a completely new multi-
lateral approach of allocating deemed residual profits
should be avoided. The integration of a bilateral but
multilaterally coordinated approach in the form of the
ALP with that of a multilateral procedure has con-
siderable practical and procedural implications for
both approaches. When all countries have finally
agreed on an allocation of the deemed residual profit,
it would be a complete disaster if an adjustment by
any one or two countries as a result of a transfer
pricing audit, mutual agreement procedure (MAP),
or arbitration would affect that multilateral agreement
years later. It would be similar if the guidelines under
Amount A and/or the agreement on the allocation of
deemed residual profits make transfer pricing audits
even more complicated or even impossible (examples
are the determination of low risk distributors or the
determination of entrepreneurs within the framework
of Amount A).
3. No double taxation: the new system should not
result in double taxation of profits allocated by the
Amount A system. All profits that are part of that
system are already taxed. If many countries receive
additional profit, there must be a sincere way that all
of these profits are released from the original taxa-
tion. This system must be transparent for all coun-
tries and independent from all different types of
taxation by any legislation. Additionally it has to
be a universal and exact system, how to determine
the profit.

Figure 1
2 CASE STUDY
2.1 Description of the Facts
The MNE group is active in the field of production
and selling smartphones (SP), the development and
offering of application software (App), and exploiting
and selling commodities (C). A Co. is the ultimate
parent entity (UPE) with a comprehensive functional
and risk profile. The main business area of the MNE
group is smartphones. For the production of the
smartphones, the MNE group requires raw materials
that are supplied by B Co. Any remaining raw materi-
als are sold on the market without being processed.
The App sector is an emerging business area and is
Notes
9
OECD, OECD Tax Talks – Centre for Tax Policy and Administration (4 May 2020), https://www.oecd.org/tax/oecd-tax-talks-presentation-may-2020.pdf (accessed 13 Oct.
2020).
Taxing the Digital Economy
Overview of the MNE Group and Its Business Activities
increasingly displacing the smartphone segment. The
MNE group does business in six countries and is
located in six countries. The following figure shows
the structure of the MNE group. The annex contains
the individual profit and loss accounts (P&Ls) and the
consolidated P&L. They are based on the legally
applicable accounting standards.
2.2 Solving the Case Using the Unified
Approach
As it stands at present, based on statements by represen-
tatives of the OECD Secretariat9 and the Blueprint on
55
 Intertax
Pillar 1,10 the application of Amount A comprises various
steps that are listed below and are applied to the case
study. At this point, it should be noted that the case study
does not implement one to one the order provided in
Annex A of the Blueprint. However, this is not detrimen-
tal to the content.
2.2.1 Step 1: Activities Test
First, an activities test must be applied to determine if the
MNE group performs activities within the scope of
Amount A.11 In-scope activities are related to an ADS
and a CFB.
Within the scope of ADS are businesses that generate
revenue from the provision of automated digital services
and revenue from the monetization of data that are pro-
vided on a standardized basis to a large population of
customers or users across multiple jurisdictions using
little or no local infrastructure. They generally exploit
customer or user network effects and generate value from
interaction with users and customers. They often benefit
from data and content contributions made by users and
from the intensive monitoring of users’ activities and the
utilization of corresponding data. ADS, therefore, is some-
thing that is delivered over the internet or an electronic
network, the provision of the service to the user is largely
automated, and it is impossible to provide it in the
absence of information technology. Examples are online
search engines, social media platforms, and digital content
streaming. The general definition could be combined with
an updateable positive and negative list of services listing
in-scope and out-of-scope services.
Within the scope of CFB are businesses that generate
revenues from selling goods or services, either directly or
indirectly, to consumers. In addition, special exceptions,
for instance, an extractive industry, financial services as
well as aircraft and shipping are discussed. However, the
delineation is somewhat ambiguous as it is based on
subjective criteria. For example, gold mining and the
subsequent sale to business customers would probably be
out-of-scope, however, further processing into a piece of
jewellery and its subsequent sale would qualify as CFB.
Finally, each revenue stream of each entity of the MNE
group must be identified and assigned to one of the three
activities (ADS, CFB, or other activities). The burden of
proof will likely fall on the MNE group to prove that
their activities and related revenue are out of scope.
Within the framework of the case study, it is assumed
that the activities relating to the smartphone segment fall
under CFB and activities regarding the apps segment
under ADS. The commodity segment, however, would
Notes
10
OECD, Tax Challenges Arising from Digitalisation, supra n. 8.
11
The detailed process map of Amount A starts with the global revenue test. OECD, Tax Challenges Arising from Digitalisation, supra n. 8, Annex A. However, this step is
required implicitly.
56
be out of scope. However, it should be noted that the
identification and classification of the individual business
activities and the resulting revenue streams in ADS, CFB,
and other activities do not have to be accompanied by the
segmentation performed by an MNE group – as assumed
here for the sake of simplicity. Accordingly, a product- or
service-related identification and classification must be
carried out. For example, in the smartphone segment,
services that are more closely related to ADS could also
be provided and, in addition, not all income of the smart-
phone segment has to be generated by ADS or CFB
activities.
Finally, the Blueprint does not mention a required
quantum of revenue resulting from ADS and CFB activ-
ities to be in-scope. Therefore, this step could or should
also be combined with a threshold test. This would have
the consequence that only MNE groups with aggregated
revenue from in-scope activities exceeding an ‘x’ amount
of euros are taken into account for Amount A liability. In
the present case, any thresholds would have been sur-
passed (ADS: EUR 395 million; CFB: EUR 2,005 mil-
lion; other activities: EUR 100 million). The activity test
is required in the third step at the latest.
2.2.2 Step 2: Global Revenue Test
In a second step, a global revenue test has to be applied to
MNE group consolidated financial accounts. As previously
mentioned, only MNE groups with revenue exceeding an
‘x’ amount of euros are potentially in scope of Amount A.
Various thresholds have already been mentioned here. At
least the threshold of EUR 750 million is promising. This
is also because the country-by-country reporting (CbCR)
threshold is EUR 750 million, and the CbCRs may
become an integral part of the documentation package
for determining and verifying Amount A. The threshold
is met in the case study. Whether such a threshold, in
general, is appropriate shall not be discussed at this point.
Just consider the following example: two MNE groups (A
and B) are almost identical. Both are active in the online
platform business in countries A and B, have their head-
quarters in country A and generate sales of EUR 700
million each with customers from country B. Group A
has sales of EUR 750 million. It would be subject to the
scope of Amount A. Group B has sales of EUR 749
million. It would not be subject to Amount A.
However, the connection to the requirements of a
group and a consolidated financial statement must be
questioned. On the one hand, not all units are included
in these statements due to their insignificant materiality.
These units would additionally then have to be taken into
 Taxing the Digital Economy
account as in the case of the CbCR. On the other hand, it
is intended to capture economic units, however, other
economic units come into consideration here for which
their units are related to each other but do not have to
prepare consolidated financial statements. One example
that can be thought of is the National Football
League (NFL) which grants rights worldwide and makes
billions in revenues from these without having a physical
presence locally. Although the profits are paid out to the
individual teams, this economic success can only be gen-
erated through economic cooperation via the NFL.
2.2.3 Step 3: Domestic Business Exception
In a third step, a domestic business exception could be
applied (‘de minimis foreign in-scope revenue test’). MNE
groups that generate more than ‘x’% of their aggregate in-
scope revenue from their domestic market and with for-
eign in-scope revenues less than an ‘x’ amount of euros
could be excluded from Amount A. However, this plau-
sible exemption complicates its application. Looking at
Figure 1 and the corresponding P&L of the MNE group,
questions may arise as to what is actually domestic. Only
A Co. generates revenues from cross-border direct busi-
ness, in this context, with countries E and G. However, in
country E, a company of the MNE group is resident that
is responsible for marketing but does not generate any
revenues with third parties. The necessary application of
highly complex revenue sourcing rules is carved out at
this point and described within step 4.
The next question is whether CFB and ADS should be
considered as a whole or consistently separated – particularly
in view of the considerations regarding the nexus that
provides for different treatment of ADS and CFB. In the
case study, this now leads to the following (see table 1).
Table 1 Exception for Domestic Business
Share of Revenues
Exception for Share of Revenues from Countries E
Domestic Business from Country G and G
CFB only 7.48% (= 21.45% (= 430/
(smartphone) Revenue Country 2,005)
G/Revenues All
Countries = 150/
2,005)
ADS only (app) 37.97% (= 150/ 68.35% (= 270/
395) 395)
ADS & CFB 12.50% (= 300/ 29.17% (= 700/
2,400) 2,400)
Assume that MNE groups that generate more than 75%
of their aggregate in-scope revenues from their domestic
57
market would be excluded. In the event that, for example,
only country G is relevant, the case study would be
finished here. This would not be the case if the revenues
in country E were also taken into account.
Another option is to focus on the state of residence of
the UPE (here: A). In this case, all revenues except those
in country A would be treated as foreign. Then, in most
cases, this test will have no impact.
However, if it is assumed that the total amount of in-
scope revenues is high enough to apply Amount A, then
the domestic business exemption does not apply.
2.2.4 Step 4: Nexus Test in Each Market Jurisdiction
In the next step, a nexus test must be applied to deter-
mine the market jurisdictions eligible for Amount A. The
Blueprint applies this test later. However, this is in itself
only a question of sequence. The result is not dependent
on it.
For this purpose, the respective local turnover has to be
determined, or the turnover has to be allocated to the
corresponding market states. This requires so-called rev-
enue sourcing rules that need to be different for different
activities, and this can be technically challenging. The
revenue sourcing rules determine the revenue that should
be treated as deriving from a particular market jurisdic-
tion. The rules are relevant for applying the scope rules,
the nexus rules, and the Amount A formula. The follow-
ing example illustrates the complexity.
The user of an online search engine is located in coun-
try A. The search engine operator is only located in
country B. The use is free of charge, and only the user’s
data is used to display precisely tailored advertising from
other companies who pay a fee for this. The company
placing the advertisement is located in country A and
offers services that can be consumed 1) in country A or
2) in country C. The situation is even more challenging if
the advertising company is located in country C and
advertises services that can be consumed a) in country A
or b) in country C. Thus, on the one hand, the question
arises in which country Amount A should actually be
allocated and, on the other hand, how an allocation should
be made since the Internet Protocol address of the user is
an indication but would also have to be linked to the
advertising payment.
In addition, there are further challenges, for example,
with regard to the question of the treatment of interme-
diaries. However, once these challenges of allocation have
been solved, the threshold for the new nexus has to be
determined. Consideration is being given to establishing
different requirements for ADS and CFB in order to
trigger a tax liability. For example, the thresholds could
be set up differently (e.g. EUR 1 million for ADS and a
higher threshold for CFB) or different periods of assess-
ment (e.g. one year for ADS and three years for CFB)
 Intertax

could be applied.12 Furthermore, plus factors13 are also
being discussed for CFB.
In the present case, it is assumed that a nexus is estab-
lished in each country in which a turnover is made (see
table 2). In addition, this would also mean in the case of
Country A, E, and G that a tax liability would be triggered
twice (for ADS and for CFB, respectively). The Blueprint
also considers the necessity of segmentation for the nexus
test (see step 6). Accordingly, the test would have to be
performed for each segment and for each activity.
group ‘profit before tax’ (PBT). However, for reasons of sim-
plification, no adjustments are made here to the MNE group’s
P&L; the PBT amounts to EUR 660 million (including B Co.
which is focused on commodities as it is not really clear if B
Co. should be eliminated for determining the tax base),
representing a profit margin of 26.40%. At this point, tax
adjustments only contain a potential for discussions between
the MNE group and the tax administrations and/or between
the tax administrations.

2.2.6 Step 6: Segmentation

Table 2 Nexus Test in Each Market Jurisdiction
In a sixth step, it must be determined whether segmen-
Nexus Test in tation is required.15 If so, the PBT would be deter-
Each Market CFB (EUR ADS (EUR mined on a segmented basis. This may be relatively
Jurisdiction million) million) easy for businesses to implement as long as the seg-
mentation that is used for accounting purposes is
Country A 375 125
employed. For tax administrations, the challenge of
Country B 0 0 verifiability arises at this point, which will hardly be
possible in practice. Rather, they will have to rely on it
Country C 600 0
as the audit of a segment requires the analysis of all
Country D 600 0 underlying business units, including those located
Country E 280 120 abroad. This also highlights the challenge that
Amount A poses as a multinational approach.
Country F 0 0 Otherwise, a segmentation specifically designed for the
Country G 150 150 purposes of Amount A would have to be applied. This,
however, will likely prove to be particularly unsuitable
in practice. In this context, even the certificate of an
Since Amount A is a new right of taxation that is to be
auditor on which one could possibly rely is no longer
introduced alongside the existing system, it should also be
available.
independent of it. It would, therefore, be appropriate in
This case study is based on the segmentation that
itself to allocate Amount A to wherever revenue is gener-
the MNE group also uses for accounting purposes. The
ated. However, it could be considered that remuneration
authors are well aware that the individual revenue
for activities through an existing nexus such as a permanent
streams with regard to ADS and CFB do not necessa-
establishment or a subsidiary could be offset in a second
rily correspond to the segmentation not only in the
step to avoid double taxation or, if necessary, remuneration
case study. The automotive industry also serves as an
of permanent establishments (PEs) and subsidiaries could
example. A segmentation, for example, into automo-
be increased to reach the level of Amount A.
biles, motorcycles, commercial vehicles, and financial
services is quite usual. The sale of a car can then be
2.2.5 Step 5: Tax Base of the MNE Group allocated to CFB revenue and accordingly to the auto-
mobiles segment. The provision of an additional infor-
If an MNE group is in-scope for application and a new nexus is mation technology or digital service, e. g. electronic
created, the tax base for Amount A has to be determined. The activation of seat heating or auxiliary heating, is more
beginning point is the consolidated financial accounts.14 likely to fall within ADS but will probably also be
There seems to be an appetite for potential adjustments (e.g. reported in the automobile segment. Thus, if segmen-
income tax expenses or dividend income and gains or losses tation is not performed according to each ADS- and
arising in connection with shares) to determine the MNE CFB-activity, it is inherently inaccurate and irrelevant.

Notes
12
Consider the following example: A Co. (resident of country A) sells Blue Ray Discs via direct sales to customers in country B. B Co. (resident of country A) provides an
online streaming service for movies that stream to customers in country B. In both cases, sales to customers in country B are the same and all other criteria are the same.
Should it really make a difference regarding the nexus whether it is ADS or CFB? On the contrary, the physical delivery of the Blue Ray Discs places an even greater burden
on the infrastructure in country B.
13
Test 1: physical presence of the group or other factors. Test 2: CFB revenue in market over a certain amount.
14
MNE groups that do not produce consolidated accounts would be required to prepare consolidated accounts under standards permitted by their UPE jurisdiction, provided
that those standards qualify as eligible or, otherwise, do not result in material competitive distortions.
15
The Blueprint again provides for several tests. For example, a revenue test and segmentation hallmarks. OECD, Tax Challenges Arising from Digitalisation, supra n. 8.

58
 Taxing the Digital Economy

Table 3 Segmented PBT included on a corporate group basis unless segmentation

was applied.16
Segment PBT Profit Margin
Smartphone EUR 471.97 23.54% Table 4 Profit Margins of Different MNE Groups17
(CFB) million
MNE
App (ADS) EUR 179.64 45.48%
Group Year 18/19 Year 17/18 Year 16/17
million
Microsoft 31.35% 29.84% 23.24%
Apple 22.81% 24.78% 25.24%
2.2.7 Step 7: Recognition of Losses and Profit
Shortfalls Alphabet
(Google) 22.10% 17.37% 21.30%
In a next step, losses and profit shortfalls have to be
Uber -53.82% 10.51% -52.08%
considered. If the segment or the MNE group has a loss
(or a profit shortfall), they are calculated and carried Amazon 4.75% 4.74% 2.26%
forward to offset future profits. If the segment or the
Netflix 9.24% 7.01% 3.75%
MNE group has a profit, available losses carried forward
can be offset. Twitter 9.67% 16.51% 0.36%
The consideration of possible losses but also the con- Pinterest -109.90% -9.05% -26.35%
sideration of profit shortfalls – i.e. profit margin below
the profitability threshold but still positive – is only Snap -54.42% -96.69% -377.26%
logical and appropriate. Especially in light of that, in Hellofresh -1.51% -6.47% -9.81%
contrast to a digital service tax (DST), net taxation is
intended to be implemented although this idea may be Spotify -0.80% -0.82% -9.24%
violated simply because of the intended segmentation. Zalando 2.53% 2.14% 4.14%
This would particularly be the case if, for example, the
MNE group as such is in a loss situation, and only one SAP 15.96% 22.85% 20.63%
segment of interest to Amount A has sufficient profit-
ability so that an Amount A liability arises and must be
paid despite the MNE group’s loss situation. 2.2.8 Step 8: Calculate and Allocate Amount A to
However, the recognition of losses is associated with Eligible Market Jurisdictions
considerable complexity. Losses would have to be deter- The quantum of Amount A that is taxable in each eligible
mined separately for Amount A, and there would have to market jurisdiction will result from a formulaic calcula-
be special rules for restructuring and reorganization of tion applied to the decisive PBT measure. The formula
MNE groups as well as reorganization of segments (e.g. needs a profitability threshold, a reallocation percentage,
because the management requires this, or the Amount A and an allocation key. A twenty over ten rule is applied as
system demands it). such a rule is not very unlikely. This means that a profit-
In addition, there is the question of how to deal with ability threshold of 10% applies, and 20% of the deemed
losses incurred before the new Amount A tax system is residual profit is allocated to market jurisdictions.
established. Are previous years to be taken into account The formula on which this would be based is as follows:
and, if so, how many years?
The majority of companies will probably demand to Deemed Residual Profit (DRP) = PBTGroup or Segment – Routine
take losses into account. Consequently, some MNE groups Profit;
would not (even in the coming years) be obligated to pay Routine Profit = Revenue Group or Segment * x%, whereby x% is
an Amount A tax liability whereas a DST would have a 10% in this case study;
direct effect. The following table 4 depicts an illustrative Amount A = DRP * reallocation percentage (y%), whereby y%
overview, knowing that the profit margins are the profit is 20% in this case study;
margins of the MNE groups and that no segmented profit Allocable to Market Jurisdictions = Amount A * Allocation
margins have been used. In particular, Amazon’s profit Key, for instance revenues.
margin illustrates why some people believe that segmen- Another mathematical method is to deduct the routine
tation is necessary. Amazon would probably not be profit margin from the profit margin in a first step to

Notes
16
Amazon, Annual reports, proxies and shareholder letters, https://ir.aboutamazon.com/annual-reports-proxies-and-shareholder-letters/default.aspx (accessed 13 Oct. 2020).
17
Data based on the publicly accessible portals Finanzen, www.finanzen.net (accessed 13 Oct. 2020) and Onvista, www.onvista.de (accessed 13 Oct. 2020).

59
 Intertax

calculate the deemed residual profit margin (DRPM). Amount A

This is then multiplied by y%. Afterwards, the allocation (CFB &
to the market states is based on an allocation key, e.g. Amount A Amount A ADS);
revenues. (CFB only); (ADS only); EUR
The table 5 below shows the corresponding DRPs of Country EUR Million EUR Million Million
the MNE group. B 0.00 0.00 0.00
C 16.25 0.00 16.25
Table 5 Deemed Residual Profit D 16.25 0.00 16.25
Deemed Residual Profit E 7.58 8.52 16.10
MNE group 16.40% F 0.00 0.00 0.00
Smartphone (CFB) 13.54% G 4.06 10.64 14.71
App (ADS) 35.48% Total 54.29 28.03 82.3218
Amount A
Amount A could be determined on a group basis or on a
segmented basis. The following two tables (table 6 and The tax liability can now be calculated since Amount
table 7) show the respective results. A should be subject to the normal income tax rate (see
table 8). To simplify matters, it is assumed that there is
only one income tax rate in each country and that there
Table 6 Allocation of Amount A on a Group Basis are no differences in the treatment of partnerships and
corporations. The result from Table 7 (segmented basis)
Amount A (Assuming That Amount A is
Allocated Wherever Income Is Generated); is used for this purpose.
Country EUR Million
A 16.4 (= 16.40% * 20.00% * 500)
B 0 Table 8 Amount A Tax

C 19.68 (= 16.40% * 20.00% * 600) Domestic Cor- Amount A

Amount A porate Income Tax
D 19.68 (= 16.40% * 20.00% * 600) (CFB & Tax Rate (EUR
E 13.12 (= 16.40% * 20.00% * 400) Country ADS) (CIT) Million)
F 0 A 19.02 10% 1.90
G 9.84 (= 16.40% * 20.00% * 300) B 0.00 20% 0.00

Total 78.72 C 16.25 12% 1.95

Amount A D 16.25 26% 4.22
E 16.10 5% 0.80
F 0.00 0% 0.00
Table 7 Allocation of Amount A on a Segmented Basis
G 14.71 45% 6.62
Amount A Total 15.50
(CFB & Amount A
Amount A Amount A ADS); Tax
(CFB only); (ADS only); EUR
Country EUR Million EUR Million Million
It should be noted that the Amount A tax (EUR
A 10.15 8.87 19.02 15.5 million) corresponds to a tax rate of 2.21% on
(= 13.54% * (= 35.48% * (=10.15 +
cross-border income of the group (relates to the rev-
20.00% * 20.00% * 8.87)
enues of A Co. from direct business with countries E
375) 125)
and G).

Notes
18
The difference compared to the group analysis is due to the different profit margins.

60
 Taxing the Digital Economy

2.2.9 Step 9: Double Counting – profits allocated to the market jurisdiction under
Examining figure 1, the calculation of Amount A existing profit allocation rules for the performance of
according to step 8 might lead to double counting. marketing and distribution activities relating to in-
The question arises whether the same residual profits scope revenue,
are allocated to certain market jurisdictions twice – a safe harbour return that would be the sum of two
according to the ALP and due to the Amount A components:
system. Consequently, those market jurisdictions o Amount A, as computed under the Amount A formula;
would tax the same residual profits several times. In and
terms of definition, this can hardly be the case. On the o A fixed return for in-country routine marketing and
one hand, deemed residual profits under commercial distribution activities which could include a regional
law are allocated in the Amount A system; in the case and industry uplift.
of the ALP, residual profits are based on tax rules. On The following tables 9 and 10 show the calculation. When
the other hand, the deemed residual profit is deter- the existing marketing and distribution profit
mined politically on the basis of a profit threshold
and, under ALP, the residual profit results from the – is lower than the fixed return, the full Amount A has
respective facts and circumstances and is economically to be allocated;
motivated. Finally, Amount A lacks a clear narrative – exceeds the fixed return but falls below the safe
and a theoretically sound foundation.19 Therefore, it is harbour return, the quantum of Amount A allo-
an independent amount based on political agreements cated to that jurisdiction would be reduced to the
that is the result of discussions on inter-nation equity. difference between the safe harbour return and the
At the same time, it is acknowledged that, in indivi- profit already allocated to the local presence; and
dual cases, there may be overlaps in amounts but that – exceeds the safe harbour return, no Amount A would
the clear determination of these overlaps is highly be allocated to that jurisdiction.
complex and should be neglected due to the materi-
ality of the amount. Table 9 Overview Earnings Before Taxes (EBT)
However, mechanisms are being considered to link
the existing system with the new system. The salient EBT
aim is to take into account residual profits that have (for
already been allocated according to the ALP when M&D In- Simplifi-
allocating the deemed residual profit for Amount A Scope Profit cation
Country Entity Activity Margin Purposes)
purposes. Such an approach provides the feeling that
the reallocation of taxation rights should be kept to a A A Co. Yes (but 13.41% 275
minimum. also other (see (see
In this regard, a marketing and distribution profits activities) Annex) Annex)
safe harbour is discussed. The premise of this safe B B Co. No —- —-
harbour is that Amount A should be allocated to a
market jurisdiction to which residual profits would C C Co. Yes 8.33% 50
not be allocated according to the ALP (because there D D Co. Yes 16.67% 100
is no subsidiary or PE). Amount A should not be
allocated to those market jurisdictions where an E E Co. Yes 15.00% 15
MNE group already leaves sufficient residual profit F F Co. No —- —-
in the market (for its in-scope activities). Three key
G —- —- —- —-
figures are required for this:

Notes
19
The current design does not seriously address the challenges of the digital economy. Three reasons could be considered to ensure that Amount A is not merely the result of
competition for allocation of taxation rights:
i) the allocation of profits that have previously not been recognized on an arm’s length basis, such as market benefits, group benefits or income from certain intangibles that
cannot be represented in comparative data such as goodwill. These advantages or intangibles could be synergy effects, network effects, customer data, user contributions to
value creation, or location specific advantages. Due to their immateriality, they cannot be clearly allocated and are sometimes not adequately remunerated. Based on this
assumption, a lump-sum compensation depending on the profitability of the MNE group could be included for these values.
ii) the allocation of excess profits since a minimum routine profit is a prerequisite for the application of Amount A. Excess profits are achieved when a total return on capital
is generated i.e. greater than the total cost of capital of the MNE group; in other words, more value is generated than the investors expect and demand as compensation.
iii) the allocation of monopoly rents (cf. also J. Lammers, The OECD Concept of User Participation and More Pragmatic Way to Tax Rent Seeking, 96 Tax Notes Int’l 611, at 621
(18 Nov. 2019)); i.e. the additional rent that a monopolist receives compared to perfect competition because he can set his prices independently of competition in a profit-
maximizing manner. This argumentation may apply to certain MNE groups but not in every individual case. Moreover, reallocation would, to a certain extent, help to limit
the market power of monopolies. However, it could sometimes reduce the tax burden of such MNE groups compared to the status quo and thus generate a comparative
advantage.
These reasons would also lead to the conclusion that there is no interaction between Amount A and the arm’s length principle.

61
 Intertax

Table 10 Calculation of Amount A Considering Safe Harbour determined which entities have to contribute to Amount
Fixed A (paying entities) and which countries have to avoid
Return double taxation. This aspect is, of course, the most difficult
(Simplified since countries now have to surrender taxing rights.
Assumptio- Amou- If the previous concept is followed, it could certainly be
n; Profit Safe nt appropriate at this point to consider an activity test, a
Coun- Amount Margin Harbour A–Ne- market connection test, and a profitability test (on a
try A 5%) Return EBT w segmented basis when applicable). This would mean
A 19.02 102.5 121.52 275 0 that only companies that are active in the field of ADS
(= 5% * (= (= and CFB in connection with the relevant market and that
Revenue 19.02 121.5- perform more than routine functions would have to con-
A Co. = + 2–275 tribute to Amount A. This would require a comprehensive
5% * 102.5) < 0) documentation package covering the entire MNE group
2,050) (in particular, CbCR, master file, all local files of the
C 16.25 30 46.25 50 0 individual companies) and the corresponding assessment
for each individual company. At the same time, this
D 16.25 30 46.25 100 0 approach connects the arm’s length principle with the
E 16.10 5 21.10 15 6.10 new system. This creates the problem that different assess-
ments based on transfer pricing audits, which sometimes
G 14.71 0 14.71 0 14.71 take place years later, affect the determination of paying
entities. It is further possible that the tax authority for
In the case of country A, the entire activity has been taken transfer pricing audits will be bound by the determination
into account for simplification purposes. Normally, only the made for Amount A.
marketing and sales activities would have to be considered. In Looking at the entities in the case study, it is not
the cases of countries C and D, it is questionable whether the possible to make a clear statement that is not open to
remuneration was at arm’s length. It is also obvious that criticism:
transfer pricing audits in which different assessments are
– A Co. is the central entrepreneur in the MNE group.
made have a direct impact on this safe harbour.
It is also active in both segments, and it is the unit
that conducts the direct business in countries E and G
so that a market connection can be established.
Table 11 New Amount A Tax – B Co. is likely to be excluded from the scope of
Amount A application as it is also active as a routine unit in
Amount A Tax the commodities sector in particular.
(CFB & (EUR – C Co. is active as a routine distribution entity in
Country ADS) Domestic CIT Million) country C and, therefore, does not have an entrepre-
neurial status and does not have the corresponding
A 0.00 10% 0.00
profitability. If an Amount A is assigned to country
B 0.00 20% 0.00 C, A Co. is more likely to be considered.
C 0.00 12% 0.00 – In the case of D Co., this could be viewed differently
for country D. As a fully-fledged distribution unit, it
D 0.00 26% 0.00 generates more than a routine profit due to its activ-
E 6.10 5% 0.80 ities in country D. Consequently, Amount A could be
attributed to country D if it is assumed that country
F 0.00 0% 0.00 D should receive a share of Amount A at all. After all,
G 14.71 45% 6.62 from the perspective of the current system, more than
routine profits are already attributed to country D.
Total 7.42 – Whether E Co. should also contribute to Amount A in
Amount A country E could be affirmed on the basis of its profit-
Tax ability. However, it will hardly qualify as an
entrepreneur.
– With regard to F Co., it should be noted that it acts
2.2.10 Step 10: Determining the Paying Entities as a financing unit for the entire MNE group.
Now that Amount A has been established and the tax However, whether it qualifies as a paying entity
liability has been determined accordingly, it must be seems questionable as it has no market access. It

62
 Taxing the Digital Economy
appears that the OECD Secretariat suggests excluding
such intra-group (financing) entities.
With regard to the profitability test, the literature
also suggests, among other things, that transfer pri-
cing adjustments that could affect the profitability
should be taken into account. This should be rejected
since such an adjustment has no effect on the profit
and loss statement under commercial law in the year
in question. It sometimes has the consequence of a
higher tax payment in the current year but would
then also be irrelevant since the new system relies on
PBT. In addition, the OECD-Secretariat proposes
using adjusted P&Ls of the single entities. That
means that the P&L of each single entity has to be
prepared within the accounting framework that the
MNE group uses for its financial statements. Finally,
by way of derogation from the formula for determin-
ing Amount A, the profitability test should be based
on a substance carve-out test.
2.2.11 Step 11: Elimination of Double Taxation &
Submission of Self-Assessment Through
Common Platform and Early Certainty
Process
The final step is to eliminate any double taxation within
the multilateral Amount A system. It is important that
the reallocation of taxing rights within the Amount A
system will not lead to double taxation issues. Therefore,
different methods of avoiding double taxation are dis-
cussed (exemption, credit, or reallocation method). This
is appropriate as Amount A is merely a reallocation of
taxing rights between countries, and the MNE groups
should not be additionally burdened.
With respect of double taxation issues due to the
interaction of the Amount A system with the existing
system, the authors refer to the explanations above under
the issue of double counting.
2.2.12 Interim Conclusion
Regarding these eleven steps, the UA relating to
Amount A does not seem to accord with the goals
that are suggested in the introduction to this case
study. The UA appears to be more like a Rube
Goldberg machine as VanderWolk truly emphasizes.20
The reallocation of taxing rights could be achieved in
a more simple, pragmatic, and transparent way. A
transparent approach should begin with data to
which all administrations involved have access.
Notes
20
J. Vanderwolk, The OECD,’s Draft Blueprints For Pillars 1 and 2 – Rube Goldberg Lives On, (3 Sept. 2020), https://news.bloombergtax.com/transfer-pricing/insight-the-oecds-
draft-blueprints-for-pillars-1-and-2-rube-goldberg-lives-on (accessed 13 Oct. 2020).
63
Methods that can be used by all 137 countries of the
Inclusive Framework should be used to easily verify
the data. It should be clear that a comprehensive
factual assessment with a complete level of detail, as
in the field of transfer pricing, seems hardly feasible in
a multilateral system. Accordingly, there must be clear
formulas based on defined and easily verifiable
documents.
2.3 Adding Some Simplifications
2.3.1 A Formulaic Approach
The application of Amount A leaves many questions unan-
swered and, in the author’s view, is not ready for practical
use with 137 states and possibly more. The objective of
reallocation can also be achieved by accepting inaccuracies
and applying an even more formulaic approach. Since the
aggregate of Amount A is basically within reasonable
dimensions, it is necessary to make a cost-benefit analysis.
Therefore, a few simplification possibilities are presented
below, but the basic procedure is retained. However, it will
be administrable in a multilateral context both for tax-
payers – including those with complex corporate struc-
tures – and for tax administrations worldwide.
2.3.2 Starting Point: The Group’s Profit
The starting point should be the profit of the MNE
group for which the audited and certified consolidated
income statement is used. As Amount A is derived from
the commercial group results, there are no losses carried
forward and no transfer pricing adjustments to be taken
into account. It is believed that the taxable amount of
Amount A seems so small that legitimate and valid
objections to the use of accounting standards to determine
taxable profit can be neglected. Similarly, there is no need
for adjustments that are merely controversial. In this case
study, the MNE group PBT amounts to EUR 660 mil-
lion, representing a profit margin of 26.40%.
The global revenue test would be retained even if not
necessary as the administration is not complex and, there-
fore, not a high burden for taxpayers. This could also
avoid constitutional and European law problems.
The activities test would not be required. In order to
overcome differing positions on the scope of Amount A
regarding ADS, CFB, and other activities, the authors
suggest a simplified and quantitative approach based on
specific indicators such as profit per employee (PPE) or
return on assets (RoA). If these (politically) agreed thresh-
olds (e.g. EUR 100.000 and 15%) are also exceeded, the
 Intertax

MNE group is in-scope. If not, it falls out-of-scope. This Table 13 Deemed Residual Profit
approach would not ring-fence a certain set of Information
technology(IT) companies, especially in the United States, as Deemed Residual Profit
it would gradually disperse to a growing number of compa- MNE group 16.40%
nies in accordance with their evolving degree of digitalization.
The rationale behind both indicators is the following: It
could be assumed that the financial productivity for each
employee of a company tends to increase with the degree of Table 14 Amount A (Tax)
digitalization in a specific business model, and digitalized
business models rely, to a lesser extent, on tangible assets as Amount A
they especially rely on intangibles. Therefore, it could be Amount A Tax
assumed that both indicators are higher for digitalized (EUR (EUR
MNE groups than for traditional MNE groups. Country Million) Domestic CIT Million)
Finally, both indicators can be taken from the Country- A 16.4 10% 1.64
by-Country (CbC) report that will be available if the
B 3.28 20% 0.66
MNE group revenue threshold is set at EUR 750 million.
This proposal also does not preclude industry exclusions. C 19.68 12% 2.36
However, it should be based on the classification of eco-
D 19.68 26% 5.12
nomic activities (NACE code) so that the group as a whole
is in or out. E 13.12 5% 0.66
The domestic business exception test would not be F 0 0% 0.00
required as there is a lack of a well-founded justification
for this. It is also a formulaic approach that simplifies G 9.84 45% 4.43
administration so that any MNE group with revenues Total 82 14.86
abroad can simply apply this approach. At the same
time, this reduces the susceptibility to disputes since a
delineation question is less likely to be answered in a The difference of the Amount A tax to the previous
multilateral context. explanations is almost negligible but can be achieved
A nexus test in each market jurisdiction – with all of with much less cost and effort.
the aforementioned problems – would still be necessary Amount A could also only be set up in places where no
but would be applied without differentiation with regard nexus currently exists. However, if the aim is to achieve a
to ADS and CFB. The following tables 12, 13 and 14 more extensive reallocation, this could also be achieved in
show the corresponding calculation of Amount A, which a simplified manner in the existing system by means of
is based on the aforementioned formula. standardized markups. Such a procedure has already been
described in the literature.21

Table 12 Nexus Test in Each Market Jurisdiction

2.3.3 The MNE Group Itself as Tax Subject to
Nexus Test in Each Market Amount A and Single Point of Contact
Jurisdiction CFB & ADS & Other
The MNE group itself is deemed to be the tax subject for
Country A 500 Amount A tax purposes. However, the UPE (here, A Co.)
Country B 100 acts as representative of the MNE group vis-à-vis the
leading tax administration (LTA). The LTA is the tax
Country C 600 administration of the UPE (here, the tax administration
Country D 600 in country A). Therefore, at an administrative level, the
UPE is responsible centrally for administrative issues
Country E 400 concerning the Amount A taxation. Accordingly, the
Country F 0 UPE must provide the LTA with a comprehensive and
easy to verify calculation and allocation of Amount A. It is
Country G 300
obligated to submit an overall Amount A tax return to

Notes
21
Compare H. Förster, S. Greil & A. Hilse, Taxing the Digital Economy – The OECD Secretariat’s New Transfer Pricing A-B-C and Alternative Courses of Action, 27(1) Int’l Transfer
Pricing J. (2020).

64
 Taxing the Digital Economy

the LTA. In order to keep the administrative burden as
low as possible, a one-stop-shop or a single point of
contact22 should be established. Therefore, the LTA (even-
tually together with certain other tax administrations
[TAs]) reviews the filed Amount A tax return, assesses
Amount A, and allocates it to the respective market
jurisdictions.
entities so that such a threshold is not necessary. In
addition, it would ensure that the Amount A tax can be
paid in any case. The contribution to the Amount A tax,
therefore, would be a linear function of the profitability of
the individual units.
Table 15 Amount A (Tax)

2.3.4 The Taxation of the MNE Group Share of

Profitability Amount A
The UPE is then liable to Amount A taxation in the (Based on the Tax
market jurisdictions with the portion of Amount A allo- P&L of the Share of (EUR
cated to them. The local portion of Amount A should be Entity Single Entity) Amount A Million)
taxed with the normal corporate tax rate, and no special A Co. 13.41% 11.89% 1.77
rate should be allowed. The UPE is committed to pay the (=13.41/
Amount A tax to the market jurisdiction’s tax adminis- (13.41+5.00
tration (TA) or to the LTA which then passes on the tax to +8.33
the other relevant market jurisdictions. However, any +16.67
compensation payments23 by entities of the MNE group +15.00
do not actuate any tax consequences. This means that +67.74))
payments are not tax-deductible for payers and do not B Co. 5.00% 0% 0.00
increase the taxable income of the recipient.
C Co. 8.33% 0% 0.00
D Co. 16.67% 14.77% 2.19
2.3.5 World Tax Credit
E Co. 15.00% 13.30% 1.98
In a next step, all taxes paid by the UPE to the market
jurisdictions under Amount A are added up to a world tax on F Co. 67.74% 60.04% 8.92
Amount A; in this case study, EUR 14.86 million. The
world tax on Amount A is converted into a corresponding
world tax credit on Amount A. The tax credit is allocated to 2.3.7 Result: No Double Taxation Within the
the respective states in which the paying entities are located. Amount A System
It can then be used in the respective state by corporate
As a result, the world tax on Amount A is split up among
entities of the MNE group that are taxable in that state.
those jurisdictions where the paying entities within the
However, the decision as to which corporate entity may use
MNE group are situated. In the context of the case study,
the tax credit in the respective state can be left to the UPE.
this would mean, for example, that a tax credit of EUR
2.19 million would be allocated to country D. Since only
2.3.6 Determining the Paying Entities D Co. is taxable here, only D Co. could use this tax credit
to calculate its own tax burden in this country. If, for
A further simplification concerns the paying entities. example, another entity was taxable in this country, A Co.
They would be determined based solely on a profitability could decide how the tax credit should be divided
test. Since an MNE group analysis is performed, this between the two in this specific country.
analysis is continued here accordingly. The activities of a Accordingly, the calculation of the tax credit is closely
company or its relation to a market are completely irrele- related to the avoidance of double taxation. There are basi-
vant. Only the group and its circumstances are decisive. cally three different methods that can be considered here:
Incidentally, this also corresponds to the interpretation of
Amount A. However, in order to ensure that only business – Tax credit method
units that can afford it financially contribute to Amount o The tax credit can be used to reduce the tax burden.
A, a profitability threshold is applied in accordance with o D Co. could thus calculate the EUR 2.19 million
the Amount A formula (see table 15). However, the against its tax burden to be paid in country D and
deemed residual profit is based on the interaction of all thus reduce the tax burden in country D.

Notes
22
Compare Ibid.
23
Under civil law, this results in a claim against the paying entities in the amount of their Amount A tax share. In the example, A Co. then has a claim in the total sum of
EUR 2.19 million against D Co. This would have to be paid by D Co.

65
 Intertax

– Tax deduction method Smartph- Application

A Co In total one App 12B
o The tax credit can be used to reduce taxable income.
o Thus, D Co. could use EUR 2.19 million as a type of 16.3728
(tax base)
business expense so that its taxable income is reduced
16.3728 *
accordingly. 5% =
– Tax exemption method 0.81864
(tax)
o The Amount A value corresponding to the tax credit
can be exempted from taxation. Revenue 300 150 150 150 *
Country 45.48% =
o D Co. could exempt EUR 12.11 million (= 14.77% *
G 68.22
82) from taxation. 68.22 *
It is at the discretion of each country to decide on the 30% =
method to be used in order to ensure maximum flexibility 20.466 (tax
for the countries and their tax policies. base)
20.466 *
45% =
2.4 Proposed Article 12B of the UN-Model 9.2097
(tax)
The UN Committee of Experts on International
Cooperation in Tax Matters released a proposal for an EBT 275 132,99 142,01
optional UN model tax treaty article that would grant
Profit 26.40% 23.54% 45.48%
additional taxing rights to countries where an automated
Margin-
digital services provider’s customers are located.24 The – MNE
draft proposal would add new Article 12B to the UN group
Model Double Taxation Convention between Developed
and Developing Countries, requiring a multinational
Although this approach also has fundamental drawbacks
group to pay taxes on payments for automated digital
and open questions, it may outweigh the presented
services under one of two approaches. Under the UN
Amount A system. Advantages of the proposal compared
approach, a company could choose whether to pay based
to Amount A are
on the gross-based tax or the net income approach. The
net income approach would apportion 30% of a com- – that it is designed bilaterally and does not end in
pany’s income from automated digital services to coun- multilateral chaos;
tries where the revenues from those sales arise. – it has little or no interaction with the current system;
Applied to the facts of the case, Article 12B would – states retain their sovereignty that they largely relin-
have, in the authors’ opinion, the following effect: Only A quish otherwise.
Co. would be in-scope as only A Co has cross-border ADS
income (with states E and G). For the sake of simplicity,
ADS income relates only to the App segment. The follow- 3 CONCLUSION
ing table 16 shows the calculation of this approach. With the very simplified case study, the complexity of
Amount A was demonstrated. It must be made aware that
Amount A does not even fully address the challenges of
Table 16 Calculation: Article 12B
digitalization. Amount A only affects the transaction
Smartph- Application between the MNE group and the customer (transaction
A Co In total one App 12B zero25). This takes into account the fact that digitalization
allows exploiting markets without being physically pre-
120 *
sent in local markets. At the same time, Amount A
45.48% =
Revenue 54.576 completely disregards the fact that digital and digitalizing
Country 54.576 * business models are increasingly using intangibles or that
E 400 280 120 30% = economic success is based on them, that value-added
models are changing and becoming increasingly

Notes
24
United Nations, 21st Session of the Committee of Experts on International Cooperation in Tax Matters (Oct. 2020), https://www.un.org/development/desa/financing/events/21st-
session-committee-experts-international-cooperation-tax-matters; MNE Tax, UN Committee Proposes New Model Treaty Provision Altering Taxation of Automated Digital Services
(6 Aug. 2020), https://mnetax.com/un-committee-proposes-new-model-treaty-provision-altering-taxation-of-automated-digital-services-39609 (accessed 13 Oct. 2020).
25
See M. Freudenberg & S. Greil et al., Data and Information as Taxable Assets, European Taxation, Nov. 2020, 489-498.

66
 Taxing the Digital Economy

integrated and that people functions are fading into the Smartpho- Commoditi-
background. However, it is precisely these factors that A Co In Total ne App es
drive tax structuring opportunities and give rise to dis-
putes between taxpayers and tax administrations as well as Revenue
Country C
between tax administrations themselves. The ALP should
(C Co.) 500 500 0 0
continue to apply here, however, it will not be adapted to
the challenges of digitalization. An increasing complexity Revenue
with a burgeoning potential for disputes is inevitable, and Country D
the new Amount A system also contributes to this. The (D Co.) 350 350 0 0
complexity is multiplied if there is an attempt to link the Revenue
Amount A system with the existing system and allow Country E 400 280 120 0
them to interact.
If the simplification measures were considered in order Revenue
Country F 0 0 0 0
to be able to implement the new taxation system in prac-
tice, Amount A would be designed and implemented as a Revenue
separate new income taxing right at the level of the MNE Country G 300 150 150 0
group as a whole including a new nexus and a profit Cost of
allocation rule. It consists of a strictly formula-based system Goods
originating from accounting standards according to com- Sold (relat-
mercial law. Therefore, this system is completely detached ed parties) 200 170 30 0
from the current system and does not interfere with the
COGS
existing tax system based on the ALP. The new system
(third
ensures that profits are allocated proportionately to market parties) 900 810 90 0
states and that the Amount A tax relief is not wholly
imposed on a UPE country of residence. Rather, it is split Other
up among those jurisdictions where the most profitable Expenses 400 320 80 0
group entities or group PEs are located. It eliminates EBIT 550 355 195 0
double taxation regarding Amount A, it is easy to admin-
ister by corporations and tax administrations due to a Interest
strictly formulaic approach, and should not lead to numer- Expenses
(F Co) 250 201.83 48.17 0
ous dispute resolution procedures due to its simplicity.
Even this simplification only addresses transaction zero Interest
and ignores intercompany transactions. However, it sim- Expenses
plifies the application and does not complicate the system (third
to the point of practical impossibility. Only a system that parties) 25 20,18 4.82 0
is simple, transparent, and administrable will prevent EBT 275 132.99 142.01 0
Pillar 1 from opening Pandora’s box where many coun-
tries are experimenting with new taxes that deviate from Profit
internationally established rules. Margin
(EBT/
Revenue) 13.41% 8.04% 35.95% 0
ANNEX

P&L: A Co. P&L: B Co.

Smartpho- Commoditi- Smartpho- Commod-

A Co In Total ne App es B Co In Total ne App ities

Revenue Revenue
Country A 500 375 125 0 Country A
(A Co.) 100 10026 0 0
Revenue
Country B 0 0 0 0 Revenue
Country B 100 0 0 100

Notes
26
B Co. only sells commodities. Its sales of commodities to A Co. is used for the manufacture of smartphones in A Co. Therefore, the related revenue is reported in this
segment.

67
 Intertax

Smartpho- Commod- C Co (lim-

B Co In Total ne App ities ited risk
distribu- Smartpho- Commod-
Revenue
tor - LRD) In Total ne App ities
Country C 0 0 0 0
Revenue
Revenue Country F 0 0 0 0
Country D 0 0 0 0
Revenue
Revenue Country G 0 0 0 0
Country E 0 0 0 0
COGS
Revenue (related
Country F 0 0 0 0 parties) 500 500 0 0
Revenue COGS
Country G 0 0 0 0 (third
COGS parties) 25 25 0 0
(related Other
parties) 0 0 0 0 Expenses 25 25 0 0
COGS EBIT 50 50 0 0
(third
parties) 160 80 0 80 Interest
Expenses
Other (F Co) 0 0 0 0
Expenses 20 10 0 10
Interest
EBIT 20 10 0 10 Expenses
Interest (third
Expenses parties) 0 0 0 0
(F Co) 10 5 0 5 EBT 50 50 0 0
Interest Profit
Expenses Margin
(third (EBT/
parties) 0 0 0 0 Revenue) 8.33% 8.33% 0 0
EBT 10 5 0 5
Profit P&L: D Co.
Margin
(EBT/
D Co (fully
Revenue) 5.00% 5.00% 0 5.00%
fledged
distribu- Smartpho- Commod-
tor - FFD) In Total ne App ities
P&L: C Co.
Revenue
C Co (lim- Country A 0 0 0 0
ited risk Revenue
distribu- Smartpho- Commod- Country B 0 0 0 0
tor - LRD) In Total ne App ities
Revenue
Revenue Country C 0 0 0 0
Country A 0 0 0 0
Revenue
Revenue Country D 600 600 0 0
Country B 0 0 0 0
Revenue
Revenue Country E 0 0 0 0
Country C 600 600 0 0
Revenue
Revenue Country F 0 0 0 0
Country D 0 0 0 0
Revenue
Revenue Country G 0 0 0 0
Country E 0 0 0 0

68
 Taxing the Digital Economy

D Co (fully Smartph- Commo-

fledged E Co In Total one App dities
distribu- Smartpho- Commod-
Other
tor - FFD) In Total ne App ities
Expenses 5 4 1 0
COGS
(related EBIT 15 10 5 0
parties) 350 350 0 0 Interest
COGS Expenses
(third (F Co) 0 0 0 0
parties) 50 50 0 0 Interest
Other Expenses
Expenses 50 50 0 0 (third
parties) 0 0 0 0
EBIT 150 150 0 0
EBT 15 10 5 0
Interest
Expenses Profit
(F Co) 50 50 0 0 Margin
(EBT/
Interest Revenue) 15.00% 14.29% 16.67% 0
Expenses
(third
parties) 0 0 0 0 P&L: F Co.
EBT 100 100 0 0
Smartpho- Commo-
Profit F Co In Total ne App dities
Margin
(EBT/ Revenue
Revenue) 16.67% 16.67% 0 0 Country A
(A Co.) 250 201,83 48,17 0
Revenue
P&L – E Co. Country B
(B Co.) 10 5 0 5
Smartph- Commo-
Revenue
E Co In Total one App dities
Country C
Revenue (C Co.) 0 0 0 0
Country A
(A Co.) 100 7027 30 0 Revenue
Country D
Revenue (D Co.) 50 50 0 0
Country B 0 0 0 0
Revenue
Revenue Country E
Country C 0 0 0 0 (E Co.) 0 0 0 0
Revenue Revenue
Country D 0 0 0 0 Country F 0 0 0 0
Revenue Revenue
Country E 0 0 0 0 Country G 0 0 0 0
Revenue COGS 50 41.42 7.77 0.81
Country F 0 0 0 0
Other
Revenue Expenses 0 0 0 0
Country G 0 0 0 0
EBIT 260 215.41 40.40 4.19
COGS 80 56 24 0

Notes
27
The allocation was based on the income of A Co. relating to country E.

69
 Intertax

Smartpho- Commo- MNE Smartpho- Commo-

F Co In Total ne App dities Group In Total ne App dities
Interest Revenue
Expenses Country D 600 600 0 0
(related
parties) 0 0 0 0 Revenue
Country E 400 280 120 0
Interest
Expenses Revenue
(third Country F 0 0 0 0
parties) 50 41.42 7.77 0.81 Revenue
EBT 210 173.98 32.63 3.39 Country G 300 150 150 0

Profit COGS
Margin (third
(EBT/ parties) 1265 1062.42 121.77 80.81
Revenue) 67.74% 67.74% 67.74% 67.74% Other
Expenses 500 409 81 10

P&L: MNE Group EBIT 735.00 533.58 192.23 9.19

Interest
MNE Smartpho- Commo- Expenses
Group In Total ne App dities (third
parties) 75.00 61.61 12.59 0.81
Revenue
Country A 500 375 125 0 EBT 660.00 471.97 179.64 8.39
Revenue Profit
Country B 100 0 0 100 Margin
(EBT/
Revenue
Revenue) 26.40% 23.54% 45.48% 8.39%
Country C 600 600 0 0

70