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Policy Proposals  Business Law Comments on the Progress Report on the Administration and Tax Certainty Aspects of Pillar One

November 11, 2022
Business Infrastructure Bureau, Keidanren

1. General comments

We thank you for the opportunity to submit our comments.

This document is submitted by the Keidanren's Business Infrastructure Bureau on the basis of discussions held by the "Corporate Liaison Group on Pillar 1 - Amount A#1".

2. Administration

2.1 General comments

As administration has a direct impact on the workload of multinational enterprises (MNEs), we consider the details of this Public Consultation Document to be important.

First of all, as Amount A is an entirely new system oriented towards formulary apportionment, its implementation and methods of eliminating double taxation should not be restricted by existing tax systems and practices, but should adopt the simplest methods that do not lead to double taxation. Rather than relying on the existing system and taxable presence in each jurisdiction, the new system should be globally standardised, with the Multilateral Convention (MLC) stipulating how the Amount A tax payment is to be calculated, and the methods and deadlines for filing, payment, and the elimination of double taxation.

It is desirable for MNEs to be able to manage tax return processes through a single entity to reduce the administrative burden of the new system, as agreed by the OECD/G20 in the October 2021 Statement. In the opinion submitted to the OECD in August, the Keidanren requested that "tax return filing and payment be carried out under a one-stop shop system to reduce administrative burden"#2, and this position has not changed. We reiterate our desire for a single administrative process which allows MNEs to file Amount A returns, pay any tax due and eliminate double taxation in all relevant jurisdictions.

Payment of Amount A to market jurisdictions and relief from double taxation should be simultaneous to eliminate impacts on cash flow. The most desirable way to eliminate double taxation is to adopt a globally uniform income exemption method, as stated in the Keidanren's opinion submitted in August. If the credit method is used, MNEs would need to seek refunds through tax credits in each relieving jurisdiction, including adjustments for prior years. This would result in a very complex system. Additionally, limitations on tax credit amounts and carry-over periods mean that double taxation cannot be completely eliminated under this method.

The following sections provide detailed comments on particular aspects of Amount A administration.

2.2 Specific topics

2.2.1 Tax registration (Part I, 2.3. para 14)

The Progress Report requires MNEs to register for tax identification numbers in each market jurisdiction. This is a significant administrative burden. We are also concerned that tax registration could lead to other tax obligations and tax audits outside of Amount A. Tax payment should take place through a legal entity in the jurisdiction of the ultimate parent entity, with no requirement for administrative procedures in market jurisdictions. In the Amount A return, a special purpose legal entity ("designated payment entity") should be designated to carry out administrative procedures on behalf of all group entities. The transfer of funds to the designated payment entity for Amount A tax payment should not trigger taxation. Also, if the designated payment entity is required to remit Amount A tax payments to each jurisdiction, tax authorities should be required to clearly indicate in advance the bank account into which the tax should be paid, and to ensure that the payment of Amount A tax is not subject to cross-border remittance restrictions.

2.2.2 Single taxpayer approach / Multiple taxpayer approach (Part I, 2.8.-2.9.)

Various approaches to tax payment have been proposed, including direct payment by the relieving entity or payment by a group tax agent (multiple taxpayer approach), and payment by the ultimate parent entity or a specific group designated entity such as a group treasury company (single taxpayer approach). The payment approach should incorporate the "designated payment entity" concept introduced above in Section 2.2.1, eliminate double taxation and resolve issues relating to intra-group reimbursements of Amount A tax payments. A complex and burdensome system that requires tax registration and the opening of bank accounts in each jurisdiction is not desirable. We expect further discussion and the development of a comprehensive system which considers the advantages and disadvantages of the various potential approaches. In addition, MNEs should be able to determine the paying entity based on its business and operational concerns.

2.2.3 Joint liability (Part I, 2.8.2. para 60)

Even where relieving entities are jointly liable for payments to market jurisdictions, it is not desirable for the tax authorities to be able to contact any entity in any jurisdiction unilaterally, as this will result in confusion. Each MNE should designate a single representative point of contact for all tax authorities.

2.2.4 Reimbursements from relieving entities (Part I, 2.9. para 69)

The single taxpayer approach implies that withholding and other taxes may be imposed on reimbursements from relieving entities. However, the imposition of additional taxes on reimbursements distorts the fair and uniform reallocation of taxing rights under Amount A. Such taxation would be inappropriate, and measures need to be taken to ensure that it is not imposed.

2.2.5 Consolidated tax returns (Part I, 2.10.)

Groups that adopt consolidated tax returns should not be required to allocate relief amounts to individual constituent entities. The designated representative should be the only legal entity providing relief.

2.2.6 Method of allocating the relief amounts to entities in relieving jurisdictions (Part I, 2.10.)

The allocation of relief amounts to relieving entities should be standardised globally in a simplified manner, for example by limiting the number of entities to which relief amounts can be allocated. It is not desirable for each jurisdiction to introduce their own rules on how to allocate relief amounts.

2.2.7 Suspension of tax audits and payments until completion of the tax certainty review (Part I, 2.2. para 9 and 2.11. para 99-100)

Tax audits should be suspended during tax certainty reviews. Audits on transfer pricing issues related to Amount A in market jurisdictions should also be restricted.

Amount A tax payments should also be suspended during the Advance Certainty Review and Comprehensive Certainty Review in order to avoid the complications of re-filing and adjusting amounts across multiple jurisdictions.

Interest should not be charged to taxpayers for late payments resulting from delays in the review process. At the very least, all penalties and interest should be waived during the first Advance Certainty Review.

2.2.8 Interaction between Pillar 1 and Pillar 2 (Part I, 2.12. para 111)

Early clarification on how the result of the Pillar 1 profit allocation should be reflected in the calculation of the effective tax rate under Pillar 2 is desirable. The deadlines for Amount A returns and Pillar 2 returns are 12 months and 15 months#3 respectively after the end of the fiscal year. If payments under Pillar 1 affect Pillar 2, this allows an insufficient three-month preparation period, and may result in late filing of Pillar 2 returns.

3. Tax certainty

We welcome that the system has been improved to reflect the views of businesses and other stakeholders in the previous public consultations.

It is also important to ensure the confidentiality of data in the tax certainty framework. The MLC should include penalties for breaches of confidentiality and inappropriate use of information. On the other hand, the results of certainty reviews should be anonymized and released to other MNEs as a guidance.

With a view to further improving the system, we would like to provide the following comments on specific aspects of Amount A.

3.1 Tax certainty framework for Amount A

3.1.1 Expanding the scope of Advance Certainty Reviews (Part II, 1.4.)

MNEs place great emphasis on the Advance Certainty Review in order to eliminate uncertainties and broaden the scope of the certainty process. The Advance Certainty Review should cover a wide range of topics, including the marketing and distribution profits safe harbour (MDSH), treatment of withholding taxes, identification of relieving jurisdictions, segmentation, scope carve-outs and the treatment of mergers and de-mergers.

3.1.2 Submitting a request for Scope Certainty Review (Part II, 2.2.1. para 2)

It is excessive to require all group entities to agree on the content of the Scope Certainty Documentation Package, though this is an improvement on the original proposal requiring a Power of Attorney (PoA). The ultimate parent entity should have the sole decision-making rights on the content of the package.

3.1.3 'Critical Assumptions' in applications for Advance Certainty Review (Part II, 2.3.1. para 11 and 2.6.3. para 15)

The definition of "Critical Assumptions" needs to be further clarified by adding examples and explanation as to when they apply. The wording of para 11 of Section 2.3.1 is too broad, and the definition of "no material changes" is unclear and remains open to a wide range of interpretations. The definition and scope of material changes should be clarified with specific examples for each item listed in para 11.

3.1.4 Conditions for changes in certainty reviews (Part II, 2.3.2. para 24)

The Progress Report stated that the review panel shall propose an adjustment under the tax certainty review if there is a change of at least 5% of the amount of adjusted profit before tax allocated to any affected party. It would be more practical, and avoid adjustments for very small absolute values, to set the threshold at the greater of 5% or a fixed amount.

3.1.5 Expert Advisory Group on Internal Control Framework (Part II, 1.4 para 14 and 2.3.2. para 57d)

We are concerned that the use of expert advisory groups could result in significant time spent understanding each MNE's unique business, dealing with language and communication issues, and other practical problems, delaying the review process.

Also, the ability of countries to challenge the decisions of an expert advisory group should be limited.

3.1.6 Timeframe for system changes after the Review Panel's conclusions (Part II, 2.3.2. para 66)

The Advance Certainty Review is intended to ensure that MNEs obtain tax certainty before building systems to deal with the significant administrative requirements of Amount A. Therefore, the validity of the certainty review should be guaranteed for a sufficient period based on the assumption that significant development and modification of systems will take place after the conclusion of the review panel. Flexibility is desirable to ensure that the period covered by the Advance Certainty Review takes into account the time required for the MNE to develop, test and improve internal control systems to the required level, and that MNEs are not left with a very short covered period following the implementation of recommendations by the review panel. If an MNE's systems have been confirmed as acceptable by the review panel, there are no grounds to significantly shorten the period covered by the Advance Certainty Review simply because it took time to put in place the internal control systems required.

Also, if the conclusion of the review is different from the position filed by the MNE, it should be clarified whether the adjustment would be made in the current fiscal year.

3.1.7 Composition of the Determination Panel (Part II, 2.4.2.)

The Determination Panel should either be composed entirely of independent experts or have a majority of independent experts, to ensure greater impartiality.

3.1.8 Relevant supporting documents for determining the affected parties (Part II, 2.6.3. para 7)

As the revenue sourcing process does not adopt a transactional approach, relevant supporting documentation should not be required to include materials relating to individual transactions.

3.2 Tax certainty for issues related to Amount A

3.2.1 Scope (Part III, 2.1.)

The tax certainty framework for issues related to Amount A should have a broader scope and include multilateral situations not covered by the existing bilateral mutual agreement procedures. The MLC should explicitly state that the MLC should be applied multilaterally even where an issue is not covered by an existing tax treaty in order to improve the process of dispute prevention and resolution.

3.2.2 Binding nature of the dispute resolution panel (Part III, 2.7.18. para 126)

Given the objective of early dispute resolution, it may be inappropriate to allow authorities to depart from the dispute resolution panel's decision. We are concerned that this would reopen the dispute unnecessarily and harm the objective of achieving tax certainty.


  1. Please see footnote 1 of our comments on the revenue sourcing rules:
    (https://www.keidanren.or.jp/en/policy/2022/018.html)
  2. Please see Section 4 of our previous comments.
    (https://www.keidanren.or.jp/en/policy/2022/076.html)
  3. 18 months in the first year

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