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7 February 20225 minute read

OECD makes progress on Pillar 1 – release of draft Sourcing and Nexus Rules of Amount A

On February 4, 2022, the Organisation for Economic Co-operation and Development (OECD) released a working document incorporating part of the Model Rules for the Pillar 1 draft – specifically, the draft Model Rules for the Nexus and Sourcing Rules of Amount A of Pillar 1. The documents were issued as part of the OECD’s public consultation, launched for the purposes of obtaining input from stakeholders by February 18, 2022.

According to the document, the nexus threshold will be EUR1 million for jurisdictions with annual GDP equal to or greater than EUR40 billion and EUR250 thousand for jurisdictions with annual GDP of less than EUR40 billion. Sourcing of income for Pillar 1 purposes is to be completed on a transaction-by-transaction basis, with details of how transactions are determined to be set forth in a commentary that will be issued later. The draft also sets out detailed rules for determining the source of income from specific types of transactions such as sales of finished goods and components, income from online advertising and intermediary services.

The OECD makes ample reference to detailed commentary on the draft Model Rules, which is expected to be released after the public consultation. Once finalized, the Model Rules will reflect the substantive agreement of the members of the Inclusive Framework on the functioning of Amount A and will serve as the basis for a new Multilateral Convention implementing Pillar 1.  The OECD aims to implement Pillar 1 by January 1, 2023.

Detailed Model Rules for Pillar 2 were released in December 2021, which shall be followed shortly by a public consultation and the release of detailed commentary. Hence, although the OECD is slightly behind its initial, ambitious implementation schedule for Pillar 1 and Pillar 2, there does not appear to be a significant delay so far.

Amount A of Pillar 1 has been developed as part of the solution for addressing the tax challenges arising from the digitalization of the economy. It does so by introducing a new taxing right over a portion of the profit allocable to market jurisdictions. It is important to remember that only companies with global revenues in excess of EUR20 billion and a profit margin over 10 percent fall within the scope of Pillar 1, meaning that possibly no more than 100 of the world’s largest and highly profitable companies shall fall within its scope.

Proposed Sourcing rules for Amount A of Pillar 1

These draft Model Rules provide significant detail in relation to how revenues of a company should be allocated to market jurisdictions through the introduction of detailed Sourcing rules. Revenues will be primarily sourced on a transaction-by-transaction basis, an approach to be further explained by the commentary. If a group is unable to determine the source for every transaction, an allocation key is provided. This allocation key applies to the portion of revenue which cannot be sourced at a transaction level. In applying the Sourcing rules, in-scope businesses must source all revenues using a so-called reliable method. This is a defined term that will be included in the main body of the Model Rules and will aim to identity where revenues arise using a reliable indicator (as defined in Schedule A of the Model Rules) or an allocation key as authorized for that purpose in Schedule A.

Although the OECD indicates that it aims to minimize the compliance burden and technical complexity, it is yet to be seen how the business community will respond to these proposals.

The OECD has identified seven separate categories of revenue, some with additional subcategories.  These are revenues from the sale of (i) finished goods, (ii) components, (iii) services, (iv) intangible property, (v) real property, (vi) government grants and (vii) non-customer revenues.

For each of these categories and its subcategories, the OECD has developed rules to determine from which jurisdiction revenues are sourced for the purpose of Amount A.  As a general theme, the Sourcing rules are aimed at identifying the source jurisdiction as the jurisdiction in which the end-customer or user is located.  Nonetheless, every company will need to make a detailed analysis of its revenues and determine the correct application of the Sourcing rules.  The OECD provides some flexibility in scenarios where a revenue stream covers multiple categories and it can be demonstrated that there is a predominant revenue source.

Proposed Nexus rules

Not much guidance is given – and perhaps not much guidance is needed – with respect to the Nexus rules. A jurisdiction is entitled to an Amount A tax if a company has revenues of more than EUR1 million in that jurisdiction based on the Sourcing rules of Amount A as outlined above.  For jurisdictions with a GDP below EUR40 billion, the revenue threshold is set at EUR250,000. The OECD expressly acknowledges that the Nexus rule is only relevant to determine if a jurisdiction is entitled to an Amount A tax as a market jurisdiction and will have no other relevance for other tax purposes.


This working document, though it does not reflect the final views of the Inclusive Framework members, allows companies to start assessing how their revenues will be sourced for the purposes of Pillar 1 and how, and what data companies will need to rely on for tax reporting and compliance purposes. Equally important, the public consultation is open until February 18, 2022, providing an opportunity for companies to inform the OECD of any potential unwanted implications.