On February 4, 2022, the Organization for Economic Cooperation and Development (“OECD”) issued model rules for nexus and revenue sourcing under Pillar One of the international tax agreement (the so-called “two-pillar solution”) signed last year by 137 countries, including the United States. As explained previously, Pillar One would allocate taxing rights over 25% of the residual profit of the most profitable MNEs to the countries where goods or services are used or consumed. The OECD anticipates that countries that are parties to the two-pillar solution will enact laws substantially similar to the model rules, while taking into account various requirements peculiar to their constitutional and legal systems.
The model rules would require that each transaction be categorized according to its “ordinary or predominant character,” based on the transaction’s substance rather than its legal form. The categories anticipated by the model rules include revenues from the sale of:
- finished goods (including digital goods),
- components of finished goods,
- services (including services relating to tangible property, advertising services, online intermediation services,transport services, customer reward programs, financing, business-to-consumer services, and business-to-business services),
- intangible property (including the licensing or sale of intangible property generally and the licensing and sale of user data),
- real property,
- government grants, and
- non-customer revenues.
Each of these categories would have its own sourcing rules. For instance, revenues from the sale of finished goods to a final customer generally would be sourced to the jurisdiction where the goods are delivered to the customer, which would be determined by looking at the customer’s delivery address, the location of the retail store that makes, or some other “reliable indicator.” Likewise, revenues from the sale of components of final goods would be sourced to the jurisdiction where the finished goods into which the components are incorporated are delivered to the ultimate customer.
Digital goods, on the other hand, would be sourced in the same way as a business-to-consumer service or a business-to-business service.
Revenues from business-to-consumer services would be sourced to the jurisdiction where the consumer is located, which would be determined differently based on whether the service was provided over the internet. If the service was not provided over the internet, then the location of the consumer would be determined based on the consumer’s billing address, the place of the international dialing code associated with the consumer’s telephone number, or some other “reliable indicator.” If the service was provided over the internet, the location of the consumer also could be determined by looking at the consumer’s user profile information, the geolocation of the device through which the consumer purchased the service, the consumer’s IP address, or information provided by a reseller regarding the location of the consumer.
Revenues from business-to-business services would be sourced to the jurisdiction where the business uses the service, which would be determined by looking at information provided by the business customer on place of use, any place of used identified in commercial documents, the billing address of a business customer that is not a large business, or some other “reliable indicator.”
And so on for the other categories. From a theoretical perspective, the proposed sourcing rules serve as an interesting illustration of possible ways to source revenue, an issue at the heart of both international and state taxation.
One term mentioned repeatedly in the model rules is “reliable indicator.” The rules would require that revenues be sourced using a “reliable indicator,” which can best be understood as a source of information that either is not specifically created for purposes of complying with the model rules or that is verified internally or by a third-party. Thus, a “reliable indicator” includes:
- information relied upon by the taxpayer for commercial, legal, regulatory, or other obligations;
- information verified by a third party that has collected the information for its own commercial, legal, regulatory, or other obligations; and
- multiple types of information included in the specific source rule that identify the same source jurisdiction.
As can be seen, these rules would be complicated, and we’ll have to wait for the OECD’s commentary on the model rules to fully flesh out how to distinguish between the various categories of revenue as well as what specific types of information can be used to substantiate source of revenue.
The Pillar One model rules follow the publication of model rules for Pillar Two on December 20, 2021. Pillar Two would impose a global minimum tax of 15% on certain multinational enterprises.
As hinted at above, the model rules would only become effective if enacted into law by the countries that are parties to the two-pillar solution. So, at this point, they merely serve as a warning of future potential legal requirements. However, businesses that may be affected by these requirements should start planning now about how to comply.
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 The model rules distinguish between online advertising services and other types of advertising services.
 The model rules define “online intermediation services” as “the provision of an online platform to enable users to sell, lease, advertise, display or otherwise offer goods or services to other users provided the Revenues derived from the service are dependent on the conclusion of transactions between users of the service. It does not include the online sale of goods and services of the platform’s own inventory.” In other words, charges by online marketplaces to third-party vendors for sales these vendors make on the marketplace.
 If the sale were made through an independent distributor, and the distributor was contractually restricted to selling in a particular location or it could reasonably be assumed that the distributor as located in the place of delivery to the customer, then the location of the distributor also could be used as a reliable indicator of the place of delivery.