Pillar One: updated agreement on withdrawal of digital taxes

In October 2021, the US, UK, Austria, France, Italy and Spain published an agreed transitional approach to the removal of existing digital taxes before Pillar One comes into effect. In essence, the five European countries agreed to allow amounts paid by way of digital service taxes between 2022 and the implementation of Pillar One measures as a credit against tax due under the Pillar One measures to the extent that those amounts exceeds tax due under Pillar One.

The statement had an assumed an end date for the transitional period of 31 December 2023 (if Pillar One was not implemented by that time), but given the delays to the finalisation of Pillar One, the participants have now agreed to extend the transitional period to 30 June 2024 (since the OECD has called for the formal signing of the Pillar One multilateral convention by that date).

The US had wanted these countries to remove unilateral digital taxes immediately upon agreement of the Pillar One measures had been reached. However, the UK and other European countries naturally insisted that the withdrawal of the unilateral digital measures should be contingent not simply upon political agreement of Pillar One but also its implementation. The Statement describes the political compromise reached.

Under the transitional agreement, those European countries are allowed to continue to apply the existing digital taxes (without imposing any new measures) until the Pillar One measures are implemented. However, to the extent that taxes that accrue to Austria, France, Italy, Spain and the UK with respect to existing digital taxes during the transitional period until Pillar One takes effect exceed an amount equivalent to the tax due under Pillar One in the first full year of Pillar One implementation (prorated to achieve proportionality with the length of the Interim Period), such excess will be creditable against the portion of the corporate income tax liability associated with Amount A as computed under Pillar One in these countries. Essentially, the excess taxes paid in the interim period (compared to the assumed Pillar One amount) will be used to reduce actual Pillar One taxes in those countries in the first and subsequent years of operation of Pillar One. The joint statement includes an example of the application of the updated statement in an Annex, showing how digital taxes paid should be allowed as a credit against any Pillar One liability.

In return, the US has agreed to terminate proposed trade actions and commit not to impose further trade actions against Austria, France, Italy, Spain and the UK with respect to their existing digital services taxes until the end of the interim period.

For the purposes of the agreement, the interim period was originally defined as the period beginning on 1 January 2022 and ending on the earlier of the date the Pillar One multilateral convention comes into force or 31 December 2023. However, in the light of the revised timeline for adoption of Pillar One, the interim period has now been extended to 30 June 2024 (whilst recognising that the participants may discuss unilateral measures imposed after 30 June 2024 at a later time).

The agreement also records that the US, Austria, France, Italy, Spain and the UK, will remain in close contact to ensure that there is a common understanding of the respective commitments under the agreement and endeavour to resolve any further differences of views on this matter through constructive dialogue.

For further details of the multilateral convention on Pillar One, see our earlier Insights article.