Pillar 1 Amount A: Scope, Calculation, and Allocation

The rise of the digital economy has created complex challenges for international taxation. Historically, tax rights were linked to a company’s physical presence, a concept that is increasingly outdated as multinational enterprises (MNEs) generate substantial revenue from markets where they have little to no physical footprint. In response, the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) has proposed a Two-Pillar Solution to modernize the global tax system.

Pillar One of this solution introduces a new taxing right for market jurisdictions, changing where the largest and most profitable MNEs pay tax. It reallocates a portion of these companies’ profits to the jurisdictions where their consumers and users are located. This article focuses on a component of Pillar One known as “Amount A,” which represents the share of profits subject to this new allocation, including how it is calculated and distributed.

Determining Scope and Applicability

The applicability of Amount A is defined by quantitative thresholds to capture only the largest and most profitable MNEs. A multinational group falls within the scope of these rules if it meets two tests. The first is a global turnover test, requiring the MNE to have consolidated revenues exceeding €20 billion. This high threshold is intended to ensure that the administrative complexity of the new system is focused on a limited number of very large enterprises.

A second test relates to profitability. An MNE must have a pre-tax profit margin greater than 10% of its total revenue to be considered in-scope. This profitability test is designed to ensure the rules target companies with high returns, which are considered more likely to have profits not tied to physical presence. The framework also includes a provision to potentially lower the revenue threshold to €10 billion after seven years, contingent on a successful review.

The proposed rules also establish specific exclusions for the extractives industry and regulated financial services. The rationale for excluding extractives, such as oil, gas, and mineral operations, is that their profits are inherently tied to the physical location of natural resources. Similarly, regulated financial services are often subject to specific capital and regulatory requirements that already link their profits to the jurisdictions where they operate.

The Amount A Calculation Framework

Once a multinational enterprise is determined to be within the scope of Amount A, the next phase involves calculating the specific amount of profit to be reallocated using a three-step framework.

The first step is to define the tax base, which is the profit or loss before tax as reported in the MNE’s audited consolidated financial statements. This figure is then subject to a limited number of book-to-tax adjustments to arrive at an adjusted profit before tax. These adjustments are intended to create a more standardized measure of profit across different accounting standards.

The second step distinguishes between “routine” and “residual” profit. The framework defines routine profit as an amount equal to 10% of the MNE’s revenue. This 10% return is considered a proxy for the normal profits an MNE would be expected to earn from its routine activities. This routine profit is subtracted from the adjusted profit before tax, and the remaining amount is termed “residual profit,” which is considered the excess profit not necessarily linked to a physical presence.

The third step determines the portion of this residual profit available for reallocation. The proposed rules specify that 25% of the calculated residual profit constitutes Amount A. This 25% represents the share of excess profits that the international community has agreed should be taxed based on market factors rather than physical presence.

To illustrate, consider an MNE with €30 billion in global revenue and €5 billion in pre-tax profit. Its routine profit would be calculated as 10% of its €30 billion revenue, which equals €3 billion. Subtracting this from the €5 billion pre-tax profit leaves a residual profit of €2 billion. Amount A, the portion to be reallocated, would be 25% of this residual profit, resulting in €500 million available for allocation.

Allocating Profits to Market Jurisdictions

After calculating the total Amount A profit pool, the next stage is to determine how this amount is divided among different countries. This distribution is managed by establishing a market nexus and applying a revenue-based allocation key.

The first requirement for a country to receive a share of Amount A is to establish a “market nexus.” This nexus is a replacement for the physical presence test and is based on revenue derived from the jurisdiction. For most countries, a market nexus is established if the MNE generates at least €1 million in annual revenue from that location. This threshold is designed to ensure a meaningful economic connection exists before a country is granted new taxing rights.

For smaller economies with a Gross Domestic Product (GDP) of less than €40 billion, this revenue threshold is lowered to €250,000. Specific sourcing rules are used to identify where revenue is generated, focusing on the location of the end consumer.

Once all eligible market jurisdictions are identified, the total Amount A profit pool is allocated among them using a revenue-based allocation key. The distribution is directly proportional to the amount of revenue the MNE derives from each qualifying market. This method ensures that the reallocated profits reflect the relative economic contribution of each market.

For example, assume the MNE from the previous section has a calculated Amount A of €500 million. Suppose it has qualifying revenue from only two market jurisdictions: Country X with €800 million in revenue and Country Y with €200 million in revenue. The total market revenue is €1 billion. Country X’s share is 80% (€800M / €1B), and Country Y’s share is 20% (€200M / €1B). Therefore, Country X would be allocated the right to tax €400 million (80% of €500M), and Country Y would be allocated the right to tax €100 million (20% of €500M).

Implementation and Tax Certainty

The implementation of Amount A requires a coordinated international legal and administrative framework. This system is founded on a new legal instrument and includes mechanisms for preventing double taxation and resolving disputes.

A component of the implementation is the Multilateral Convention (MLC), a legally binding treaty countries must sign and ratify to adopt the Amount A rules. Its function is to override existing bilateral tax treaties, allowing for profit reallocation without renegotiating each treaty. For the MLC to enter into force, it requires ratification by at least 30 countries, representing at least 60% of the parent entities of in-scope MNEs. As of mid-2025, the MLC has not been finalized, and the Amount A framework is not yet in effect.

A challenge created by Amount A is the potential for double taxation, where the same profit is taxed in a market jurisdiction and the MNE’s home country. The framework addresses this by requiring the jurisdictions relinquishing taxing rights to provide relief. This is achieved through either an exemption or a credit method. Under the exemption method, the home country exempts the Amount A profits from its own tax, while the credit method allows the MNE a tax credit for taxes paid to market jurisdictions.

To ensure the rules are applied uniformly, the framework proposes tax certainty and dispute resolution mechanisms. These processes would be mandatory and binding, providing a clear path for resolving conflicts over the application of the rules. This includes advance certainty procedures, where an MNE could get upfront agreement on its methodology. These measures are designed to provide stability for both MNEs and tax administrations, reducing the risk of prolonged and costly tax disputes.