# Annex B. Approaches to implementing the Amount A formula

1. A three-step process will be required to calculate the quantum of Amount A taxable in each eligible market jurisdiction. This process could be implemented by either using absolute amounts of profit (the “profit-based approach”) or, alternatively, profit ratios (the “profit margin-based approach”). Both approaches would apply the above-described steps without changes or variations, and hence would provide the same quantum of Amount A taxable in each market jurisdiction. This identical outcome is illustrated below in algebraic form, as well as through examples in Box B.1. and B.2. But the administration of each approach may present some variations, and these differences would inform the choice of the most appropriate approach to calculate and allocate Amount A.1

Profit-based approach

2. Consistent with the three steps described above, the profit-based approach can be described in algebraic form as follows.2

• Step 1: Isolate the residual profit (if any) by excluding the profit of the group or, where relevant, the segment that does not exceed an agreed level of profitability, e.g. a percentage of PBT to revenue (“z”). Assuming that the Amount A tax base for the relevant group or segment is “P”, revenues of the group or segment are “R”, and the profit margin of the group or segment is “P/R”, this means that Amount A applies only if “P/R” is greater than z%, and that a positive residual profit “W” can be calculated as:3

• Step 2: Separate “W” between the portion of residual profits attributable to Amount A (the allocable tax base, “A”) and other factors (“X”). Where W = A + X. If the agreed portion of residual profit attributable to Amount A is, for example, a percentage (“y”), then “A” can be calculated as:

$A=y×W$

• Step 3: Distribute the allocable tax base “A” among the market jurisdictions that meet the new nexus threshold. This would be done through an allocation key based on revenue (i.e. ratio of local revenue to total revenue). Assuming that in a particular market jurisdiction the group or, where relevant, the segment local revenue is “S”, then the allocation key is “S/R”. Therefore, the quantum of Amount A profit allocated to that particular market, expressed as “M”, can be calculated as:

$M=\frac{S}{R}×A$

3. After bringing the three components together, the Amount A formula under a profit-based approach becomes:

Profit-margin approach

4. Consistent with the three-steps described above, the profit-margin approach can be described in algebraic form as follows.4

• Step 1: Isolate the residual profit margin (if any) of the group or, where relevant, the segment by deducting the deemed routine profit margin – e.g. a percentage of PBT to revenue (“z”) – from the total profit margin. Assuming that the Amount A tax base for the relevant group or segment is “P”, revenues of the group or segment are “R”, and the profit margin of the group or segment is “P/R”, this means that Amount A applies only if “P/R” is greater than z, and that a positive residual profit margin “w” can be calculated as:

$w=P/R-z$

• Step 2: Separate “w” between the portion of residual profitability attributable to Amount A (the allocable tax base, “a”) and other factors, such as trade intangibles, capital and risk (“X”). If the agreed portion of residual profitability attributable to Amount A is, for example, a percentage (“y”), then “a” can be calculated as:

• Step 3: Allocate the relevant portion of residual profitability attributable to Amount A to the market jurisdictions that meet the new nexus threshold. This would be done through an allocation key based on local revenue. Assuming that in a particular market jurisdiction the group or, where relevant, the segment local revenue is “S”, then the quantum of Amount A profit allocated to that particular market, expressed as “M”, can be calculated as:

$M=S×a$

5. After bringing the three components together, the Amount A formula under a profit-margin approach becomes:

## Notes

← 1. In practice, some variances may arise for the implementation and administration of each approach. For example, using profit margins instead of profit amounts may limit the scope and relevance of some currency exchange issues (i.e. timing and determination of the appropriate conversion rate), to the extent that the locally sourced revenue is booked in the currency of the market jurisdiction (e.g. multiplying local revenue by a profit margin would not involve any currency exchange). These practical differences will be considered as part of the work on implementation and administration of Amount A, especially when designing a simplified administration system to centralise the computation and compliance of Amount A (see below Chapter 10).

← 2. To facilitate the illustration, the calculation assumes that all the revenue of the MNE group (or segment where relevant) falls in the scope of Amount A (see section 2.2).

← 3. As there can be no negative residual profit (W), this calculation could also be expressed as W = Max(P-R*z, 0).

← 4. To facilitate the illustration, the calculation assumes that all the revenue of the MNE group (or segment where relevant) falls in the scope of Amount A (see section 2.2).

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