Comments on the Public Consultation Document concerning Pillar One Amount A: Draft Model Rules for Tax Base Determinations
March 4, 2022
Business Infrastructure Bureau, Keidanren
We appreciate the opportunity to submit our comments. We would like to provide
the following comments bearing in mind the need to strike an appropriate balance
between simplicity and accuracy. This document is submitted by the Business
Infrastructure Bureau, Keidanren, based on discussions at the "Corporate Liaison Groupon Pillar 1 - Amount A 1".

1. General Comments

To the extent possible Tax Base Determinations should be based on figures alreadyavailable to Covered Groups during the preparation of their consolidated financial
statements, and adjustments for Amount A purposes should be minimized.
In addition, regardless of which Qualifying Financial Accounting Standard is adopted by
the Covered Group, it should be made clear that the portion of profit or loss attributable
to non-controlling interests is definitively excluded from the financial accounting profit(or loss).
We understand that the Adjusted Profit Before Tax constitutes not only the Tax Basebut also the numerator used in the calculation of profitability when assessing whether acompany is in scope for Amount A. The profitability test should use a simpler approachthat does not use the Adjusted Profit Before Tax, because this requires detailed
adjustments to the accounting figures. We intend to revisit this issue at a future public
consultation on “Scope”. We also understand that MNEs that do not exceed thethresholds will not be required to make any calculations related to Amount A.

2. Specific Issues

2.1. Tax Expense
The Public Consultation Document (hereinafter “the Document”) assumes that tax
expense consists of the items that are not deductible for corporate income tax
purposes (footnote 1). We would like to confirm the reason that interest charges forlate payment of tax are not included in tax expenses. Is this because such interest
charges are deductible? Some jurisdictions allow the deduction of interest 2. Conversely
how are taxes which are not deductible in some countries going to be treated? For
example, delinquent taxes 3 , additional taxes for understatement 4 , and substantial
additional taxes 5?
Please see the foot note 1 of our previous comments:(https://www.keidanren.or.jp/en/policy/2022/018.html)
2 Amount equivalent to interest in the case where a taxpayer applies for an extension of the due date
for a corporate income tax return.
3 Amount equivalent to interest when a corporate income tax is not paid by the legally mandated
due date.
4 Taxes imposed on a corporate tax based on amended tax returns or correction decisions
5 Taxes imposed in cases of disguised concealment of a corporate income tax.
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2.2. Equity Gain or Loss
2.2.1. Gain and Loss of JV
If equity gains (or losses) are to be included in the tax base of Amount A (i.e., theAdjusted Profit before Tax, which is the numerator in the calculation of profitability), it
seems theoretically necessary that the corresponding amount of revenue be included in
the denominator as well, from the perspective of balance. However, this would result in
artificially “creating” revenues for the purpose of Amount A that are not recognized in
the financial accounts and gives rise to a serious concern. Gains and losses recognizedunder the equity method are typical examples.
Therefore, from the perspective of simplification, all investment gains and losses underthe equity method including those of JVs should be excluded from the tax base ofAmount A. A JV is not consolidated in financial statements because a Covered Group
does not truly control a JV. Even if gains and losses of JV were included in the tax baseof Amount A, it would be extremely difficult to collect enough information in a timely
and appropriate manner to comply with the complicated revenue sourcing rules.
Nonetheless, if gains and losses of certain JVs are to be included in the tax base, thefollowing should be clarified.
 Typical examples of JVs that are subject to the equity method AND "jointlycontrolled".
 Scope of JV gains and losses that should be included in the tax base (of course, we
understand that profits and losses corresponding to non-controlling interests are
not included).
 The corresponding amount of revenue of the JV and how to identify the source ofthat revenue (the revenue sourcing rules for JVs should be as simple as possible
because the collection of information is extremely challenging and should neverdeviate from financial accounting practice as stated above).
Furthermore, consideration should be given to not including immaterial gains andlosses of JVs in the tax base, such as where gains and losses of a JV are below a certain
percentage of the financial accounting profit (or loss) of a Covered Group.
2.2.2. Controlling Interest
We understand that the pros and cons of including gains (or losses) associated withdisposals of Controlling Interests in the tax base are being considered, from theperspective of consistency with the inclusion of gains (or losses) associated with disposalof assets in the tax base (footnote 12). We would like to point out the following as
additional factors to be considered if such gains (or losses) were to be included.
 The definition of a Controlling Interest should be clarified. It would be natural todefine this based on whether the interest is consolidated for financial accounting
purposes or not. Where the shareholding ratio exceeds 50%, this can be defined as aControlling Interest.
 The capital gain of a Controlling Interest may reflect the after-tax profit of thecorporation that issues the shares, which may result in double taxation if included in
the tax base (for this reason, we understand that a capital participation exemption isprovided in several jurisdictions.).
 Changes in the fair value of a controlling interest are not included in the tax base but
2capital gains are included upon disposal. This difference should be explained.
 A simple and clear method should be established to identify the source of revenue
for the disposal of a controlling interest. Creating a new category for revenue
sourcing would add complexity.
2.2.3. Others
We have no specific issues with the treatment of equity gains (or losses), except for theissues listed in 2.2.1. and 2.2.2. Our understanding from the current draft is that suchgains (or losses) are excluded from the tax base regardless of where they are presented
in the consolidated financial statements (for example, whether they are classified as
operating income or not). We also understand that step-up gains under purchaseaccounting are excluded.
2.3. Policy Disallowed Expenses
Adjustments under this category (“Policy Disallowed Expenses”) should be very limited,such as illegal payments (e.g., bribes) and fines/penalties. In some jurisdictions, there
are some items that are fully recorded as expenses for accounting purposes but partiallydeductible for corporate income tax purposes (e.g., entertainment expenses anddonations). For the sake of simplicity, it should not be necessary to make adjustments
for Amount A purposes (i.e., adding back these Policy Disallowed Expenses to increase
the tax base of Amount A). Also, the treatment should not differ depending on thesituation in each jurisdiction. Further, even if additional items are subject to adjustment,
those that are not material in amount should be excluded.
We understand that book-to-tax adjustments listed in 2.1~2.3 are made using thecurrency with which the consolidated financial statements are prepared.
2.4. Restatement
Restatement is defined as "a restatement of Financial Accounting Profit (or Loss) of aPeriod(s) that preceded the current Period under a Qualifying Financial AccountingStandard". We understand that "correction of errors" and "retrospective application
due to changes in accounting standards" are reasons for restatement. We would like toconfirm whether our understanding is correct. If there are other reasons, they should
be clearly explained with examples. We understand that restatement is required under
Qualifying Financial Accounting Standard. Adjustments unique to Amount A should not
be introduced. If the amount reviewed by auditors is not material, there should be norestatement.
In order to limit complexity due to carryforwards, it is recommended that the limitation(cap) on restatement be removed.
2.5. Deducting Net Losses
In general, the longer the carry forward period for Net Losses, the more advantageous
it is for the taxpayer. At the same time, it should be also consistent with the carryforward period of Net Operating Losses for corporate tax purposes and the related
documentation requirements. Given this, the carry forward period should be at least 10years. Regardless of the internationally agreed carry forward period, the requirements
for document retention should reflect the fact that the OECD's stated approach to3

auditing for compliance with the regulations is focused on internal controls at a systemlevel, not on individual transactions.
Furthermore, it is desirable that the fiscal year that begins (or ends) within five years
prior to the Commencement Date (the implementation date of Amount A) should beconsidered as the Eligible Prior Period.
2.6. Business Combination/Division
2.6.1. Transferred Losses
According to the Document, relevant transferred losses based on an Eligible Business
Combination or an Eligible Division would be added to the Net Losses of the CoveredGroup (Article 5, 3., b.). We would like to confirm that the transferred losses can not
only be added to the financial accounting loss of the Covered Group, but also deductedfrom the financial accounting profit of the Covered Group. We consider that there is norational reason to treat the transferred losses differently in cases where a profitable
Covered Group acquires a loss-making start-up, and in cases where a profitable CoveredGroup establishes a start-up within the group which makes losses in its initial years ofoperation.
In addition, some Covered Groups conduct dozens of business combinations ordivisions every year, and the administrative burden of identifying transferred losses forAmount A purposes could be significant. It should be acceptable to allow taxpayers toelect to recognize transfer losses, or to limit the scope of transferred losses to those
disclosed as significant business combinations in the notes to the consolidated financial
statements.
2.6.2. Business Continuity Conditions
Of the Business Continuity Conditions, the requirement that the Covered Group carries
on the same or similar business(es) throughout the twenty-four months immediately
following the Eligible Business Combination or Eligible Division needs to be reconsideredin accordance with the reality of business operations. It is common for a Covered Groupto review the business of acquired companies (or groups), including discontinuation,during PMI (Post Merger Integration) to create synergies through businesscombinations/divisions. For example, the twenty-four months requirement could bereplaced with a system where transfer of losses is restricted only when there is a definite
future PMI plan, such as consolidation of businesses within a Covered Group, at the timeof the business reorganization.
Numerical standards using existing accounting data such as assets and headcountfigures should be established to enable easier determination of whether businesses are“the same or similar”.
2.7. Others
Is it correct that the profit (or loss) of a subsidiary that is excluded from theconsolidated financial statements based on materiality need not be taken into accountin the tax base determinations for Amount A?

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