Pillar One and Pillar Two

28 February 2021

In January, the OECD Inclusive Framework held virtual consultation meetings on its published Pillar One and Pillar Two Blueprints for reforming the international tax system. Despite much of the detail still needing to be worked through, it is clear that (at least) some change is on the horizon.

Access our in-depth report or read a short reminder of the central mechanics of the proposed new rules.

In-depth report 

Unpacking Pillar One and Pillar Two Blueprints

Key observations for corporate groups

For more detail on the Blueprints, including key takeaways for multinational businesses potentially affected by the proposals, see our in-depth report: Unpacking Pillar One and Pillar Two Blueprints.

Download the full report

Overview of the proposals

Pillar One

Pillar One broadly seeks to create a new nexus rule allowing a reallocation of a business’ residual profits to their market jurisdictions – i.e. jurisdictions where businesses create (or harness) value without having a physical presence. It introduces three new mechanisms to achieve this:

  • a new nexus rule (Amount A);
  • a fixed return for certain baseline marketing and distribution activities taking place physically in a market jurisdiction (Amount B); and
  • processes to improve tax certainty through effective dispute prevention and resolution mechanisms.
Amount A – new nexus rules

Amount A gives a new taxation right to “market jurisdictions” in which an MNE engages in an active and sustained way, irrespective of physical presence.

Highly digitalised businesses are definitely in the OECD’s sights, but the US has also suggested that consumer facing businesses should be within scope, so they are currently included in the proposal. It’s for this reason that, as the OECD describe them, the “scope” questions remain firmly at the top of the political agenda, effectively acting as the “gating item” for the entire Pillar One proposal.

Whether a digitalised business or a consumer-facing business, MNEs must meet two revenue-based criteria for the rules to apply: a “global revenue” threshold based on the annual consolidated group revenue and then a “de minimis foreign in-scope revenue” threshold.

Fairly tricky “revenue sourcing rules” – most of which require a tracing exercise and a solid under-standing of an MNE group’s user base, including their location (whether that be established by an IP address or other geolocation data) – would then identify the MNE’s market jurisdictions and determine the amount of revenue to be treated as deriving therefrom. These would operate using indicators of a significant and sustained engagement in a jurisdiction, absent which no group profits would be reallocated to that jurisdiction under amount A.

Amount A thus represents a departure from the arm’s length principle, as the result is that a portion of an MNE’s deemed “residual profit” (as calculated by a formula at an MNE group level) is allocable to, and taxable in, the market jurisdictions that are the source of an MNE’s in-scope revenue.

Amount B - arm’s length remuneration for “baseline” marketing and distribution activities

Amount B would standardise the remuneration of related party distributors that perform “baseline marketing and distributing activities” in the market jurisdiction. The aim would be to provide a more transparent system of remuneration for such activities as compared to the current transfer pricing rules. This would simplify the administration of, and compliance with, such rules as well as enhancing tax certainty and reducing controversy between taxpayers and tax administrators. Amount B is welcomed by many, since it is one aspect of the proposal which will bring some tax certainty to businesses.

Processes to improve tax certainty though effective dispute prevention and resolution mechanisms

Pillar One also includes proposed dispute prevention and resolution procedures (think here MAP but with lots more stakeholders and mandatory binding arbitration) both in relation to Amount A (and beyond Amount A). The “innovative” dispute prevention in the Amount A context is (understandably) emphasised in the proposal. Recognising that the calculation and allocation of Amount A is complex, involving multiple competing stakeholders, the proposal envisages that a new “tax certainty” procedure be implemented which (although not expressed in these terms) would effectively enable MNE groups to obtain advanced clearance as to its Amount A calculation and allocation amongst market jurisdictions.

Pillar Two

Pillar Two aims to insert a floor to international tax competition and forestall a race to the bottom. The intended outcome is that internationally operating businesses within the scope of the rules will pay a minimum effective tax rate (ETR).

The ETR functions as both the trigger that identifies “low tax jurisdictions” (a jurisdiction is low tax if the MNE’s jurisdictional ETR is below the agreed minimum rate) and the computational tool to determine how much income must be brought back into the tax net to raise the aggregate tax on income in that jurisdiction to the ETR.

The proposed mechanisms to implement the ETR are as follows:

  • the GloBE rules, comprised of the Income Inclusion Rule (the IIR), the Switch-Over Rule (the SOR) and the Undertaxed Payments Rule (the UTPR); and
  • the subject to tax rule (the STTR), which runs in tandem to the GloBE rules and is expected to operate in priority.
GloBE rules

The GloBE rules seek to provide a right for jurisdictions to “tax back” where low tax jurisdictions have not exercised their primary taxing rights, or the payment is otherwise subject to a low tax rate. The top-up tax required for an MNE to meet the minimum ETR is collected through either the application of the IIR in a parent jurisdiction, or through a corresponding adjustment under the UTPR.

The IIR requires a parent entity to bring into account its beneficially owned share of income of each group entity located in the relevant low tax jurisdiction. The IIR therefore works to include, and tax, income at the corporate shareholder level if it was taxed below a threshold rate lower down the structure – operating similar to many established CFC regimes.

The IIR may be accompanied by a “switch-over rule” (SOR). This is currently under consideration by the Inclusive Framework. The SOR would enable treaty exemptions for income derived from PEs in a low tax jurisdiction to be switched off, thereby enabling such income to be included in the low tax jurisdiction’s income for the purposes of working out how far short of the ETR such jurisdiction falls.

The policy rationale of the UTPR is similar to the IIR but serves as a backstop for circumstances where the parent entity (and therefore the low tax constituent entity) is not within the scope of an applicable IIR. It is designed to protect jurisdictions against base erosion through intragroup payments to low tax jurisdictions that have not signed up to the Pillar Two regime. In practice the application of the UTPR is likely to be narrow.


With only 21 of 246 pages devoted to the STTR, it is not a particularly developed idea, however its application is potentially very wide-ranging. It is a standalone treaty-based rule that targets the risks associated with intragroup payments which take advantage of treaty benefits and low tax rates. This rule is designed to operate on a payment-by-payment basis which for many global businesses would apply to hundreds of thousands of individual payments and despite its lack of prominence in the Blueprint it is anticipated that it would apply in priority to the GLoBE rules.

The STTR is designed to restore taxing rights to source states to help protect their tax base. Where the nominal tax rate in the payee jurisdiction falls below an agreed rate (yet to be decided upon), the payer jurisdiction would impose a withholding tax on such payments to levy the top-up tax required. The rationale is that the ceding of its taxing rights by a source jurisdiction under a tax treaty should not result in an overall lowering to the MNE’s effective tax rate; the top-up tax levied by the payee jurisdiction should raise this to the agreed minimum rate.