OECD Inclusive Framework agrees on the design components of Pillar One and Pillar Two

17 October 2021

New Components of Pillar One

Generally, the same design elements considered in the previous communication have been included in the Statement. However, the IF provided clarifications in relation to Amount A and confirmed that the technical work for the application of Amount B will be completed by the end of 2022. The new components that have been agreed upon are summarized below:

Amount A
  • Scope: The Statement ratified that Multinational Enterprises (MNEs) with global turnover above EUR 20 billion and profitability above 10% are within the scope of Pillar One rules. However, such profitability would be calculated using an averaging mechanism.
  • Quantum: It was agreed that MNEs will reallocate 25% of their residual profit to market jurisdictions. Previously, it was set out between 20% and 30%.
  • Tax certainty: The IF clarified that the elective binding dispute resolution mechanism for Amount A will only be applicable by developing economies that are eligible for deferral of BEPS Action 14 Peer Review and have no or low levels of mutual agreement procedures for disputes. The conditions to access this mechanism will be reviewed on a regular basis at the level of each country.
  • Unilateral measures: The multilateral convention (MLC) for the implementation of Amount A will require that parties commit to remove of all digital services taxes (DSTs) and similar measures to all companies, and to not introduce such measures in the future. No newly enacted DSTs or similar measures will be imposed on any company from 8 October 2021 until 31 December 2023, or the coming into force of the MLC. The modality for the removal of existing DSTs and other relevant similar measures will be coordinated.


New components of Pillar Two

As with Pillar One, the same design elements considered in the previous communication have been included in the Statement. However, new components have been added as a result of the recent negotiations at the level of the IF. The new components may be summarized as follows:

  • Rate: The Global Minimum Tax rate has been set at 15%. The phrase “at least” has been removed.
  • Undertaxed Payment Rule (UTPR) exclusion: The Statement sets out a new exclusion from the application of the UTPR for MNEs that have a maximum of EUR 50 million tangible assets abroad and operate in less than 5 other jurisdictions. This exclusion is limited to a period of 5 years after the MNE comes into the scope of the GloBE rules for the first time. For MNEs that are in scope when the rules come into effect, the period of 5 years will start at the time the UTPR rules come into effect.
  • Effective Tax Rate (ETR) calculation: The ETR calculation remains the same. However, the Statement has clarified that for existing distribution tax systems earnings distributed within 4 years would not trigger the top up tax. Previously, a timeframe of 3 to 4 years was provided.
  • Exclusions: Two exclusions are considered for purposes of calculating the ETR and GloBE Income – substantial activity and a de minimis exclusion. The Statement considered the following:
    • Substantial activity exclusion Under previous work, MNEs were allowed to exclude certain income from the computation of the ETR, based on a percentage of its tangible assets and payroll expenses. The amount of exclusion of substantial activities has been set at 5% (the phrase ‘at least’ has been removed), but the conditions of the exclusion during the transitional period have been extended as follows:
      • The transitional period has increased from 5 to 10 years.
      • The amount to be excluded during that period has been set at 8% of the carrying value of tangible assets and 10% of payroll (the previous statement referred to at least 7.5% for both). The percentage will progressively decrease annually by 0.2 percentage points during the first 5 years, and by 0.4 percentage points for tangible assets and by 0.8% percentage points for payroll during the remaining 5 years.
    • De minimis exclusion: In addition, a de minimis exclusion will apply at a jurisdictional level, if the following two conditions are met: (i) MNE has revenues of less than EUR 10 million, and (ii) has profits of less than EUR 1 million.
  • Subject to tax rule (STTR): The STTR remains a core element of the proposal for Pillar Two. The minimum tax rate will be 9%. Previously, it was established that it could range between 7.5% and 9%.


Implementation plan for Pillar Two

The Statement also sets out an implementation plan. Below is a summary of the key aspects:

  • The existing timeline is maintained - all rules should come into force as of 2023, except for the UTPR which would be effective as from 2024. However, the OECD clarified that Pillar Two should be brought into law in 2022, to be effective in 2023, with the UTPR coming into effect in 2024.
  • Model rules for the GloBE rules are expected to be published in November 2021. The OECD has agreed that the rules will be supplemented by commentaries that explain the purpose and operation of the rules.
  • Model tax treaty provision for the STTR and commentaries will be developed by the end of November 2021. The STTR is expected to be implemented in the relevant Tax Treaties through a multilateral instrument (MLI), which will be developed by the IF by mid-2022.
  • Finally, the OECD is expected to develop a detailed implementation framework by the end of 2022. This framework would facilitate the coordinated implementation of the GloBE rules. The IF is expected to evaluate the possibility of utilizing a multilateral convention to implement GloBE rules.   

Next steps

  • The response from GCC countries remains unclear, with countries with ‘low’ or ‘no’ taxation facing enormous pressure as a result the implementation of GloBE rules, especially in respect to Pillar Two.

Tax and finance teams should prepare for upcoming changes in the existing tax landscape and understand the potential challenges the business would face when Pillar One and Pillar Two are introduced and of any changes in the existing domestic tax systems. It is imperative to start preparing an effective roadmap for change.

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