OECD/G20 Inclusive Framework on BEPS agreement on key components for two-pillar solution

Deloitte Malta Tax Alert

06 August 2021

Following the publication of the blueprints on tax challenges arising from the digitisation of the economy in October 2020 and the subsequent public consultation, the OECD/G20 Framework on Base Erosion and Profit Shifting (‘IF’) recently issued a statement (‘Statement’) outlining an agreement which addresses the tax challenges arising from the digitisation of the economy. The IF Statement has been joined by 132 countries, amongst them Malta, and outlines a two-pillar approach to be followed and implemented.

Pillar One provides for a revised reallocation of a portion of the taxing rights to the market jurisdiction, while Pillar Two introduces rules which provide for an agreed minimum level of effective taxation at a rate of 15%. Both pillars generally apply to multi-national enterprises (‘MNEs’) and contemplate differing applicable thresholds.

Pillar One

Pillar One establishes a rule that allocates a proportion of the profits of an MNE to market jurisdictions where (a) an MNE falls within the scope of Pillar One and (b) the nexus criteria are met. The Statement provides that Pillar One should apply to MNEs having global revenues exceeding EUR 20 billion and ensures a coordinated application of such new rules through, inter alia, the removal of digital service taxes and similar unilateral measures.

Design & scope

In-scope MNEs are those having a global turnover in excess of EUR 20 billion and a profitability margin (computed as profit before tax divided by revenue) in excess of 10%. The Statement also provides for a review process that shall commence seven years following the entry into force of Pillar One, with a view to potentially reducing the turnover threshold to EUR 10 billion. It was further announced that regulated financial services and the extractives industry are set to be excluded from the scope of Pillar One.

Nexus rule

The allocation of profits to market jurisdictions shall be determined by reference to a special nexus rule. Such allocation, referred to as ‘Amount A’, will be allocated to market jurisdictions with respect to which the MNE derives more than EUR 1 million of revenue. This is to be reduced to EUR 250,000 in the case of jurisdictions having a GDP of less than EUR 40 billion. The tax base will be determined using the MNE’s financial accounting income with limited adjustments. Losses may be carried forward.


The end market jurisdiction (i.e. where the goods or services are consumed) shall levy Amount A using detailed sourcing rules for specific categories of transactions depending on the MNE’s particular facts and circumstances. 20-30% of the residual profit of an MNE (i.e. profit in excess of 10% of the revenue) is set be allocated to jurisdictions having the established nexus.

Prevention of double taxation and compliance

The credit or exemption method will be employed to relieve the double taxation of profits allocated to a market jurisdiction and a mandatory and binding dispute prevention mechanisms shall ensure that any conflict is resolved. A safe harbour rule will also cap residual profits allocated to a market jurisdiction where the MNE’s residual profits are already taxed. Another identified objective in the Statement is the streamlining of tax compliance and filing obligations through a system which allows the process to be managed through a single entity of the MNE.

Amount B

Work to simplify the application of the arm’s length principle to in-country baseline marketing and distribution activities is also underway, scheduled for completion by the end of 2022.

Pillar Two

While Pillar One is intended to apply to a limited number of entities, Pillar Two is given a wider scope and intends to establish the Global anti-Base Erosion Rules (‘GloBE’). The GloBE Rules are set to utilise a minimum tax rate of at least 15% and designed to operate as a top-up tax based on the effective tax rate of a jurisdiction and the MNE’s tax base, determined using financial accounting income.


The GloBE rules are comprised of an Income Inclusion Rule (‘IIR’) and an Undertaxed Payment Rule (‘UTPR’). The IIR imposes a top-up tax on a parent entity’s low-taxed income of a constituent entity, following a top-down approach, with shareholdings of less than 80% subject to a split ownership rule.

On the other hand, the UTPR requires an equivalent adjustment or denies a deduction to the extent that low tax income is not subject to the IIR, including those located in the parent entity jurisdiction.

A treaty-based rule also allows a source jurisdiction to limitedly tax certain related party payments which are subject to tax below the minimum rate. This Subject to Tax Rule (‘STTR’) will be creditable as a covered tax under the GloBE rules.


MNEs meeting the EUR 750 million revenue threshold as determined by BEPS Action 13 are within scope of Pillar Two, however countries may still apply the IIR to MNEs that do not meet this threshold but are headquartered in their jurisdiction. Government entities, international organisations, non-profit organisations, pension funds and investment funds that are the Parent Entities of MNEs are not subject to GloBE rules.


GloBE rules provide a carve-out of at least 7.5% (to be reduced to 5% following an initial five-year transition period) for the income of the carrying value of tangible assets and payroll. A de minimis exclusion will also apply, together with an exclusion for international shipping as defined in the OECD Model Tax Convention. An exclusion of MNEs in their initial stages of international activity from the global minimum tax is also set to be explored.


This IF Statement signals the direction that the IF members intend to follow and forms a commitment to continue discussions, with a final decision based on the agreed framework expected by October 2021. Following the entering into of a future agreement, an implementation plan is expected to be issued with the aim of legislating Pillar Two in 2022 (and entering into effect in 2023) and Amount A in Pillar One in 2022 (entering into effect in 2023) by means of a multilateral instrument.

The IF statement may be accessed here.  

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