Pillars in cyberspace

ME PoV Summer 2020 issue

The OECD’s Pillar One and Pillar Two initiatives will have significant impact for multinationals operating across the Middle East.

Consumers in the Middle East region apply their smartphones each day for online research, e-shopping, GPS navigation, and social media. The ongoing digital transformation spurs innovation, generates efficiencies, and improves services while building sustainable growth and enhancing well-being. However, as the digital economy grows, the taxation complexities facing digital businesses grow also.

The G20 and the Organization for Economic Cooperation and Development (OECD) have released Pillar One and Pillar Two proposals to adapt the manner in which businesses operating digitally1 are taxed. Pillar One looks at new taxing rights for jurisdictions based on consumer usage, local marketing intangibles and an in-country nexus concept based on significant economic presence; Pillar Two looks at a minimum rate of corporation taxation to reduce the incentive for multinational enterprises (MNEs) to shift profits from high tax jurisdictions to low tax jurisdictions.

Many Middle East jurisdictions have become signatories to the BEPS2 inclusive framework (IF). Jurisdictions fall into the following categories in this regard:

  1. Those that have already introduced regulations in advance of the OECD Pillar one and Pillar two proposals (such as the UK revenue-based taxation for large digital businesses);
  2. Those that are G20, OECD member states or IF signatories and have committed to a fair and transparent tax system;
  3. Those that have not signed the IF commitment (e.g. Kuwait and Iraq) and will not be impacted by the proposals.



In terms of the evolution of these proposals, the BEPS IF adopted a Program of Work (POW) in May 2019 to help develop a consensus solution to the tax challenges raised by the increasing digitalization of the economy. This POW was later endorsed by G20 leaders in June 2019. The POW calls for a unified approach of Pillar One acknowledging the commonalities of different proposals recommended by the BEPS IF members.

Later in 2019, the OECD released public consultations for Pillar One and Pillar Two. In January 2020 it issued a statement following public consultation to include support from the BEPS IF members. This is a positive step towards a consensus-based solution–MNEs value certainty and consistency.


Pillar One brief overview

Pillar One proposals call for three types of taxable profit that may be allocated to a market jurisdiction, focusing on mainly automated digital services and consumer-facing business:

1) Amount A: This is a new taxing right to allocate a share of deemed residual profit to a market jurisdiction using a formulaic approach, irrespective of the existence of physical presence.

2) Amount B: This is a fixed return-based (or safe harbor) based on the arm’s length principle for defined baseline distribution and marketing functions.

3) Amount C: This covers the allocation of additional profit at arm’s length which exceeds the above amounts and is agreed between the relevant jurisdictions under a dispute resolution mechanism.


Pillar Two brief overview

Pillar Two proposals outline four methods in which an MNE can be assessed on a minimum rate of corporation tax in particular operating locations:

  1. An income inclusion rule to tax the income of a foreign branch or a controlled entity if that income were subject to tax at an effective rate that is below a minimum rate;
  2. An undertaxed payment rule to deny the deduction or impose source-based taxation (including withholding tax) for a payment to a related party if that payment was not subject to tax at or above a minimum rate;
  3. A switch-over rule to be introduced into tax treaties that would permit a residence jurisdiction to switch from an exemption to a credit method if the profits attributable to a permanent establishment or derived from immovable property are subject to tax below a minimum effective rate;
  4. A subject to tax rule that would complement the undertaxed payment rule by subjecting a payment to withholding or other taxes at source and adjusting treaty benefits on certain items of income where the payment is not subject to tax at a minimum rate.

The OECD proposals recommend using financial accounts to determine the tax base, taking into account various temporary and permanent differences followed by blending high-tax and low-tax income from different sources to determine blended effective minimum tax rate.


Thresholds and carve outs

To minimize the compliance and administrative burden, the OECD is considering certain thresholds and carve outs to decide which businesses will be impacted by Pillar One and Pillar Two. Pillar One may have an equivalent revenue threshold to country-by-country (CbC) reporting (revenue threshold of €750 million). As mentioned above, Pillar One is supposed to target MNEs that operate digitally (such as online marketplaces used or online advertising services). It is hoped that Pillar Two jurisdictions such as the UAE may be exempted from a minimum rate of corporation tax if there is sufficient economic substance in that location (clearly such a test would be practical for the UAE in which there is a significant amount of foreign direct investment).



The Pillar One and Pillar Two proposals represent a major shift to the international tax landscape. Businesses value certainty and a consistent approach without unilateral tax measures would be a helpful outcome of the proposals. There will need to be a workable solution for both taxpayers and tax administrations that takes into consideration the differing administrative capacities. As the minimum effective tax rate is not yet decided, it is difficult to know what impact it will have on tax base, investment, and innovation. Furthermore, there needs to be more clarity on the relationship between income inclusion rules and undertaxed payment rules within Pillar Two.

More importantly, more and more countries are implementing the existing 15 BEPS Action items to mitigate base erosion and profit shifting. Taxpayers may need additional time to digest these existing changes before being faced with additional international tax rules.

The OECD may therefore find it beneficial to conduct a thorough economic impact assessment to measure this additional impact compared to the already implemented BEPS actions. Preliminary assessments by the OECD estimate the combined effect of the proposals will be 4 percent of existing global corporate income tax rate or US$100 billion annually.

Recent developments and challenges

Due to the COVID-19 pandemic, countries are grappling with tax revenues and crippling economies. And while some tech companies prosper due to the work from-home environment, the international tax community is clamoring louder for the imposition of a digital tax as the government authorities are facing growing budget deficits. This can certainly create new challenges to the OECD as it tries to seek a consensual solution towards the end of 2020.

As a major setback to the OECD’s digital tax initiative, and in response to the joint proposal for a phased implementation of Pillar One with respect to imposing the taxation of digital businesses by the UK, Spain, France and Italy, US Treasury Secretary Steven Mnuchin, in June 2020, called upon the OECD to pause discussions of Pillar One, with a view to resuming later this year. Mnuchin cited current, serious public health concerns and economic challenges as more important issues to deal with. This move comes at a delicate time in the OECD consensus-based project. Further, the lack of resolution can certainly create a risk of proliferation of digital services tax by some countries towards end-2020, potentially leading to the United States imposing tariffs as a retaliatory response, thus creating further uncertainty in global trade and commerce. We have yet to see how the OECD and IF will address this delicate matter.


What does this mean for the Middle East?

As members of Inclusive Framework, many Arab countries have implemented the four minimum standards under the inital BEPS project in relation to Action 5 (Harmful Tax Practices), Action 6 (Tax Treaty Abuse), Action 13 (Country by Country Reporting) and Action 14 (Mutual Agreement Procedure).

Notwithstanding the latest challenges and developments aforementioned, Middle East government authorities and taxpayers certainly have to keep an eye on the progress of Pillar One develpment. If there is positive progress in this regard, digital businesses operating in the region above the threshold will be impacted under Pillar One. As regards Pillar Two, it is not just the zero tax jurisdictions of the UAE and Bahrain that will be impacted:

  • The minimum rate of corporation tax being debated is 12.5 percent and this will impact Qatar for example where the current rate is 10 percent;
  • Special regimes in the Middle East that exempt certain classes of business from taxation or impose a lower rate of taxation (e.g. Zakat in Saudi Arabia or special economic zones in Qatar).

Even if consesnus is reached in 2020, it may be 2-3 years before full measures are implemented. However, we are already seeing jurisdictons introducing their own domestic taxes on digital businesses and we may see the introduction of a corporate income taxation in the UAE for example in advance of the OECD propsals coming into force. 


by Abi Man Joshi, Director, Tax, Deloitte Middle East


  1. The current Pillar One proposals are likely to impact very large digital businesses; while the current Pillar Two proposals are likely to impact all businesses irrespective of whether they are digital or not and irrespective of size
  2. Base Erosion and Profit Shifting
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