The OECD/G20 BEPS 2.0 Project – A Two-Pillar approach

Pillar One comprises an Amount A and an Amount B. Amount A will lead to a reallocation of taxing rights with new profit allocation and nexus rules for market jurisdictions and applies to companies with global revenues of more than EUR 20bn and a profitability of more than 10%. It is planned to be applicable if a critical mass of countries sign an Amount A Multilateral Convention (MLC). Amount B, on the other hand, relates to a simplified arm’s length principle for baseline marketing and distribution activities and should be incorporated into the OECD Transfer Pricing Guidelines. Unlike Amount A of Pillar One and the global minimum tax rules under Pillar Two, there are no monetary thresholds for MNE groups to be within the scope of Amount B.

Status regarding Amount A

The text of the MLC to Implement Amount A of Pillar One was published by the OECD Inclusive Framework in October 2023. This laid down the technical rules for Amount A. Despite the publication of the MLC text, consensus has not yet been reached among all Inclusive Framework members on certain specific items. These ongoing discussions are preventing the MLC from being opened for signature.

As part of the Pillar One agreement, Inclusive Framework members agreed to a standstill on introducing new Digital Service Taxes and to remove existing ones once Amount A is in place. The standstill period was extended to the end of December 2024 for most members, conditional on a sufficient number of jurisdictions signing the MLC by the end of 2023. As this condition was not met, the future of this standstill is uncertain, potentially opening the door for new domestic DSTs.

Status regarding Amount B

The OECD released the final report on Amount B in February 2024, with further updates finalised in June 2024. The globally standardised application of Amount B is intended for tax years beginning on or after January 1, 2025.

Amount B provides a simplified and streamlined approach to applying the arm's length principle to in-country baseline marketing and distribution activities. This aims to enhance tax certainty and reduce transfer pricing disputes. The OECD has developed a Pricing Automation Tool to help compute the Amount B return, aiming to further simplify the process for both tax administrations and taxpayers.

However, jurisdictions have the autonomy to choose whether and how they implement Amount B into their domestic legislation and administrative practices and at this stage it remains to be seen how many jurisdictions will adopt Amount B.

On 20 December 2021, the OECD published the Global anti-Base Erosion (GloBE) Model Rules on Pillar Two, which are now implemented into the domestic tax laws of various jurisdictions around the world. They apply to MNE groups with a turnover over EUR 750m and are designed to ensure a 15% minimum tax rate in each jurisdiction. This is achieved by applying a top-up tax in the case of undertaxed income in foreign jurisdictions. This top-up tax can be levied by foreign jurisdictions via two charging mechanisms: either by applying a top-up tax on the parent company level – through the Income Inclusion Rule (IIR), or on the subsidiary level by applying the Undertaxed Payments Rule (UTPR). There is also a third mechanism, the Qualified Domestic Minimum Top-up Tax (QDMTT), which is designed according to the Model Rules and allows a jurisdiction to increase the tax burden of domestic in-scope companies to 15%, and therefore avoid the foreign levying of top-up taxes. To uniformly determine and compare the effective tax rate (GloBE ETR) of in-scope MNEs for each jurisdiction, the GloBE Model Rules also create a new tax basis (GloBE Income) and define the Covered Taxes.

More than 50 jurisdictions around the world have now implemented at least parts of Pillar Two.  Several jurisdictions brought rules into effect for fiscal years starting on or after 31 December 2023/1 January 2024. Among them are, for example, Australia, Canada, most EU Member States, the UK and Switzerland, whereas others delayed implementation until 31 December 2024/1 January 2025. However, there are currently notable exceptions such as the US, China and India, who all have not introduced Pillar Two so far. Thus, the global Pillar Two landscape remains fragmented and it is challenging for taxpayers to remain on top of the ever evolving compliance landscape.