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Rethinking taxation of work

Author: Steve Wade

Published: 01 Sep 2021

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Lindsey Wicks and Wendy Nicholls discuss the issues surrounding BEPS 2.0, the OECD’s two-pillar approach to global tax reform

June and July 2021 saw a leap forward on the roadmap to international tax reform. First, we had a high-level statement from the G7 finance ministers, followed by more detail from the Organisation for Economic Co-operation and Development’s (OECD) inclusive framework (IF).

The aim is to tackle domestic tax base erosion and profit shifting (BEPS) due to multinational enterprises exploiting gaps and mismatches between different countries’ tax systems – particularly the tax challenges arising from digitalisation of the economy. The OECD has suggested a two-pillar approach (sometimes referred to as BEPS 2.0) to address the issues:

  • pillar one seeks to achieve a fairer distribution of profits and taxing rights between countries; and
  • pillar two will put a floor on tax competition on corporate income tax through the introduction of a global minimum corporate tax that countries can use to protect their tax bases.

The press headlines have focused on the 15% global minimum tax rate followed by a brief mention that the largest multinational enterprises will have to shift some taxing rights to the countries where the profits are generated. The statement from the OECD on 1 July provided some detail on the high-level agreement reached by 130 countries and jurisdictions (132 subsequently), but many points were mentioned in vague terms or stated that design elements are outstanding.

The G20 finance ministers and central bank governors expressed their desire to maintain momentum, calling for the OECD’s IF “to swiftly address the remaining issues and finalise the design elements within the agreed framework together with a detailed plan for the implementation of the two pillars”, in time for the next G20 meeting in October. However, the detail itself will not be released until 2022 and implementation is not planned until 2023.

Pillar one

Pillar one will initially apply to multinational enterprises (MNEs) with global turnover above €20bn and profitability (PBT) above 10%. These MNEs will be required to allocate 20%-30% of their residual profits to market jurisdictions (Amount A), but only if they derive at least €1m in revenue from that jurisdiction (the threshold is reduced to €250,000 for smaller developing economies with GDP of less than €40bn).

The OECD statement claims that compliance costs will be minimised. But apart from a brief comment about tracing small amounts of sales, it does not explain how this will be achieved.

For a start, MNEs will be required to track the end-market jurisdictions for goods and services within the scope of the rules, and arguments are likely on the identification of where electronically delivered services are used/consumed. Sourcing rules for different categories of transactions will need to be developed and MNEs will be expected to use a reliable method to apply the sourcing rules based on their facts and circumstances.

However, the detail on what categories of transactions are within scope is still to be developed and, although the implication is that transfer pricing considerations should apply, there is currently no guidance on what a reliable method might look like.

Certain industries including, notably, regulated financial services, are exempted. But beyond these wholesale carve-outs, segmentation will only be possible in ‘exceptional circumstances’ where, based upon the financial statements, the segment itself would meet the scope criteria (ie, presumably, global turnover above €20bn and profitability above 10%).

There will be a safe harbour for marketing and distribution profits that will apply where residual profits are already taxed in a market jurisdiction. This should cap the residual profits allocated to that jurisdiction, but further design work is needed on this.

The OECD statement also talks about tax certainty and that there will be dispute prevention and resolution mechanisms that will be mandatory and binding. Disputes over transfer pricing and business profits are mentioned, but what else might be covered? Is this the same as arbitration, or different?

The G7 statement had been silent on the ‘Amount B’ aspect of pillar one, which relates to the “application of the arm’s length principle” to baseline marketing and distribution services. We may be waiting some time for the outcome, as the OECD statement claims this work will be completed by the end of 2022.

Pillar one is predicated on coordination between the introduction of these new rules and the withdrawal of unilateral measures such as digital services taxes and other similar measures. What remains unclear is what other measures might be in scope. Could it affect the US base erosion and anti-abuse tax (BEAT), the Australian multinational anti-avoidance law (MAAL) or even the UK’s diverted profits tax?

In practice, even if a multilateral instrument can be used here, repeal of existing measures is likely to require approval of national parliaments. Pillar one is not a like-for-like replacement of existing unilateral measures. For example, the UK’s digital services tax applies when a group’s worldwide revenues from digital activities are more than £500m and more than £25m of these revenues are derived from UK users.

Pillar two

There are arguably even more unknowns in this. The high-level concepts are:

  • two domestic tax rules (known as the Global anti-Base Erosion (GloBE) rules. These consist of a top-up tax for parent entities in respect of low taxed income of constituent entities – the income inclusion rule (IIR) – and where low tax income of a constituent entity is not subject to tax under the IIR, an undertaxed payment rule (UTPR) will deny deductions or require an equivalent adjustment; and
  • a treaty-based rule allowing source jurisdictions to impose limited source taxation on related-party payments that are subject to tax below a minimum rate – the subject to tax rule (STTR).

GloBE rules

Members of the IF are not required to adopt the GloBE rules, but where they do, they must implement them in accordance with model rules and guidance, and they must accept the application of the rules by other IF members, including rule order and safe harbours. The intention is that the US global intangible low-taxed income regime will coexist alongside the GloBE rules, although here again the statement hints at disagreement on how this will be achieved.

The minimum tax rate for the IIR and UTPR will be at least 15%. The GloBE rules will impose a top-up tax on a jurisdictional basis using an effective tax rate calculation. This will use a common definition of covered taxes, and STTR will be creditable as a covered tax. The tax base will be determined by reference to financial accounting income and subject to agreed adjustments, including for timing differences.

The GloBE rules apply to MNEs subject to the country-by-country reporting rules, but countries will also be free to apply the IIR to MNEs headquartered in their country that fall below that reporting threshold.

The IIR will be applied on a top-down basis, apportioning amounts where the shareholding is below 80%.

Once again, there is an undertaking to minimise compliance and administrative costs of the GloBE rules by including safe harbours and/or other mechanisms. There are already undertakings to provide:

  • a formulaic substance carve-out to exclude a proportion of the carrying value of tangible assets and payroll;
  • a de minimis exclusion; and
  • an exclusion for shipping income.


The minimum STTR rate will be 7.5%-9%. Developing IF members (countries with gross national income per capita of $12,535 or less in 2019) can request IF members with nominal corporate income tax rates below the STTR rate to implement the STTR in their bilateral treaties for royalties, interest and other payments that are yet to be defined. The taxing right will be the difference between the minimum rate and the tax rate on the payment.

How long until we get there?

While the support in principle of so many countries, including the US, is undoubtedly an impressive achievement for the OECD and IF, there are still several members of the IF that have not yet agreed. As regards the EU, while the European Commission may prefer to implement this via a directive, that may prove difficult while some EU member states hold out on agreement (including Hungary and Ireland, although Ireland has issued a public consultation on the proposals, open until 10 September). The lack of detail in the statements made so far indicates that many areas are still subject to detailed wrangling.

For pillar one, the OECD’s statement talks of a multilateral instrument being opened for signature in 2022, with Amount A coming into effect from 2023. The statement is silent on precise timings, possibly for the practical reason that staggered adoption will be required. As we have seen with BEPS action 15 (the multilateral convention to implement tax-treaty-related measures to prevent BEPS), the timing of entry into effect is fluid, as it is linked to the ratification of each individual treaty. In this case, the timing of the repeal of existing measures is likely to be staggered.

Similar (vague) timings are suggested for pillar two, with the possibility of separate multilateral instruments for GloBE and the STTR. Transitional rules are also floated, including the potential to defer implementation of the UTPR.

About the authors

Lindsey Wicks, Technical Editor, ICAEW
Wendy Nicholls, Independent Transfer Pricing Consultant and Director at Leystar