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Highlights on Pillar 1 and Pillar 2 Blueprints recently released by OECD

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On October 12, 2020, the OECD published blueprints on Pillar One (“Pillar One”) and Pillar Two (“Pillar Two”, together the “Blueprints”), both related to the ongoing work of the OECD/G20 inclusive framework on BEPS (“OECD/G20 IF”) which was firstly established in 2016.

In general terms, the OECD/G20 IF recorded the needs to solve tax issues arising from the challenges of the digitalising economy.

As a consequence the Blueprints propose to reallocate international taxing rights of the income of multinationals operating in digital economy business.

Before focusing on the two Pillars, it is helpful to  analyse an example in order to show the reasons behind the Blueprints.

A company, based in Country A, develops a digital platform and intends to exploit the digital platform abroad.

Such company licenses it to a company based in Country B (“OpCo”).

The right to use the platform would be equal to 2000 while the price paid by OpCo is 800.

In the absence of a subsidiary in the Country where the Customers are based (Country C), it is impossible/ difficult, for such Country to tax OpCo even if the users of the digital platform are therein located.

Indeed,  in conclusion, the only taxable basis are equal to 800 in Country A and 1400 in Country B.

In the light of the above, the Blueprints’ main aim is to avoid that a taxing right can be claimed only in case of a physical presence (see Country C).

Pillar One focuses on adapting the international income tax system to new business models through changing tax methods to the profit allocation and nexus rules applicable to the business profits.

It introduces:

-         Amount A: a new right for corporate taxes which deviates from the arms length principle and allocates part of the residual profits of multinational enterprises to market jurisdictions.

-         Amount B: a fixed return for certain baseline marketing and distribution activities taking place physically in a market jurisdiction, in line with the Arm length principle; and

-         Improved tax certainty processes:  a dispute prevention and resolution mechanism.

The new taxing right (Amount A)

Amount A concerns a new taxing right for market jurisdictions with the reallocation of a share of a multinational group’s residual profit.

The Amount A is aplicable only to entities which deal with Automated Digital Services (“ADS”) and Consumer Facing Businesses (“CFB”).

In particular, while ADS refers to automated and standardized digital services provided to globally extended customers without any kind of local infrastructure, CFB refers to sale of goods and services usually provided to final consumers directly or indirectly (by means of third parties).

The key features of the Amount A concern the determination of tax and the loss carry forward regime to ensure that there is no amount A allocation when the business is not profitable overtime.

Losses, according to  Amount A, will be carried forward at the level of the group and not allocated to individual market jurisdictions.

A revenue threshold on annual consolidated group revenue should be determined in order to trigger the determination of Amount A

In the application of Amount A, it is of paramount importance the determination of a new nexus rule which will be created based on indicators of a significant and sustained engagement with market jurisdictions.

The fixed return for defined baseline marketing and distribution activities (Amount B)

Amount B is mainly aimed at two purposes.

First of all, it is destined to simplify the administration of transfer pricing rules for tax administrations and reduce compliance costs for taxpayers.

Secondly, Amount B is intended to grow tax certainty and reduce controversy between tax administrations and taxpayers.

For this reason, it has been acknowledged as a key deliverable of Pillar One on the presumption that the intended benefits may be achieved.

In general terms, Amount B provides for the allocation to the State of the source of a fixed remuneration for baseline marketing and distribution functions.

The definition provided by Pillar One of baseline marketing and distribution activities covers distributors that (i) buy from related parties and resell to unrelated parties and (ii) have a routine distributor functionality profile.

Indeed, these activities are defined by a “positive list” of typical functions performed, assets owned and risks assumed at arm’s length by routine distributors. There is also a “negative list” of typical functions that should not be carried out.

Assets not owned and risks not assumed at arm’s length by routine distributors are also used to qualitatively measure the additional factors that would deem a distributor as being outside the scope of Amount B.

Amount B  could be based on comparable company benchmarking analysis under the Transactional Net Margin Method with the quantum potentially varying by industry, as well as region, provided any such variation is supported by the relevant benchmarking analysis. As a result, Amount B may have a number of ranges of potentially appropriate fixed returns.

Each fixed return provided to remunerate baseline marketing and distribution activities under Amount B is intended to deliver a result that approximates the  ones determined in accordance with the arm’s length principle.

Improved tax certainty processes

It is a key feature of Pillar One and it provides for a:

–          dispute prevention mechanism by which the new taxing right is determined through the application of a formula to an innovative defined tax base, corresponding to a portion of the residual profit of large multinational companies’ activities;

–          dispute resolution mechanisms according to which, in the event a dispute related to Amount A arise, appropriate mandatory binding dispute resolution mechanisms is developed.


Pillar Two has the aim of providing jurisdictions with a right to tax when (i) other jurisdictions have not exercised their primary taxing rights or (ii) a payment would be subjected to low taxing levels.

Indeed, such rules have been created with the purpose of ensuring that all big internationally operating companies pay at least a minimum level of tax.

In general, Pillar Two essentially allow jurisdictions to decide their own tax systems, including whether having or not a corporate income tax and the level of their tax rates.

The actual innovation, however, consists in the possibility, for jurisdiction, to apply an internationally agreed Pillar Two tax regime in case the income is taxed below an agreed minimum rate.

More specifically, in Pillar Two there are several mechanisms aimed at establishing a global framework of minimum taxation:

-      The income inclusion rule (“IIR”) permits the shareholder to include the income of the controlled foreign entity when it is taxed below an effective minimum tax rate.

-      The switch-over rule (“SoR”) complements the IIR, indeed it removes treaty obstacles through its application when an income tax treaty would obligate a contracting state to use a certain exemption method.

-      The undertaxed payments rule (“UTPR”) is a secondary rule and it applies when an entity is not already subject to IIR.

It operates as backstop to the IIR by providing for a level playing field taxation.

-      The subject-to-tax rule (“STTR”) can be qualified as complementing IIR and UTPR, indeed it permits source countries to protect their tax base through the denial of treaty benefits for deductible intra-group payments to jurisdictions with low or no taxation.

The IIR and the UTPR (together “GloBE”) have many common features, not only they have the same rules to determine scope and the level of effective taxation but also they are only applicable to companies with annual gross revenues exceeding Euro 750 million.

With reference to the implementation of the above, while the IIR and the UTPR do not require particular changes to the bilateral treaties and can be implemented by way of merely changing domestic law, both the STTR and the SOR can only be implemented by amending the existing bilateral tax treaties. The way these could be implemented is through bilateral negotiations and amendments to individual treaties or as part of a multilateral convention.


In conclusion, the Blueprints cannot be qualified as a final solution.

Indeed, on the one hand, the OECD admits the urgency to find further technical work and political decisions. On the other hand, until December 14, 2020 interested parties are invited to send written comments to the OECD, in order to improve the content of the Blueprints. Moreover, the OECD is planning to host virtual public consultation meetings in mid-January 2021.

According to the OECD, a final conclusion will be probably reached not before the mid-2021.

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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