The key takeaways from the two panel sessions dedicated to the Pillar Two Blueprint are:

  1. the need to simplify the proposed rules to mitigate compliance costs and risks of disputes,
  2. the strong preference of MNEs for deferred tax accounting rather than carry-forward mechanisms to account for timing differences, and
  3. the desire to have clear, transparent administrative guidance to reduce the number of jurisdictions for which complex computations are necessary.

The OECD aims at reaching a consensus on these proposals by mid-June 2021. Albeit some changes and simplifications are expected, MNE groups with over EUR 750 million global consolidated gross revenue can already start assessing at a high level the potential impact of the proposed rules and the related compliance mechanisms that would be required. In this article, our Digital Economy Taxation team shares more insights.


Pillar Two effectively seeks to enforce a global (yet to be determined) minimum level of effective taxation on income derived by large multinational enterprises (MNEs). To that end, it combines domestic and treaty-based measures that allow the other jurisdictions where the MNE operates (notably the jurisdiction of the ultimate parent entity (UPE)) to charge a top-up amount of tax on resident group entities with respect to the income of low-taxed entities forming part of the MNE group. The proposal includes four different rules: the income inclusion rule (IIR), a switch-over rule (SOR, to facilitate the application of the IIR in a treaty context), an undertaxed payment rule (UTPR, which serves as back-stop to the IIR), and a subject-to-tax rule (STTR), which would consist of a withholding tax on certain intragroup payments to a low-taxed group entity. The STTR and SOR would require changes to tax treaties. The IIR and the UTPR are the “GloBE rules” and would rely on the same computation of the jurisdictional effective tax rate (ETR) and the same minimum GloBE ETR threshold. For further background on the Pillar Two proposal, please read our earlier newsflash.

The ETR computation

Computing the jurisdictional GloBE ETR

The computation of the “GloBE tax base” would start from the financial accounts and then undergo certain adjustments for permanent differences (e.g., exemption for certain dividends) and timing differences (through carry-forward mechanisms). Some participants suggested to minimise adjustments to the financial statements or to the local jurisdictional tax base. Also, business representatives asked that covered taxes that relate to income excluded from the GloBE tax base (but included in the local jurisdiction’s tax base) be taken into account for computation of the jurisdictional GloBE ETR.

Deferred tax accounting vs. carry-forward mechanisms

Timing differences in the imposition of taxation were extensively addressed by several panellists, as the risk of over-taxation may damage investment in capital intensive projects and high-risk R&D. Businesses, especially representatives from capital intensive industries and industries with long product cycles strongly pushed for relying on deferred tax accounting, rather than the carry-forward mechanisms currently contemplated. They stressed that IIR tax credits or local tax carry-forwards (when there is “surplus tax” paid in a jurisdiction over the minimum GloBE ETR) were insufficient to prevent over-taxation, as credits are useless when they cannot be used. They also noted that deferred tax accounting is broadly used and well understood. If deferred tax accounting is not retained, then businesses suggested that carry-back mechanisms, a long period of transition into the Pillar Two regime and the possibility to get refunds would need to be added. An unlimited recognition of pre-regime and regime losses was also requested.

Jurisdictional blending vs. worldwide blending

There seems to be large support for the jurisdictional blending approach, albeit certain participants suggested worldwide blending could be used either (i) to grant a carve-out from the Pillar Two rules to MNE groups reaching a certain global ETR or (ii) as alternative proposal. The OECD indicated that some written contributions had raised issues on the allocation of certain taxes across jurisdictions involved (in the proposal, some taxes such as CFC levies are levied by a jurisdiction but taken into account in the jurisdictional GloBE ETR of another jurisdiction).


Should certain profits benefit from a carve-out?

Businesses welcomes a substance-based carve-out, which pursuant to the current draft proposal would exclude from the GloBE tax base a “fixed return for substantive activities”, but would like to expand its scope, whereas NGOs raised opposite concerns around carve-outs. Taking into account or not for purposes of the jurisdictional GloBE ETR computation the taxes paid in respect of profits carved-out from the GloBE tax base was also subject of diverging stances.

Excluding certain industries from the GloBE rules

The proposal excludes certain types of taxpayers, such as investment funds and pension funds. The insurance industry pleaded for a carve-out as well, or at least to have DTA as measure to solve timing differences and to exclude dividends and capital gains from the GloBE tax base. In written comments, international shipping industry representatives also sought a carve-out.

The key requirement of simplification

Which simplification option has the biggest potential to minimise compliance costs?

The OECD representatives readily accepted the need for further simplification stressed in numerous written contributions and many panellists during the virtual meeting. The Blueprint proposes four measures: (i) a CbCR safe harbour, (ii) a de minimis profit exclusion, (iii) a single jurisdictional GloBE ETR computation that covers several years and (iv) tax administrative guidance.

The latter was the most favoured option, subject to appropriate mechanisms, while the multi-year ETR computation was seen as not harmful but the least capable of delivering simplification. There should, e.g., be a “whitelist” of jurisdictions whose ETR is deemed sufficient based on their tax base and tax rate, so that no computations need to be undertaken in respect of these jurisdictions. The administrative guidance should rely on transparent, objective criteria; a panellist suggested that having CFC rules would be good. The OECD would be in charge of monitoring.

Several panellists also addressed the CbCR safe harbour. Some were of the view that it would be a good gateway to identify jurisdictions that should not have a jurisdictional ETR falling below the GloBE minimum ETR. Eventually, the appeal of this simplification option depends on the number of adjustments required. A solution to bridge the gap was presented: the CbCR ETR safe harbour would be a multiple of the GloBE minimum ETR and that multiple would decrease depending on the adjustment or combination of adjustments to the CbCR ETR performed by the MNE group. The same type of adjustment(s) should be applied to all jurisdictions. Also, taxes allocated to a jurisdiction under CbCR that are excluded under the simplification option should remain with that jurisdiction and not be thereafter reallocated (e.g. CFC tax liability) to avoid double counting.

A phased-in introduction?

A number of submissions suggested a phased-in approach, either by starting with a higher global turnover threshold than the currently contemplated EUR 750 million also used for CbCR purposes or by initially introducing solely the IIR and introducing the UTPR and STTR later in time.

Selected issues concerning the GloBE Rules

IIR: top-down approach and its exceptions

The top-down approach was supported as means to simplify compliance by having only one filing jurisdiction in principle. However, the complexity in respect of partially owned sub-groups (“split-ownership rule” and sizeable minority shareholdings (in “Associates”) was raised, amongst others by Loyens & Loeff: exceptions to the top-down approach increase the risk of disputes and double taxation. The interaction with the simplification options was also discussed.

Which coexistence of the IIR with GILTI?

The written submissions seem to strongly favour treating GILTI as a qualified income inclusion rule, albeit there were apparently concerns around the global blending approach. The OECD also noted that GILTI should either be “deactivated” when applied to US sub-groups of a foreign MNE or give rise to a credit to be offset against the IIR top-up tax if GILTI is nevertheless applied. U.S. MNEs do not want a “GILTI+” model where they would bear additional compliance burden on top of GILTI.

Concerns around the UTPR

The necessity to track each payment involving a “low-tax jurisdiction” and to coordinate between numerous jurisdictions to avoid over-taxation and properly allocate a share of the top-up tax under the UTPR were identified as key issues. A panellist presented several solutions to mitigate the complexity, such as (i) expanding the scope of the IIR (with potential re-charging of the top-up tax to the entities causing the need for top-up tax), or (ii) limiting the UTPR to payments to MNE constituent entities that are 100% owned by taxpayers not resident in jurisdictions applying the IIR. The idea of a self-certification mechanism was also very much welcomed.

The need to have an outcome compatible with EU rules, notably the fundamental economic freedoms, was also stressed. In particular, only wholly artificial arrangements should be targeted.

Contrasting views on the STTR

One of the main defaults of the STTR in the view of MNE groups is that it would apply on gross payments without taking profitability of the recipient into account. Another big issue is the lack of information available in the year in which the payment is made. Businesses also questioned the usefulness of the STTR if the GloBE rules are applied on a global basis. Some solutions they proposed included (i) detailed guidelines on which payments are covered, (ii) a variable STTR rate to account for the profitability, and (iii) capping the sum of STTR top-up taxation and nominal tax rate in the low-tax jurisdiction at an amount lower than the minimum GloBE ETR.

Developing countries see the STTR as key to get a “share of the pie”. A panellist acknowledged the complexity; potential solutions could include lowering the STTR-triggering nominal tax rate in the recipient jurisdictions (so that only payments to really low-tax jurisdictions are caught) and levying the STTR top-up tax as an ex post annualised charge.

The treaty-based character of the STTR also reinforces the difficulty to introduce it in a coordinated manner.

Which jurisdictions get the right to tax?

Several participants observed that the primacy intended for the IIR (although the STTR would come before the GloBE rules with respect to certain payments) effectively favours the jurisdictions where the UPEs of in-scope MNE groups are situated, which are more likely to be developed countries. Developing countries, which often are in even greater needs of raising additional tax revenues, would likely get a small share of the additional revenue.

How could disputes be prevented and solved?

Written submissions and panellists invited the OECD to develop model legislation and guidance and standardised compliance tools.

Many of them also suggested to have another multilateral convention to coordinate the implementation and interpretation of the rules. Such a convention should also include a mandatory binding dispute resolution mechanism.

Narrowing the scope of the STTR and UTPR was also seen by businesses as a means to mitigate the risk of over-taxation and cut down complexity. Some submissions also called for re-examining domestic and BEPS anti-abuse rules to avoid overlaps with Pillar Two rules.

Next steps

The OECD Inclusive Framework on BEPS will continue discussing and fine-tuning the proposals, with a view to reaching an agreement by the proclaimed deadline of mid-June 2021. The Inclusive Framework meeting of 27-28 January will be to a large extent broadcasted to the public.

We will keep you informed of further developments. Should you wish to discuss the OECD proposals in more detail or assess the impact on your MNE group, please contact our digital economy taxation team or your trusted Loyens & Loeff adviser.