For several years, the Inclusive Framework explored adapting the international tax rules to an increasingly digitalised economy. On 8 October 2021, almost all members of the OECD/G20 Inclusive Framework agreed on certain key parameters to reallocate some taxing rights to market jurisdictions (“Pillar One”) and to introduce a global minimum effective taxation (“Pillar Two”). The 8 October 2021 agreement applies not only to “digital” MNEs but to all MNEs, irrespective of their business. 

Pillar One

The Inclusive Framework has developed “Amount A” (deemed “residual profit”) of Pillar One as a new taxing right over a portion of the profits that large and highly profitable enterprises (“Covered Group”) realise in jurisdictions where they supply goods or services, or where consumers or users are located (hereafter, “market jurisdictions”). Until 2031, only groups that have a global turnover above EUR 20 billion and a pre-tax profit margin above 10% would be "Covered Groups”. 

Implementing Amount A of Pillar One requires developing:

  • A Multilateral Convention (“MLC”),
  • Explanatory Statement on the MLC,
  • Model rules for domestic legislation (“Model Rules”) for implementing Amount A, and
  • Commentary on the Model Rules. 

We refer to our article of 7 February 2022 for the first building block on Pillar One for nexus and revenue sourcing rules. 

On 18 February 2022, the OECD Secretariat released for consultation a working document illustrating the Model Rules for tax base determinations (“Draft Rules”). Once there is a consensus at Inclusive Framework level, jurisdictions will still be free to adapt these Draft Rules to reflect their own constitutional law, legal systems, and domestic considerations and practices (albeit that within the European Union the European Commission plans to issue a directive to ensure a coordinated implementation of Pillar One rules).

What does the Working Document entail?

According to the Draft Rules, Pillar One tax base is determined by (i) starting with the consolidated group profit or loss from the financial accounts, (ii) making book-to-tax adjustments, (iii) making restatement adjustments, and (iv) deducting net losses. These steps are discussed in more detail below. 

Starting with the consolidated group profit or loss

The starting point is the profit or loss from the consolidated financial statements of the ultimate parent entity. The consolidated financial statements of the ultimate parent entity should be drawn up in accordance with IFRS, or equivalent financial accounting standards. The Draft Rules include as equivalent financial accounting standards the GAAP of Australia, Brazil, Canada, EU and EEA Member States, Hong Kong, Japan, Mexico, New Zealand, the People’s Republic of China, the Republic of India, the Republic of Korea, Russia, Singapore, Switzerland, the United Kingdom, and the United States of America. 

Making book-to-tax adjustments

From the amount taken from the consolidated financial statements of the ultimate parent entity, the following inclusion of income and deduction of expenses should be reversed:

  • Tax expenses/income,
  • Dividends,
  • Equity gains/losses, and
  • Policy disallowed expenses.

The Draft Rules provide for limited guidance on how these four book-to-tax adjustments should be interpreted. It is, however, stated that equity gains/losses include profits or losses from the disposition or change in value of an ownership interest. Policy disallowed expenses include bribes and fines. 

Making restatement adjustments

The Draft Rules state that profit or loss restatements would be attributed to the group’s tax base during the period that the restatement is identified and recognised. Restatements will only be taken into account if the amount of allocable profit would be affected by such restatement and if such restatement occurs during the period that the restatement is required by the financial accounting standard. A restatement may not exceed 0.5% of the group’s revenues in the given period; the remainder will be carried forward. 

Net losses

The Draft Rules include rules on the attribution of losses. Unrelieved losses of a group incurred in a prior period (“Net Losses”) are carried forward and offset against any subsequent profit of that group, following an ‘earn-out’ mechanism. The Draft Rules indicate that regular loss carry forward would be between five and fifteen years, and the carry forward of pre-regime losses would be between two and eight years. Interestingly, the draft rules seem to refer only to losses in the strict sense of the word, i.e. less than zero profit. In the Pillar One Blueprint, the possibility was still considered to carry forward profit ‘shortfalls’, i.e., when the profitability of a group would be below the Pillar One threshold (10%): such shortfall could also be carried forward to future years. 

The Draft Rules further provide that Net Losses can be attributed to other entities upon an eligible business combination (merger) and an eligible business division (demerger). Upon an eligible business combination, the Net Losses of the transferred entities are attributed to the recipient. Upon an eligible business division, the Net Losses of the dividing entity are allocated proportionally on the basis of the net asset value of the receiving entities. It is only possible to attribute Net Losses if the transferred entity has carried on activities in the same line of business for 12 months prior to the eligible business combination or division, and when the group carries on activities in the same line of business as the transferred entity for 24 months prior to the eligible business combination or division. In addition, attribution of Net Losses would only be possible in case of a demerger into two or more separate entities and would not be available for a spin-off.

What are the next steps?

Other building blocks related to Amount A are expected to be released by the OECD Secretariat in the upcoming months. It has been indicated that the OECD still plans to develop the MLC "early 2022" and to strive to have sufficient ratifications in 2022, so that the reallocation of taxing rights on Amount A can occur as from 2023. The MLC would include a removal of, and going forward a renouncement to, digital service taxes and similar measures. 

For Amount B (standardised arm’s length return for baseline marketing and distribution activities), a public consultation document will be issued mid-2022 followed by a public consultation event. Technical work on Amount B will continue throughout 2022.

What can taxpayers do?

An implementation of Pillar One by 2023 is very ambitious, but political pressure is strong. 


Step 1: Determine whether your MNE is a covered group under the Pillar One rules. 


Step 2: Determine your Pillar One tax base and Amount A as computed under the Draft Rules.


Step 3: Determine which revenue sourcing rules apply to your business. For this we refer to our article flash of 7 February 2022. 


Step 4: Based on the experience you have gained in step 2 and 3, determine whether your MNE wants to contribute to the public consultation on the second building block (before 4 March 2022). 


Step 5: Include the results of step 3 in a Pillar One impact assessment model. 


Step 6: Since Pillar One might enter into force in 2023, the key lessons drawn from the modelling exercise should help MNE groups assess the need for restructuring to mitigate the tax compliance burden and increased taxation. This assessment will notably depend on the national tax reforms that may take place following this global tax overhaul, the cost/benefit analysis of being present in certain jurisdictions, and the available mechanisms to mitigate the risk of double taxation. 


We would be happy to assist you in preparing a reaction to the consultation and with any other step indicated above. We will keep you informed about further developments. Should you have any question or need assistance in assessing the impact of the rules, please contact a member of our Digital Economy Taxation team or your trusted Loyens & Loeff adviser.