Pillar One & Pillar Two
Building on years of international efforts to adapt tax rules to an increasingly digitalised economy, the OECD/G20 Inclusive Framework has reshaped the global tax landscape through its two pillar solution.
As part hereof, the OECD/ Inclusive Framework released the Pillar Two Rules at the end of December 2021, resulting in a 15% minimum tax rate for in-scope (multinational) groups in all jurisdictions where they have presence as early as of financial years 2024. These rules are by now introduced in many jurisdictions, imposing a global minimum tax and significantly expanding compliance and reporting obligations for (multinational) groups.
While the OECD has finalised the technical framework for Pillar One, implementation of Amount A remains uncertain due to the absence of global consensus. Amount B, by contrast, is incorporated in the OECD Transfer Pricing Guidelines and can be applied by jurisdictions to determine a return on sales for in-scope distributors.
Pillar One
Pillar One seeks to create a new taxing right for market jurisdictions through Amount A, which will be independent of the physical presence requirement and determined using a formulaic approach. It will apply to the largest MNEs with global revenues exceeding EUR 20 billion and profit margins above 10%. To enhance tax certainty, it also includes mandatory dispute prevention and resolution mechanisms aimed at mitigating double taxation. While a multilateral convention to implement Amount A has been published, its adoption remains uncertain due to the lack of global consensus.
In addition, Pillar One includes Amount B, an optional simplified and streamlined approach for pricing baseline marketing and distribution activities. Incorporated into the OECD Transfer Pricing Guidelines as an annex, Amount B offers a 3-step process for determining a return on sales for in-scope distributors. Jurisdictions can choose to apply Amount B for fiscal years beginning on or after 1 January 2025.
Pillar Two
Pillar Two seeks to enforce a global minimum corporate income tax at an effective rate of 15%, calculated on a jurisdiction‑per‑jurisdiction basis. It applies to MNEs that meet the EUR 750 million threshold in a reference period generally consisting of two out of the four prior years.
Pillar Two consists of a set of measures to enforce a 15% minimum tax, including giving taxing rights to:
- Domestic jurisdictions through a (Qualified) Domestic Top‑up Tax;
- The jurisdiction of the ultimate parent entity under the Income Inclusion Rule; and
- As a backstop, other jurisdictions that have implemented the relevant GloBE Rules under the Undertaxed Profits Rule, based on an allocation key.
The Pillar Two rules generally apply as from financial year 2024 and are implemented in jurisdictions across the world. With Pillar Two heavily relying upon financial accounting data, deviations between accounting and local tax rules may result in surprising outcomes when calculating the effective tax rate.
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