July 12, 2021

G20 Agrees on Framework for Pillars One and Two and Targets 2023 Effective Date


On July 10, 2021, the G20 endorsed a broad framework to advance Pillars One and Two, which includes an aggressive timetable for bringing the new rules into force in 2023. The endorsement came in a Communiqué, which approved the July 1 statement by the 139-country Inclusive Framework (the “IF Statement”). The G20 agreement represents a political consensus on a substantial revision to global tax policy.

As discussed below, there is still much work to do to flesh out the details of the framework. Moreover, there is considerable skepticism as to whether a final agreement can be reached, whether it can be implemented legislatively in the United States and abroad, and whether countries that have enacted (or are considering enacting) digital services taxes (DSTs) and similar unilateral measures will find the proposed framework sufficiently revenue-generating to repeal their DSTs.

On July 15, we will be hosting a webinar to discuss these important developments, together with an analysis of the US President Biden administration’s international tax proposals that complement the G20 agreement.

Pillar One Details

The IF Statement provides important details on the scope, application and implementation of Pillar One under the new consensus approach.


The key political breakthrough to achieving consensus on Pillar One was changing the focus from the types of business in scope (i.e., the digital economy) to one of size and profitability. Under the final agreement, a business will be in scope if it has global turnover in excess of EUR 20 billion and profit-to-revenue ratio above 10%. It has been widely reported that the negotiators expect that roughly 100 companies would be in scope under the revised test.1

It appears that the revenue and profitability tests are measured on an annual basis rather than on a multi-year average, as suggested by some commentators, including Mayer Brown. This means that multinational enterprises (MNEs) can move in and out of Pillar One on an annual basis.


One of the challenges under the previous formulation of Pillar One was the need to identify and appropriately segment in-scope businesses. Since many multinationals conduct both digital and non-digital businesses, the Organisation for Economic Co-operation and Development (OECD) recognized that segmentation was necessary in order to target Pillar One to profits associated with digital businesses. This need for segmentation raised a number of challenges, not least of which was complexity.

The IF Statement notes that segmentation will occur only in “exceptional circumstances” and only where a segment itself (as disclosed in the MNE’s financial statements) meets the revenue and profitability tests. Segmentation is inevitable as various Global 500 companies have individual segments that meet the revenue and profitability thresholds.2

Relationship to Financial Statements

The financial statements of an MNE will be highly relevant in determining the scope and application. The revenue and profitability thresholds will be measured using financial statement data with only limited book/tax adjustments. Presumably the tests will be measured by reference to Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). As a result, revenue recognition principles and other accounting methods for financial reporting purposes will take on increased importance. It should be noted that it is commonplace for companies to also report revenue and profitability on a non-GAAP/non-IFRS basis as a separate measure of performance. The extent to which these measures will be relevant to the Pillar One thresholds is unclear. Also unclear is how differences between GAAP and IFRS will be reconciled so that companies will be treated equally under the new rules regardless of which standards are used for financial statement purposes.

Amount A Quantum

If an MNE is in scope under the revenue and profitability tests, an amount of residual profit is allocated to market jurisdictions where the MNE has nexus (as discussed below). The residual profit amount to be allocated is known as “Amount A” and is defined as residual profit of 20-30% of the amount of profit exceeding 10% of revenue either on a total MNE or segmented basis. Amount A will be allocated to the market jurisdictions based on revenue.


The total Amount A quantum is then allocated to all the market countries where the MNE is deemed to have taxable nexus. Once an MNE is in scope by virtue of the revenue and profitability tests, the MNE will be deemed to have taxable presence in a country if its revenue from sources in that country is at least EUR 1 million.3 The threshold is much lower than commentators suggested as Pillar One was first being developed and presumably reflects the need to ensure that tax revenue reaches developing countries. 4

The IF Statement is silent on whether the revenue test is an annual test or based on a moving average as commentators have recommended.5 As a result, it is quite possible that an MNE will move in and out of taxation in a particular country.

The IF Statement indicates that revenue will be sourced for purposes of the nexus rule on the basis of where the goods and services are consumed. Detailed sourcing rules will be developed to facilitate this test, which will likely become a source of controversy between tax authorities and MNEs and between tax authorities themselves as countries seek to maximize tax revenue.

As recommended by a number of commentators, including Mayer Brown, the IF Statement notes that nexus for purposes of Pillar One applies solely for that purpose and does not otherwise create nexus in a country for value-added tax (VAT) purposes.6

Local Marketing and Distribution and Amount B

Where an in-scope MNE already has a taxable presence in a market jurisdiction, a safe harbor mechanism will be developed to cap the quantum of Amount A allocated to market country. It is not clear how this relates to Amount B, which remains relevant to the reformulated Pillar One. Under the previous formulation of Pillar One, an amount—known as Amount B—which is attributable to the baseline marketing and distribution activities conducted by the MNE in country was excluded from Amount A. Amount B remains relevant as the IF Statement notes that it will be simplified and streamlined.


One of the criticisms of Pillar One as originally designed was the complexity and likelihood that multiple entities within an MNE group could be subject to Pillar One. As recommended by a number of commentators, including Mayer Brown, the IF Statement notes that tax compliance for Pillar One will be streamlined and allow an in-scope MNE to manage the compliance process through a single entity.

Double Tax Relief

Amount A is a reallocation of profit to market jurisdictions. As Amount A is allocated to and taxed in the market jurisdictions, there will be double taxation absent a mechanism to relieve tax in the surrendering country. The IF Statement indicates that the mechanism will either be an exemption or credit. There are a number of important points here. First, by indicating that a double tax relief mechanism will be provided, it appears that the IF (including the United States) has agreed that taxes on Amount A are creditable taxes. Second, whether the credit method or the exemption method provides full double tax relief depends on the tax position of each MNE. Mayer Brown recommended that MNEs be able to elect which method to use. Third, if the credit method is ultimately adopted, there are some important interactions with the US foreign tax credit rules. In particular, since Pillar One is to be implemented through a multilateral agreement (MLI), it is unclear whether the special treaty basketing rules of IRS Section 904(d)(6) will cause Amount A taxes to be isolated in a separate basket.


Pillar One is to be implemented through a new MLI, which is meant to be signed and ratified by the end of 2022. From a US perspective, this would be a groundbreaking development as the United States has never signed a multilateral income tax treaty. Moreover, as discussed below, treaty ratification in the United States will be extremely challenging.


An important issue in the development of the final Pillar One Blueprint was determining which industries should be carved out because of the nature of the industry, how the industry is regulated or the existence of special tax regimes already in place. Considerable analysis went into the Pillar One discussions as to which industries should be excluded, and the October, 2020 Blueprint provided that natural resources (extractives), construction, international shipping, financial services and certain real estate businesses should be excluded from Pillar One.  However, the final agreement provides that only extractives and regulated financial services are excluded from Pillar One.

Repealing DSTs

The final agreement provides for “the removal of all Digital Services Taxes, and other relevant similar measures, on all companies (emphasis added).” A threshold issue in this regard is whether all DSTs need to be repealed or repealed only with respect to the 100 companies that are in scope. At a recent conference, one of the IF Steering Group members made clear that DSTs must be repealed in their entirety. However, representatives of developing countries have objected to this, indicating that DST repeal should apply only to in-scope MNEs.

Another issue is the scope of the phrase “other relevant similar measures”and whether the UK Diverted Profits Tax is included as a measure requiring repeal.

Separately, notwithstanding the agreement to repeal DSTs, the European Union has proposed a “Digital Services Levy” and has indicated that this levy would be consistent with the Pillar One agreement. As a result of pressure by the United States and other countries, the European Union has agreed to postpone further consideration of the levy until October 2021 when the final Pillar One plan is presented. 

Pillar Two Details


Pillar Two will apply to MNEs that meet the relevant annual revenue threshold for Country-by-Country Reporting, generally EUR 750 million or USD 850 million for US-parented MNEs.

Global Minimum Tax Rate

The overarching objective of Pillar Two is to ensure that a minimum level of taxation is paid by a multinational company and ensure that deductible payments by such companies are subject to a minimum rate of tax in the hands of the recipient.  This is accomplished through a complex series of rules.  The primary mechanism would be a controlled foreign company regime similar to the US GILTI provisions that would that would tax the parent company on the earnings of a subsidiary if that subsidiary was not subject to the global minimum tax (the Income Inclusion Rule).  A backstop regime, similar to the Biden SHIELD proposal, would impose the minimum tax on various affiliates based upon the amount of deductions for intercompany payments (the Undertaxed Payment Rule).  A further backstop would be treaty based and would permit withholding or other taxes on a related party payment if the payee was not subject to the global minimum tax on the payment (the Subject to Tax Rule). 

The IF Statement enshrines the objective of Pillar Two by establishing a global minimum tax rate of at least 15%. Importantly, the 15% threshold would be tested on a country-by-country basis to eliminate the ability of multinationals to average high-tax and low-tax country profits.

The IF Statement should be read in conjunction with the Biden administration proposals that would raise the tax on GILTI income to 21%, test GILTI on a country-by-country basis and eliminate the GILTI benefit for a 10% return on tangible property constituting qualified business asset investment (QBAI). Moreover, the Biden administration proposes to reconfigure the base erosion and anti-abuse tax (BEAT) regime by denying deductions to related parties where the recipient or a member of the recipient’s group is not subject to a minimum level of taxation.7

The Biden proposal uses 21% as the minimum rate threshold for GILTI. Although the proposed 21% predates the G20 agreement, the Biden administration has recently reiterated that it intends to pursue a rate of 21% in US legislation.8 In contrast, for SHIELD, the Biden proposal would explicitly adopt the agreed-to Pillar Two rate (i.e., 15%) as the relevant rate threshold and only use a 21% rate in the absence of such an agreement.

Tax Base

As with Pillar One, the IF Statement notes that the tax base to be used for testing the minimum tax rate will be based on financial statements with limited book-to-tax adjustments. While not clear from the IF Statement, it would make sense for these adjustments to be consistent between Pillar One and Pillar Two.

Using financial statement (i.e., book) income to test the effective tax rate is significant as many companies have considerable book-to-tax differences for stock option costs, pension funding expenses and other material items. Excluding these differences will cause many MNEs to have effective tax rates below the 15% threshold. The details of the tax base determination will be critical particularly in light of the Biden administration proposal to establish a 15% minimum tax on book income.

Substance Carve-Out

The IF Statement notes that there will be a formulaic substance carve-out that will exclude from a Pillar Two income inclusion an amount of at least 5%9 of the carrying value of tangible assets and payroll. This is an interesting development in light of the Biden administration proposal to eliminate the GILTI benefit for QBAI. The Green Book stated that the return on QBAI encourages US MNEs to invest outside the United States. Eliminating QBAI is intended to curb this perceived incentive. The proposed substance carve-out would appear to bring a QBAI-type benefit into the Pillar Two inclusion rules. As further discussed below, it remains to be seen how this rule will interact with the proposed changes to GILTI.

GILTI Coexistence

Many aspects of Pillar Two were modeled on the US GILTI rules. Early in the development of Pillar Two, many commentators including Mayer Brown recommended that GILTI be considered a compliant regime for Pillar Two purposes. Some legislative changes to GILTI will be needed to make it consistent with the final version of Pillar Two, in particular changing the GILTI calculation from a global-blended basis to a per-country basis. The Biden proposals already include this change.


The IF Statement provides for an important exclusion for the international shipping industry reflecting the special income tax regimes applicable to the industry.  Other carve-outs are also provided for government entities, international organizations, pension funds and investment funds.


Pillar Two will need to be implemented through legislation in each country. The IF Statement indicates that the IF members will agree on an implementation plan with a view to bringing the new rules into place in 2023. The implementation package will likely include model legislation for the various Pillar Two rules. An MLI will also be proposed to implement the subject-to-tax rule.

Recognizing the complexity of the various Pillar Two rules, the IF Statement notes that simplification rules and safe harbors will be included in the final plan. These will be critical as developing countries take up implementation.

The Way Forward

Now that the G20 has endorsed the IF Statement, work continues on finalizing the technical details of the new rules. These will then be presented back to the G20 in October 2021. During 2022, one or more MLIs will be negotiated, and countries will begin enacting legislation to bring the new rules into force around the world in 2023.

The IF Statement has been approved by 132 out of the 139 countries in the Inclusive Framework. Important holdouts include Ireland, Hungary, Estonia, Kenya and Nigeria. The G20 Communiqué strongly encouraged the eight remaining countries to join the consensus. The insistence on at least a 15% minimum tax rate was the key reason why Ireland did not join in the agreement. Moreover, the holdouts of Ireland, Estonia and Hungary may present complications to the extent there is implementation at the EU level as EU Tax Directives generally require unanimity among the EU member states. Considerable skepticism also remains in developing countries, which believe that the final agreement will not raise sufficient revenue.

Implementation in the United States is also challenging. The Pillar One MLI will require ratification by two-thirds of the US Senate. While there is bipartisan support for DST repeal, many legislators remain skeptical about the revenue loss through Pillar One. As noted, Pillar Two will require legislation. Any Pillar Two legislation must originate in the US House of Representatives and will likely need to be enacted without Republican support.

Although Pillar One and Pillar Two have been accepted by many more countries than commentators expected, the road to implementation will be bumpy.

For further information, Mayer Brown has extensive coverage of OECD and BEPS developments on its Best Methods blog.

1 The IF Statement proposes that the revenue threshold be reduced to 10 billion euros, contingent on successful implementation of tax certainty on Amount A, beginning seven years after the agreement comes into force.

2 Under US GAAP, public companies generally must report a segment if it accounts for 10% of total revenue, 10% of total profits or 10% of total assets. IFRS contains similar segment reporting rules. 

3 For smaller jurisdictions with GDP less than 40 billion euros, the nexus will be set at 250,000 euros.

4 See Mayer Brown Responds to OECD’s Pillar One Consultation, Pillar Two on the Way (Nov. 12, 2019).

5 See id.

6 See id.

7 See Déjà Vu All Over Again: Life Sciences Companies Brace for More US and Global Tax Reform (Apr. 2021).

8 Testimony of Secretary Janet Yellen at the US House of Representatives, Committee on Ways & Means, June 17, 2021.

9 7.5% in the first five years.

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