On October 8, 2021, the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (IF) announced that 136 countries have agreed on a two-pillar framework that would dramatically alter the taxation of multinational enterprises (MNEs).1 As announced, the agreement would reallocate $125 billion of annual profit to countries that would not otherwise tax such profits under current international tax norms. The agreement also requires that all profits be subject to a global minimum tax rate of 15%. By virtue of the agreement, the United States and other major countries have essentially agreed to a redistribution of tax revenue to other countries as well as the injection of multilateralism into domestic tax legislation to enforce the 15% global minimum tax.

The agreement will be presented for approval at the next G20 meeting in Rome at the end of October with the objective of having the implementing mechanisms in place to be effective in 2023. While some aspects of the agreement have already been included in tax legislation proposed by the Biden administration and the US House of Representatives Ways & Means Committee, important implementing mechanisms will require treaty ratification and changes to domestic tax legislation around the world. This will be challenging given the proposed effective date.

Pillar One

At its core, Pillar One creates a new taxing right that will enable a country to tax a portion of the premium profits earned by the world’s largest and most profitable MNEs regardless of whether the country would have been entitled to tax such profits under traditional international tax norms (i.e., whether the MNE has a permanent establishment in the country). The OECD has been working for a number of years on how to frame the new taxing right, focusing initially on the types of businesses to which the new taxing right would apply.

The original focus of Pillar One was consumer facing businesses (CFB) and automated digital services (ADS), recognizing that these types of businesses were able to generate premium profits in a destination or market country without the need for the tangible physical or other presence that would enable a country to tax the MNE. As noted in our previous Legal Update,2 numerous challenges arose in trying to define and appropriately scope and segment CFB and ADS businesses. A breakthrough was reached in June 2021, when countries agreed to focus instead on the size and profitability of the MNE rather than the type of business. In reaching this breakthrough, countries agreed that if an MNE is large enough and profitable enough, it should be paying some tax in the countries where its customers are located even if the MNE does not have a taxable presence there.


As agreed, the new taxing right under Pillar One would apply to MNEs with both average annual revenue in excess of €20 billion and a profit margin in excess of 10%. According to the documents released regarding the agreement, it is expected that roughly 100 MNEs would fit this profile. Extractive and regulated financial services industries are carved out.

The agreement provides that the revenue and profitability tests would be based on an averaging mechanism to be determined. The inclusion of an averaging mechanism is significant as many MNEs have revenue and/or profitability at or near the agreed thresholds. Without an averaging mechanism, MNEs could move in and out of Pillar One scope from one year to the next. As a result, the details of how the averaging mechanism will work will be closely watched.

Responding to criticism by developing countries and others on the perceived limited reach of Pillar One, the agreement provides that the €20 billion threshold will be reduced to €10 billion in eight years subject to a maximum one-year review of how Pillar One has been implemented.

Nexus and Sourcing

An in-scope MNE will be subject to tax in a market country if the MNE generates at least €1 million of revenue in that country. The threshold is reduced to €250,000 for countries with GDPs below €40 billion.3 Importantly, the agreement makes clear that nexus for Pillar One purposes does not create nexus for any other purpose (for example, value-added tax).

Revenue would be sourced to a country based on the place where the MNEs goods or services are consumed. The agreement notes that detailed sourcing rules will be developed for specific transactions. Such sourcing rules could involve significant complexity, so companies should consider whether they want to provide input into their development.


If an MNE is in-scope and has nexus in a jurisdiction based on the revenue threshold discussed above, a portion of the MNE’s premium profits will be subject to tax in the nexus countries. The agreement provides that the quantum of profit subject to tax is 25% of residual profit above the 10% profitability threshold. The taxable quantum is allocated to the nexus countries using a revenue allocation key.

Tax Base Determination and Segmentation

Under the agreement, the relevant measure of an MNE’s profits or loss for purposes of applying Pillar One will be its financial accounting income with “a small number of adjustments,” the specifics of which are not yet enumerated. The agreement also provides that losses will be carried forward for purposes of these profit and loss calculations.

The agreement indicates that segmentation (i.e., the application of Pillar One to a specific segment(s) of an MNE but not others) will apply in “exceptional circumstances” where a segment separately disclosed in an MNE’s financial statements (but not other segments) meets the scope rules. For example, assume that an MNE has two segments (A and B) that each have revenue in excess of €20 billion, but segment A has a profit margin of 5% and segment B has a profit margin of 20%. Under these facts, the agreement contemplates that segment B could be subject to Pillar One even if the MNE as a whole was not in-scope because its overall profitability was less than 10%.

Safe Harbor

The agreement provides for a marketing and distribution safe harbor that will cap the maximum amount of Amount A that can be allocated to a market jurisdiction when the MNE’s residual profits are already subject to tax in the same market jurisdiction under existing rules. That is to say, if an MNE already allocates significant residual profits to a legal entity or permanent establishment in the market jurisdiction, the safe harbor may apply to prevent Amount A from duplicating or over-allocating profits to that jurisdiction. While the agreement indicates that additional work on the design of the safe harbor is required, the proper application of the existing transfer pricing and profits attribution rules to remunerate legal entities and permanent establishments for their market jurisdiction activities will likely be of paramount importance to the administration of the safe harbor.

Relief from Double Taxation

Pillar One operates by overlaying an entirely new taxing right (Amount A) on top of the existing international tax system. It does this by reallocating to market jurisdictions a portion of the residual profits that other jurisdictions would otherwise have the right to tax under existing physical presence-based nexus and arm’s-length allocation rules (which otherwise remain unchanged). Therefore, Pillar One necessarily gives rise to potential double taxation of the same profits under both the new taxing right and existing rules. To address this, the agreement provides for double tax relief with respect to Amount A through either an exemption or credit method and provides that the entity(ies) that will bear the tax liability will be drawn from those that earn residual profit. The agreement does not specifically address how the burden of double tax relief would be allocated when more than one entity earns residual profit.

Tax Certainty

The agreement calls for a binding dispute resolution mechanism to avoid double taxation and to address all issues related to Amount A, including transfer pricing and business profits attribution disputes impacting Amount A. This binding dispute resolution mechanism will be implemented through the Multilateral Convention (MLC) detailed in the Pillar One implementation plan (discussed below). This binding dispute mechanism will generally be mandatory for all IF members, subject to a limited exception for certain developing countries with low or no levels of Mutual Agreement Procedure (MAP) disputes that may be eligible for an elective mechanism.

Local Marketing and Distribution: Amount B

Under the original formulation of Pillar One, an amount—which is known as Amount B and attributable to the in-country baseline marketing and distribution activities conducted by the MNE—was excluded from Amount A. It remains unclear if Amount B remains relevant to Amount A, unless perhaps Amount B is interwoven with the marketing and distribution profits safe harbor. The agreement provides that the application of the arm’s length principle to in-country baseline marketing and distribution activities will be simplified and streamlined by the end of 2022. Amount B is not included as part of the Pillar One MLC.

DSTs and Other Unilateral Measures

The MLC will require all parties to remove all Digital Service Taxes (DSTs) and other relevant similar measures with respect to all companies and to commit not to introduce such measures in the future. Per the agreement, no newly enacted measures will be imposed on any company from October 8, 2021, through the earlier of December 31, 2023, or the coming into force of the MLC. Removing any existing DSTs will be coordinated. Of note, the agreement seems to eliminate DSTs for all companies and not just in-scope MNEs.

Pillar Two

Pillar Two provides for a minimum 15% tax on corporate profits, which effectively would create a floor on tax competition among member jurisdictions. The overarching framework by which MNEs will be subject to this minimum level of tax is by virtue of the Global Anti-Base Erosion (GloBE) rules. The GloBE rules are composed of (i) an income inclusion rule (IIR) and (ii) an undertaxed payment rule (UTPR). In essence, to the extent an MNE is caught by the GloBE rules, the IIR would seek to impose a top-up tax on a parent entity on the income of a constituent entity that is taxed at an effective rate below 15%, and the UTPR would deny deductions or require an equivalent adjustment to the extent the income of a constituent entity is taxed under the 15% tax rate threshold.

Scope and Design of IIR and UTPR

The agreement states that the IIR allocates the top-up tax based on a top-down approach subject to a split-ownership rule for shareholdings below 80%. The agreement also provides an exclusion from the UTPR for MNEs that have a maximum of €50 million in tangible assets abroad and that operate in no more than five jurisdictions (i.e., MNEs that are just starting international activities). This UTPR exclusion is limited to the five-year period after such MNE is first caught by the GloBE rules.

In general, the GloBE rules will apply to MNEs with annual revenues exceeding €750 million. The agreement clarifies, however, that countries have discretion to apply the IIR to MNEs headquartered in their jurisdictions even if the annual revenue threshold set by Pillar Two is not met. Certain entities (e.g., governmental entities, non-profit organizations, pension funds and investment funds) that are the ultimate parent entities of an MNE group, or any holding vehicles used by such entities, are carved out from the GloBE rules.

Effective Tax Rate (ETR) Calculation

The GloBE rules will impose a top-up tax that uses an effective tax rate test that will be calculated on a jurisdictional basis that uses a common definition of covered taxes and a tax base determined by reference to financial accounting income with agreed adjustments and mechanisms to address timing differences. Similar to the proposed adjustments relevant to Pillar One, the specifics of these adjustments for the ETR calculation have not yet been enumerated.

For existing distribution tax systems, there will be no top-up tax liability if earnings are distributed within four years and taxed at or above the minimum level.

Carve-outs and Exclusions

The GloBE rules will include a formulaic substance carve-out that will exclude an amount of income that is a percentage of the carrying value of tangible assets and payroll. Over a transition period of 10 years, the amount of income excluded will initially be 8% of the carrying value of tangible assets and 10% of payroll. This amount will decline annually by 0.2 percentage points for the first five years and then by 0.4 percentage points for tangible assets and 0.8 percentage points for payroll for the last five years.

The GloBE rules will also exclude international shipping income as defined under the OECD Model Tax Convention, but it is curious that international shipping income is not also carved out from Pillar One. The IF also states that the forthcoming implementation framework will also include other safe harbors and simplification measures to ensure that the rules are as targeted as possible and to avoid administrative costs that are disproportionate to policy objectives.


Pillar Two will apply a minimum rate on a jurisdictional basis. The agreement states that consideration is still being given to the conditions under which the United States’ global intangible low-taxed income (GILTI) regime will co-exist with the GloBE rules. As we described in a prior Legal Update,4 the United States tax provisions proposed to be included in the Build Back Better Act legislation include changes to the GILTI rules, which are similar to Pillar Two, and changes to the base erosion and anti-abuse tax (BEAT), which are similar to the UTPR rules. However, there are still significant differences between Pillar Two and these comparable provisions that will need to be harmonized.

Subject-to-Tax Rule (STTR)

IF members that apply nominal corporate income tax rates below an STTR minimum rate of 9% to interest, royalties and a defined set of other payments will implement the STTR into their bilateral treaties with developing IF members when requested to do so.5 This taxing right will be limited to the difference between the minimum rate and the tax rate on the payment.

Implementation Plan

The agreement included an implementation plan that laid out the key milestones and timing that stakeholders can expect in order to implement Pillar One and Pillar Two by the end of 2023.

Pillar One

Amount A and the removal of all DSTs will be implemented through the MLC where necessary correlative changes to domestic law, to come into effect in 2023.

The MLC will be a multilateral framework for all jurisdictions that join, without regard to whether a tax treaty exists currently between two jurisdictions. It will contain all the rules necessary to determine and allocate Amount A and eliminate double taxation, as well as the simplified administration process, the exchange of information process and the dispute prevention/resolution processes. If a tax treaty exists between the parties to the MLC, it is anticipated that the tax treaty will remain in force and continue to govern cross-border taxation outside Amount A, but the MLC will address inconsistencies with existing tax treaties to the extent necessary to give effect to the solution with respect to Amount A.

The IF has mandated the Task Force on the Digital Economy (TFDE) to work out the details of Amount A and develop the MLC by early 2022. The IF is hoping that the MLC will be open to signature by mid-2022. Jurisdictions are then expected to ratify it as soon as possible with the objective of enabling it to enter into force and effect in 2023. The MLC will set forth terms defining what a critical mass of jurisdictions is in order for it to go into effect. The TFDE has also been mandated to develop model rules for domestic legislation by early 2022 to give effect to Amount A.

The MLC will also require all parties to remove all digital service taxes and other relevant similar measures and not introduce new measures with respect to all companies.

Pillar Two

The IF expects that model rules to give effect to the GloBE rules will be developed by the end of November 2021, which will define the scope and set out the mechanics of the GloBE rules. These rules will cover determining the ETR on a jurisdictional basis and the relevant exclusions, such as the formulaic substance-based carve-out and the international shipping carve-out, as well as transition rules and administrative safe-harbors. A model treaty provision to give effect to the STTR will also be developed by the end of November 2021, and a multilateral instrument will be developed by the IF by mid-2022 to aid implementation in bilateral treaties.

An implementation framework to coordinate implementation of the GloBE rules will be developed by the end of 2022. A multilateral convention will be considered to help ensure coordination and consistent implementation of the GloBE rules. Unlike with Pillar One, there is no target timeframe to implement Pillar Two in each jurisdiction.

For further information, see Mayer Brown’s extensive coverage of OECD and BEPS developments on our Best Methods blog.



1 See OECD, Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy (Oct. 8, 2021).

2 See G20 Agrees on Framework for Pillars One and Two and Targets 2023 Effective Date (July 12, 2021).

3 Roughly 100 countries have a GDP in excess of €40 billion.

4 See Overview of US Tax Provisions of Build Back Legislation Approved by House Ways & Means Committee (Sep. 21, 2021).

5 For this purpose, developing countries are defined as those with a GNI per capita, calculated using the World Bank Atlas method, of $12,535 or less in 2019, and to be regularly updated.