OECD Inclusive Framework agrees on two-pillar Approach for International Tax Framework


On 1 July 2021, the Inclusive Framework (IF) announced an agreement backed by 130 (out of 139) members of the Inclusive Framework on the two-pillar approach. This approach redesigns the international tax framework. Here’s a summary of the main points of the agreement:

Pillar one

Pillar One is intended to re-allocate the taxing rights of certain MNEs (multinational enterprises) across market countries, irrespective of whether the MNE has a physical presence there.  Pillar One consists of several steps, including Amount A (new nexus and allocation rules), Amount B (fixed return for baseline marketing and distribution activities) as well as measures to avoid disputes and controversy.  

Amount A

Falling under the scope of Amount A are MNEs with a global turnover of more than 20 billion euros (this may be reduced to 10 billion after 8 years) and a profit before tax / revenue ratio of more than 10%. A nexus to the market state (even in the absence of physical presence) is created when the MNE derives at least 1 million euros in a market state; for countries with a GDP lower than 40 billion euros, the nexus is set at 250,000 euros.

The level of profit to be reallocated to market states is between 20 and 30 percent of all profit in excess of 10% of the revenue. Revenue sourcing is linked to the end user or consumer country, based on detailed sourcing rules (yet to be determined). The tax base is determined on the basis of financial accounting income, with a limited number of adjustments and a carry-forward of losses. Segmentation is needed only when the segments disclosed in the financial accounts exceed the scope rules (more than 20 billion in turnover for the time being and PBT / revenue ratio of more than 10% for that segment); 

The agreement provides for the introduction of a marketing and distribution safe harbour (further work is needed on its design). Double taxation will be relieved through the exemption or credit method. The surrendering entities will be selected from the group members that have residual profits.

The agreement calls for mandatory and binding dispute prevention and a resolution for tax certainty. An elective binding dispute resolution will be considered for certain developing economies with no or low experience with regard to MAP. 

Amount A will be implemented through a multilateral instrument, open for signature in 2022 and entering into effect in 2023. Digital services taxes (or equivalent) should be removedExtractives and regulated financial services are excluded from Amount A.

Amount B

Amount B is intended to simplify and streamline the arm’s length principle for baseline marketing and distribution activities and will be completed by the end of 2022. No further details were released in the communication by the IF.

Pillar Two

Pillar two will allow 

  • residence countries of the ultimate parent entity to top up  tax if a certain minimum tax rate is not met through the income inclusion rule (domestic rule) and /or the switch over rule (treaty application rule);
  • source countries can deny deductions or adjust the low-taxed income of the recipient when that recipient is not subject to a minimum tax rate through the undertaxed payment rule (domestic rule) and / or the subject to tax rule (treaty application rule).

The minimum effective tax rate (on a jurisdictional basis) is set at 15% (but individual countries may decide to apply a higher rate) for MNEs that meet the 750 million euros threshold (as determined under BEPS 13 on Country-by-country reporting). The rules are not applicable to international shipping income as defined under article 8 of the OECD Model Tax Convention. A formulaic carve-out of at least 5pct (at least 7.5 pct during a five-year transition period) of the carrying value of tangible assets and payroll will be provided. Pillar Two will include safe harbours or other simplification mechanisms, the details of which are not yet decided. With regard to the Subject to Tax Rule (STTR), the taxing rights will be limited to the difference between the minimum rate and the tax rate on the payment. The minimum rate for the STTR will be between 7.5% and 9%.  

Pillar Two should be transposed into law over the course of 2022, so as to be in force in 2023.   

The G20 finance ministers will discuss the outcome of the IF’s meeting and the plan at their meeting on 9-10 July in Venice under the Italian presidency. A final decision on the design elements will be made in October 2021.

For more insights on the two-pillar approach, reach out to Isabel Verlinden, Jonas Van de Gucht, Evi Geerts, Pieter Deré, Jean-Philippe Van West, Stefaan De Baets, Gilles Franssens, Jens Kiekens or your usual contact.