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BEPS 2.0 Pillar One and Pillar Two

BEPS 2.0 Pillar One and Pillar Two

BEPS 2.0 Pillar One and Pillar Two



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The work of the Organisation for Economic Corporation and Development (OECD) on developing proposals to address the challenges of the digitalised economy led to soundings taken through public consultations in November and December 2019.

In this article, Sharon Burke, KPMG takes stock of the direction of development of the proposals and of feedback provided by KPMG and businesses in their responses to the consultations. She considers what the current shape of the proposals under review might mean for businesses operating in Ireland.  


The OECD as secretariat is working under the direction of over 130 jurisdictions participating in the Inclusive Framework to develop proposals to reshape the framework of international tax. This is being done with a view to achieving a consensus related to global adoption of BEPS 2.0 measures by jurisdictions in the Inclusive Framework. The work is being done under two pillars, which are intended to be adopted in tandem.   

Pillar One is focussed on identifying an amount of the residual profits of consumer facing and highly profitable multinationals which is to be reallocated to market jurisdictions in which those multinationals have a sufficient economic link.

In the latest iteration of the Pillar One proposals which was presented for consultation, it was suggested that this might be done under a ‘unified approach’. Under the unified approach, an amount, known as Amount A, would be calculated and allocated as additional taxable profits to market jurisdictions. Amount A is not linked to an arm’s length amount. It would be calculated based on revenues in the consolidated financial statements of the ‘in scope’ multinational. A fixed percentage of Amount A would then be allocated, based on a formula, to those jurisdictions where the multinational has a significant economic link.

At this stage of building consensus on the Pillar One proposals, the fixed percentages used to determine Amount A, the formula and factors to allocate amount A to market jurisdictions and the thresholds for allocating revenues to market jurisdictions have not been determined. 

Amount A is intended to be used as a proxy for an amount of residual profits attributable to market based activities of the multinational. Market jurisdictions eligible for allocation of Amount A should include jurisdictions in which the multinational interfaces with consumers without necessarily having a taxable presence in that jurisdiction. 

The consultation on the unified approach acknowledged that a consensus has not yet been reached amongst jurisdictions in the Inclusive Framework. The consultation forms part of the process of building a consensus to move ahead to the next stage of development of proposals using the unified approach.

Some of the main matters that emerged from the consultation are as follows:

  • Greater clarity is needed to determine which types of business sectors are considered to be in scope sectors that interface with consumers. A number of respondents expressed concern that, for example, businesses which interface with business customers but whose goods and services ultimately affect consumers could be in scope e.g. consumer pharmaceutical products distributed through hospitals and pharmacies. More work needs to be done in defining the business sectors that are in scope. They are likely to include highly digitised business sectors that have a significant market impact without necessarily having a local taxable presence. It was acknowledged that if certain business sectors are excluded from scope, multinationals who carry on a mix of in scope and out of scope lines of business may need to prepare additional segmented business line profit information in addition to the segmental reporting currently reported in their consolidated financial statements.
  • It appears that the intention is to focus the reallocation of profits under Amount A on highly profitable multinationals. This could be done by estimating the deemed residual amount of profits under Amount A by excluding a relatively high fixed percentage of revenues. This could mean that consumer facing businesses whose profitability falls below this threshold could find themselves out of scope of the Amount A reallocation approach.
  • De minimis thresholds are likely to be set to exclude market jurisdictions where the extent of the economic link measured by the multinational’s revenues attributable to local consumers falls below a threshold. It was acknowledged that the threshold would need to be adjusted for the size of the local economy.
  • Although it may be possible to estimate the amount available for reallocation under Amount A, it is more complex to identify the entities within a multinational group where these profits currently arise. In order to provide for relief from double taxation of these profits, it is likely to require changes to international tax treaties, etc. This is to allow the allocation of Amount A profits to market jurisdictions but also to relieve from tax the entities currently taxed on those profits.
  • In order to prevent dispute resolution, businesses expressed an interest in the possibility of establishing a centralised authority which would certify and validate Amount A for a multinational. This central body would also certify the amounts to be attributable to market jurisdictions. The idea is to have an allocation approach that is as transparent and as straightforward as possible in order to reduce the risk of disputes arising.
  • Businesses expressed interest in having greater certainty around the possibility of applying Amount B which is a fixed amount benchmarked to the overall profitability of the multinational and attributable to profits arising from routine sales and marketing activities carried on through a local taxable presence in the market jurisdiction. Current OECD guidance on establishing an arm’s length price for routine activities is considered not to be sufficiently effective to give certainty on the amount of attributable profits – especially in jurisdictions which have adopted a relatively aggressive approach to the application of transfer pricing and the determination of an arm’s length amount of profits from routine activities. It is understood that work will continue within the OECD to define routine sales and marketing activities that could then be used to progress work on calculating Amount B.  

Depending on the outcome related to business sectors within scope of the measures, and on the assumption that a relatively high profitability threshold is set before Amount A applies, many multinational businesses operating in Ireland whose products and services interface indirectly or directly with consumers may find themselves outside of the scope of Pillar One measures.

If implemented, Ireland is likely to see a reduction in its corporation tax revenues arising from highly profitable multinationals with an impact on consumers in international markets as some of their residual profits are likely to form part of Amount A profits which are reallocated to market jurisdictions under the proposed unified approach.  

Pillar Two

Under Pillar Two, the objective is to reach consensus on a global minimum tax rate (GLoBE). 

A consultation was carried out on Pillar Two proposals to obtain feedback on whether a multinational’s consolidated financial statements might be used as the starting point to determine the effective tax rate borne on the profits of its international subsidiaries. Soundings were also taken on whether an effective tax rate could draw upon the accounting tax charge, including deferred tax, in order to capture timing differences between the measure of accounting and taxable profits, the impact of losses etc. in determining the effective tax rate, period on period.      

In addition, the consultation looked at whether calculating the effective tax rate should be done on a global blending basis by taking together the effective tax rates of all entities operating outside a parent country jurisdiction - or whether it should be calculated by blending the rate of tax borne, jurisdiction by jurisdiction. The majority of respondents appear to support the adoption of a global approach to blending. This is because of the complexities that could be involved in calculating the effective tax rate borne on the profits of foreign subsidiaries on a jurisdiction by jurisdiction basis.   

Where the profits of subsidiaries of a multinational are not subject to tax in the period at the minimum global rate, the idea is that the parent company could be subject in the parent jurisdiction to top up taxation on the profits of the low-taxed subsidiaries. This is known as an income inclusion rule. 

Complementary rules apply under Pillar Two which include a subject to tax rule that would be inserted into double tax treaties in order to deny tax treaty benefits in cases where a payment to an associated party had been taxed below a minimum rate and an undertaxed payment rule that would deny a deduction (or impose source-based taxation, such as a withholding tax) on a payment to an associated party, where the payment had been taxed below a minimum rate. There is also a switchover rule that would be inserted into double tax treaties in order to allow residence states to switch from an exemption to a credit method of double tax relief, in cases where profits of a permanent establishment or immovable property had been taxed below the minimum rate. 

The consultation did not focus specifically on the priority or order of interaction of these rules. The feedback provided to date suggests that the income inclusion rule should have primary effect and where it has effect, the subject to tax and undertaxed payment rules under Pillar Two should not apply. 

Work on Pillar Two is at a less advanced stage than Pillar One and there are strong differences in the preferences of jurisdictions under the international framework as to whether the Pillar Two proposals can only be implemented in tandem with Pillar One. 

It is not clear how the Pillar Two proposals could work within the European Union (EU) and fit with EU legal principles. These generally require parent countries not to subject the profits of EU subsidiaries to additional tax under an anti-avoidance regime where those subsidiaries have sufficient economic substance.

An approach under Pillar Two to calculating the effective tax rates of subsidiaries of the parent of a multinational which adopts a global blending approach appears to be closest in design to the GILTI regime in the United States of America (US). This regime applies additional US federal corporate income tax on a US parent which is calculated by reference to the profits of its controlled foreign corporations and affords double tax credit relief for foreign taxes paid on those profits on a global blended basis.

While Ireland has expressed reservations on in the appropriateness of measures under Pillar Two which seek to set a minimum tax rate, a regime that sets an effective tax rate which can be met by reference to the profits of Irish based entities subject to Irish corporation tax a rate of 12.5% could mean a modest impact on Ireland of measures under Pillar Two.

Further information

To access more articles on related tax matters, click here to login/register to TaxWatch, KPMG’s client-only portal on tax insights.  

If you have any questions in relation to the potential impact of BEPS 2.0 proposals on your business, please contact Sharon Burke via this form.