BEPS 2.0 – Pillar one and Pillar two blueprints

BEPS 2.0 – Pillar one and Pillar two blueprints

The BEPS 2.0 Pillar 1 and Pillar 2 Blueprints have been released by the OECD’s Inclusive Framework and are now open for public consultation until 14 December 2020.


On 12 October 2020, the OECD published Blueprints for Pillar 1 and Pillar 2, together with accompanying documentation including an impact assessment. The updated Blueprints provide detail on the technical design and features of each pillar; identify areas that require further technical work prior to finalisation; and also highlight aspects where political agreement will be necessary. There has been significant progress in developing the proposals, with Pillar 2 being particularly close to a consensus. The OECD is now targeting bringing the process to a successful conclusion by mid-2021.

Pillar 1

Pillar 1 seeks to address perceived flaws in the taxing rights of market jurisdictions through changes to the profit allocation and nexus rules applicable to business profits. This is a fundamental change to existing tax principles and a departure to the arm’s length principle.

Under Pillar 1, a portion of a multinational group’s residual profit would be taxed in the jurisdiction that the revenues are sourced from. Pillar 1 will apply to automated digital services (ADS) and consumer facing businesses (CFB); effectively businesses that are able to profit from significant and sustained interaction with customers and users in a market.

Under Pillar 1, ‘amount A’ allocates profits based on a formula. Amount A profits are allocated based on local revenues (determined by sourcing rules) with double taxation elimination measures built in. This allocation of profits may not be the same as the allocation of profits currently realised under the arm’s length principle. ‘Amount B’ defines a set return under the arm’s length principle for routine marketing and distribution activities. This may vary per industry and alternative amount B methodologies may be adopted if supported by evidence.

Much of the detail for Pillar 1 remains to be agreed, including how the proposals are intended to apply to CFBs and how the nexus and revenue sourcing rules will work. The US proposals that departure from the arm’s length principle should be on a safe harbour basis have also not yet been resolved.

Pillar 2

Pillar 2 is effectively a global minimum rate of taxation. The proposals are more developed than those of Pillar 1 and are close to reaching consensus. The main areas of Pillar 2 which still need to be resolved are around simplification measures.

Pillar 2 introduces four new rules granting jurisdictions additional taxing rights where another jurisdiction has not exercised their primary taxing right, or the income is subject to a ‘low rate’ of tax. The intention is for Pillar 2 to apply to multinational groups with a total consolidated revenue above EUR €750 million.

The new rules are:

  • Income inclusion rule - foreign income of branches and controlled entities is subjected to an agreed minimum rate of tax in the parent jurisdiction;
  • Undertaxed payments rule – this would operate as a backstop to the income inclusion rule to deny deductions or introduce source-based taxation under certain conditions;
  • Subject to tax rule – this would complement the undertaxed payments rule in certain cases; and
  • Switch-Over rule – this would apply where a permanent establishment (PE) is ‘undertaxed’, switching off a treaty-based exemption in the head office jurisdiction and replacing it with a credit based method of taxation.

The rules are designed to focus on ‘excess income’, particularly intangible-related income, which is regarded as most susceptible to diversion. The proposals therefore include a ‘carve-out’ and simple fixed returns for payroll and certain tangible asset costs. A further in-principle exclusion may be to recognise tax already imposed under the US Global Intangible Low Tax Income (GILTI) regime, which is still to be agreed. 

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