Road to BEPS 2.0: October 2021 Statement on Pillar 1 & Pillar 2

Jacob Parma Director - Transfer Pricing & Value Chain Transformation, PwC Switzerland 13 Oct 2021

On 8th October 2021, the OECD/G20 Inclusive Framework (“IF”) published an update statement on the progress of technical work related to Pillars 1 & 2. The latter are designed to form the solution addressing the tax challenges arising from the digitalisation of the economy (popularly referred to as “BEPS 2.0”). The statement was previously announced following the 1st July 2021 statement by the G20 Finance Ministers.

The latest statement provides a number of awaited confirmations on several key parameters and practical implications of how Pillars 1 & 2 will be applied in practice. Nevertheless, various important tax technical areas and open points that were generally expected to be clarified have not been addressed, with more time needed to reach political and technical consensus among the IF members. For a global perspective on the practical implications of the recent statement, this PwC Tax Policy Alert will provide you with a useful summary of the key facts, open points and a timeline update. In the following paragraphs, we outline the key points and potential practical implications for Switzerland and Multinational Enterprises (“MNEs”) with presence in Switzerland.

Pillar 1

Amount A
  • Scope: the statement confirms EUR 20 billion in global revenues (to be reviewed and potentially adjusted downwards in the future) and 10% profit before tax (PBT) margin as the key parameters from a materiality test perspective.
  • Exclusions: in terms of types of activities covered, the exclusions for “extractives” and “regulated financial services” are confirmed – with more details expected to determine the exact applicability of the latter category to financial service focused MNEs that have a presence in Switzerland and other markets.
  • Nexus: a jurisdiction will generally qualify for an Amount A allocation if a minimum level of EUR 1 million in revenues is achieved by an MNE in a given market. For smaller jurisdictions (with a GDP below EUR 40 billion), this threshold will be reduced to EUR 250k.
  • Revenue sourcing: further details, particularly for business models involving B2B activities or sales through intermediaries, should be determined in the near future. The statement did not provide any further information on the rules surrounding determination of the “surrendering entities” (e.g., a Swiss-based entity with a PBT margin above 10%), which was one of the more highly anticipated and practically relevant areas of Pillar 1 Amount A application.
  • Quantum: an important confirmation was included in the statement on the share of the residual profits (i.e., above 10% PBT margin) that will be re-allocated to market jurisdictions under Amount A. Following an indication of 20% - 30% in the 1st July statement, the current version confirms a precise value of 25%.
  • Tax base determination: it is confirmed that the measure of profit or loss of the in-scope MNE will be determined by reference to “financial accounting income, with a small number of adjustments.” In practical terms, recent experience with BEPS 2.0 simulations and readiness analyses across a number of Swiss-based MNEs shows this to be one of key focus areas purely from an operational perspective – with a number of questions arising in connection with use of differing accounting standards, characterisation of specific financial positions and potential need to reconcile between principles applied for Amount A determination, the overall transfer pricing model of each MNE and the implication of Pillar 2 (more comment below).
  • Safe harbour: the statement reconfirms the need for a marketing and distribution profits safe harbour in connection with Amount A calculation, with further work on its design still ongoing.
  • Tax certainty: while a confirmation on the availability of “mandatory and binding” dispute prevention and resolution mechanisms to avoid double taxation is included, no further details are provided. However, this will be a crucial element for the success of the entire initiative.
  • Timeline: a new Multilateral Convention (MLC) is intended to be developed and opened for signature in 2022 with the intention of removing unilateral “all Digital Services Taxes and other relevant similar measures” and facilitating the implementation of Amount A – which continues to be scheduled for coming into effect in 2023.
Amount B
  • The technical analysis and publication of specific parameters for Amount B, covering minimum target profitability levels for routine distribution and marketing activities within MNEs, shall be completed by the end of 2022.
  • Practical experience shows that for Swiss-based (and other) MNEs, the relevance of Amount B lies beyond the potential need to adjust pricing points in the existing transfer pricing policies, but also to verify the need to adjust and/or align the overall transfer pricing models to allow for sufficient segmentation and differentiation of different business flows that may be (increasingly) intertwined.

Pillar 2

The October IF Statement is similar in many respects to the July 2021 Statement with some exceptions:

  • The minimum tax rate for the GloBE rules is now firmly expressed as being 15% rather than 'at least 15%'. For Switzerland, it is good news that the 15% are now treated as a ceiling rather than an indication of a floor for the minimum rate. Most of the cantons currently offer an effective corporate income tax rate of below 15% (combined rate, including Federal level) while the average effective tax rate across all cantons is some 14.9%. Applying this narrow view (i.e. leaving aside the tax base aspects, noting though that differences between the Swiss and the GloBE tax base can be quite substantial), Pillar 2 will become relevant for companies in most if not all cantons.
  • UTPR relief for smaller MNEs: companies should not be bothered with the UTPR in the initial phase of their international activities. Namely, the Statement now provides for a UTPR “grace period” of 5 years if an MNE has tangible assets of max. EUR 50m abroad and if that group does not operate in more than 5 other jurisdictions. This exemption may prove useful for Swiss-based MNEs with limited presence abroad.
  • Details of the substance based carve-outs are more specific and slightly more generous, with an initial mark-up on tangible assets of 8% and of 10% on payroll, both declining to 5% over a period of 10 years. This development is beneficial for Swiss MNEs as well. Unfortunately, the demand placed by Federal Councillor Ueli Maurer (see his letter to the OECD dated 25 August 2021) that payroll costs related to R&D activities should qualify for a double-deduction did not make its way into the IF Statement.
  • De minimis exclusion: while the OECD in its July 2021 Statement only alluded to such exclusions being available, the October IF Statement now makes clear that the GloBE rules shall not apply for those jurisdictions where the MNE has a minimal presence, namely revenues of less than EUR 10m and profits of less than EUR 1m.
  • The application of the Subject to Tax Rule (STTR) has been restricted to double tax treaties between a developing country and a country with a nominal corporate income tax rate lower than 9% (previously 7.5% to 9%). It is anticipated that the nominal rate should equal a jurisdiction’s statutory rate in most instances. As such, we would expect that the STTR’s potential future implications for Swiss MNE’s or non-Swiss MNE’s with Swiss presence should be fairly limited (for instance, it can be relevant for companies, which benefit from a tax holiday).

  • Switch-over Rule (SOR): while the July 2021 Statement did not make any reference to the SOR, the October IF Statement mentions that the model rules to be developed for Pillar 2 will also address the need for the SOR in certain treaties and in circumstances where the exemption method would apply.

  • There is still no definitive statement on the status of the US minimum tax regime (GILTI) as a compliant Pillar 2 regime.
  • Timeline: Pillar 2 should be brought into law in 2022, to be effective in 2023. One important exception to this general rule is that the UTPR shall be coming into effect a year later, in 2024. In this regard, it is worthwhile mentioning that Switzerland has emphasized towards the OECD that it would require an implementation period of at least 3 years from the finalization of the rules and that it must be ensured that a jurisdiction does not suffer any disadvantages during the implementation period (see the above-mentioned letter from Ueli Maurer for further details). While this demand was not met by the OECD, it remains to be seen how this topic will be handled going forward. Should other countries stick to the OECD timetable (and thus enact the rules prior to Switzerland), there is a risk of misalignment, which may result in other countries levying a top-up tax that could in theory be levied by Switzerland in the future.

Key Takeaways and What’s Next

The statement of the IF dated 8th October 2021 provides some useful further clarity on open questions on Pillar 1 & 2 but it still leaves quite a few key questions open. For Pillar 1, the key parameters relevant for application of Amount A (e.g., determination of surrendering entities) and Amount B (target margin parameters) are to be expected in the coming months. With respect to Pillar 2, it is intended that model rules and a commentary should be developed by the end of November 2021 to give effect to the GloBE rules. It is generally expected that this (final?) set of model rules will provide further details which will be helpful for companies to prepare in more detail for their path to BEPS 2.0 readiness. What remains certain is that this will not be the end of the “story” and MNEs will need to closely follow further discussions/developments at IF and other forums to continuously refine their approach towards BEPS 2.0 implementation and maintenance over the next months and years.

Given the quite ambitious time plan for implementation of Pillar 1 & 2 as outlined above, companies should start looking into addressing the upcoming operational challenges (e.g., data collection, segmentation, tax accounting determinations and decisions, ERP system readiness) sooner rather than later. Specific attention points in this regard can ideally be properly identified in the coming months and then addressed throughout 2022. This will then also allow for audit readiness when it comes to the tax positions including GloBE in (early) 2023 and it will ensure a good basis for the development of a proper long term strategy for a target approach to ongoing maintenance of BEPS 2.0 obligations and compliance.  

Would you like to learn more? Register for our webcast here to join our OECD digitalisation announcement discussion on Wednesday, 20 October 2021 at 10am EST, 3pm BST, 4pm CET.

Contact us

Dominik Birrer

Partner Tax, PwC Switzerland

+41 58 792 43 22


David McDonald

Partner and TP/VCT Leader, PwC Switzerland

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Markus Prinzen

Partner and Leader Corporate Tax Services, Zurich, PwC Switzerland

+41 58 792 53 10


Rolf Röllin

Partner, Corporate Tax, PwC Switzerland

+41 58 792 68 90


Jacob Parma

Director - Transfer Pricing & Value Chain Transformation, Zurich, PwC Switzerland

+41 58 792 44 87


Raphaël Matthys

Director, Corporate Tax, Zurich, PwC Switzerland

+41 58 792 9346


Christa Elsaesser

Partner, Tax & Legal Services, PwC Switzerland

+41 58 792 42 66


Etienne Michaud

Senior Manager, Transfer Pricing and Value Chain Transformation, PwC Switzerland

+41 58 792 96 70