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Update: OECD/G20 Inclusive Framework Latest Statement on Pillar 1 & Pillar 2

Jacob Parma Director - Transfer Pricing & Value Chain Transformation, PwC Switzerland 02 Jul 2021

On July 1st OECD/G20 Inclusive Framework (“IF”) published a statement on the proposed agreement surrounding the key parameters and intended timeline for the two pillars solution to addressing the tax challenges arising from the digitalisation of the economy (popularly referred to as “BEPS 2.0”). The announcement comes ahead of the expected mid-July communication of proposed technical package for the two pillars, which was to be announced following the meeting of G20 Finance Ministers on 9/10 July 2021.

Despite being relatively brief, the 5-page statement provides further clarity on some of the most anticipated elements and parameters of Pillars 1 and 2. While a number of previously discussed key technical details surrounding both pillars appear to be confirmed, the statement also includes new and potentially material changes, highlighted below.

Pillar 1

Scope of the application of Amount A under Pillar 1 is initially proposed to be limited to multinational enterprises (“MNEs”) with a global turnover above EUR 20 billion and profitability above 10% on a profit before tax basis. A revision of the turnover threshold down to EUR 10 billion is proposed within a 7-year timeframe, counting from the moment the initial agreement comes into force. Apart from explicit mention of carve-outs for the extractives and regulated financial services industries, no further scope and activity tests are mentioned. This indicates a possible compromise towards the April 2021 proposals of US Biden administration on simplification of the Pillar 1 scope definition and related complexity.

The statement provides recommendations on the important parameters to be used in allocation of Amount A, such as de minimis nexus rules for market jurisdictions, the share of residual profits (profits above the minimum profitability threshold of 10%) to be allocated as part of Amount A, limitation of segmentation requirement to only exceptional circumstances and inclusion of a marketing and distribution profits safe harbour.

Importantly, an explicit mention is included of dispute prevention and resolution mechanisms designed to avoid double taxation for Amount A, which will apply in a “mandatory and binding manner” – one of the more complex and hotly debated aspects of Pillar 1.

The IF statement confirms that Amount B will involve the application of a simplified and streamlined approach to setting arm’s length remuneration levels for baseline marketing and distribution activities. It is intended to apply to all types of MNE business models, without the scope limitations of Amount A. The technical work on Amount B part of Pillar 1 is expected to be completed by end of 2022.

From an overall Pillar 1 Amount A perspective, the expected timeline communicated by the IF involves development of a multilateral instrument in the course of 2022, with Amount A “coming into effect in 2023”.

Pillar 2

The statement confirms the proposed application of two interlocking domestic rules – the Income Inclusion Rule (“IRR”) and the Undertaxed Payments Rule (“UTPR”), otherwise known as the Global anti-Base Erosion Rules (“GloBE”). Based on these rules, the right to tax the delta between the new global minimum tax and a lower actual tax levied in a jurisdiction - taking all covered taxes as defined in Pillar 2 in a jurisdiction into account - is allocated to either a parent jurisdiction or to countries which make payments to group entities that are low taxed.
The treaty-based Subject to Tax Rule (“STTR”) for source jurisdictions is confirmed in the proposal to be creditable against the covered tax under the other Pillar 2 rules.

Whilst countries are free to decide whether or not they want to adopt the Pillar 2 rules. However, the rules have the status of a “common approach”. This means that if countries adopt the rules they should implement them in a way that is consistent with the outcomes provided for under Pillar 2, including applying model rules and guidance which the OECD will provide and still need to be agreed upon by the IF. This includes adhering to the ordering of the rule priorities and the application of safe harbors. This is important to achieve consistency of the rules across countries and respective legal certainty. It will remain to be seen in reality whether this common approach indeed will be respected in the individual country implementation of the rules, a requirement which Switzerland has explicitly requested as one of the pre-conditions to further support the OECD project.

Unlike for Pillar 1, the statement confirms the previously discussed minimum revenue threshold of EUR 750 million for MNEs in scope of Pillar 2. Notably, an explicit mention of carve outs for the “government entities, international organisations, non-profit organisations, pension funds or investment funds that are Ultimate Parent Entities of an MNE Group or any holding vehicles used by such entities, organisations or funds” is mentioned. This is provided in addition to the previously discussed exclusion of international shipping activities.

Without providing lengthy guidance on the elements covered, the statement of the IF provides some additional detail on the rule design, effective tax rate calculation approach, substance carve-outs, simplifications and co-existence with other national rules (such as the US GILTI regime). Most notably, the statement explicitly mentions the future minimum tax rate to be achieved under Pillar 2 proposals via the application of the IRR and UTPR to be at least 15%. Interestingly, the final sentence of the statement makes a mention of possible exclusion of MNEs in their “initial phase of their international activity” from the application of the global minimum tax rate.

From a timeline perspective, subject to final agreement of the more than 130 IF member countries and release of the implementation plan, Pillar 2 proposals are expected to be coming into law during 2022 and becoming effective in 2023. 

Key takeaways and what’s next

The statement of the IF expresses continued commitment to reaching an agreement on the final design of the key Pillar 1 and Pillar 2 elements, with a confirmation of October 2021 as the planned timeframe for finalization of the agreed framework.

In combination with the recent G7 communique, the current OECD/G20 IF statement serves as a clear demonstration of the global commitment towards adjusting the international tax system in order to better address the challenges arising out of the digitalization of the economy. The political and technical effort invested into progressing with Pillar 1 and 2 proposals underlines the consensus on the need for a multilateral solution, preventing a myriad of unilateral responses (e.g. digital service taxes), which would create further complexity, double taxation and political tensions among countries.

Considering current stage of the discussions, the additional guidance provided by the statement and the expected timelines, the following recommendations can be made for MNEs that meet the size thresholds:

  • Remain up-to-date on the latest announcements by the OECD/G20 IF and what their practical implications are – you can track these together with us here
  • Perform, respectively update, an assessment of the potential applicability of Pillar 1 & Pillar 2 for your organisation and related impacts – you can reach out to our experts for more information and dedicated technical discussion.
  • Simulate a potential indicative impact of Pillar 1 & Pillar 2 proposals on your organisation – contact us for more information on our easy-to-apply impact simulation tools and how we can support you.

Contact us

Markus Prinzen

Partner and Leader Corporate Tax Services, Zurich, PwC Switzerland

+41 58 792 53 10


David McDonald

Partner and Leader FSTP PwC Europe, Zurich, PwC Switzerland

+41 75 413 19 10


Armin Marti

Partner and Leader Tax Policy, Zurich, PwC Switzerland

+41 58 792 43 43


Dominik Birrer

Partner Tax , Luzern, PwC Switzerland

+41 58 792 43 22


Jim Matthews

Partner, Transfer Pricing and Value Chain Transformation, Geneva, PwC Switzerland

+41 58 792 95 60


Rolf Röllin

Director - Corporate Tax, Zug, PwC Switzerland

+41 58 792 68 90


Jacob Parma

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

+41 58 792 44 87


Etienne Michaud

Manager - Transfer Pricing and Value Chain Transformation, Geneva, PwC Switzerland

+41 58 792 96 70