What is the Two-Pillar Solution?

WHAT IS THE SOLUTION?

The OECD/G20 Inclusive Framework, which has 140 members, all participating on an equal footing, was mandated to provide a solution to these two problems in 2021.

As of 8 October 2021, 136 member countries and jurisdictions joined the Two Pillar Solution – the outcome of negotiations co-ordinated by the OECD for much of the last decade – to ensure that large MNEs pay tax where they operate and earn profits.

Pillar One

l Pillar One would bring dated international tax rules into the 21st century, by offering market jurisdictions new taxing rights over MNEs, whether or not there is a physical presence.

– Under Pillar One, 25% of profits of the largest and most profitable MNEs above a set profit margin (residual profits) would be reallocated to the market jurisdictions where the MNE’s users and customers are located; this is referred to as Amount A.

– Pillar One also provides for a simplified and streamlined approach to the application of the arm’s length principle to in-country baseline marketing and distribution activities (Amount B).

– Pillar One includes features to ensure dispute prevention and dispute resolution in order to address any risk of double taxation, but with an elective mechanism for some low-capacity countries.

– Pillar One also entails the removal and standstill of Digital Services Taxes (DST) and similar relevant measures, to prevent harmful trade disputes.

Remaining 'residual' pro ts

Country A

International Headquarters

MNE

Country B

25% of residual pro ts re-allocated to the countries where MNE’s users and customers are located

Country C

Under Pillar One, taxing rights on more than USD 125 billion of profit are expected to be reallocated to market jurisdictions

Pillar Two

l Pillar Two provides a minimum 15% tax on corporate profit, putting a floor on tax competition. Governments worldwide agree to allow additional taxes on the foreign profits of MNEs headquartered in their jurisdiction at least to the agreed minimum rate. This means that tax competition will now be backstopped by a minimum level of taxation wherever an MNE operates.

l A carve-out allows countries to continue to offer tax incentives to promote business activity with real substance, like building a hotel or investing in a factory.

Ultimate parent company Country A

MNE

Operating subsidiary Country B

The global minimum tax rate would apply to companies with over EUR 750M annual revenue

GLOBAL MINIMUM TA X15%

Pro t shifted to low-tax jurisdiction

Low-tax jurisdiction

International Headquarters