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On this page
 * What is base erosion and profit shifting?
 * What is the OECD Inclusive Framework?
 * OECD Pillar One summary
 * OECD Pillar Two summary

 * Corporate Tax Planning
 * International Tax




OECD INCLUSIVE FRAMEWORK




OECD PILLAR ONE AND PILLAR TWO EXPLAINED

With its sweeping international tax reforms, the OECD two-pillar solution seeks
to address pressing challenges that have developed as a result of digitalization
of the global economy. Bloomberg Tax helps you stay ahead of these cross-border
tax issues and effectively manage your corporate tax planning strategy with
in-depth expert analysis, news, practice tools, and compliance guidance.



Request Demo




Corporate tax planning topics

Corporate Tax Planning
Federal Tax Planning Strategies
State Tax Planning for Corporations
International Tax Planning for U.S. Corporations


YOUR INTERNATIONAL TAX CONNECTION

Take your international tax planning to the next level with expert insights and
practitioner perspectives to help you respond appropriately and effectively to
global tax developments.

GUIDE


OECD GLOBAL MINIMUM TAX: PILLAR TWO GLOBE DECISION TREE

Download the interactive flowchart for a step-by-step guide through Pillar Two
requirements.



OECD Global Minimum Tax: Pillar Two GloBE Decision Tree

REPORT


OECD PILLAR TWO GLOBE RULES: STATUS AND EFFECTIVE DATES ROADMAP

This roadmap provides a high-level overview of the implementation status of the
GloBE Rules across the Inclusive Framework jurisdictions.



OECD Pillar Two GloBE Rules – Status and Effective Dates Roadmap

ONPOINT


PILLAR TWO SAFE HARBORS AND PENALTY RELIEF

This OnPoint slide deck presentation outlines the new Safe Harbor and Penalty
Relief coordinated system under the Pillar Two GloBE Rules that apply to
multinational entities.



Pillar Two Safe Harbors and Penalty Relief



While the digital economy has grown substantially over the last three decades,
international tax regulations have struggled to keep pace. This digitalization
has changed the landscape for businesses that operate in foreign markets and
undermined traditional tax structures. Because e-commerce enables goods and
services to be sold around the world, businesses are no longer required to have
a permanent establishment, or a physical presence, where they do business. This
lack of physical presence means that e-commerce revenue may not enter a
jurisdiction’s financial system and makes it harder for those taxing authorities
to monitor transactions and enforce tax laws.

As a result, some multinational companies have avoided paying taxes using
accounting techniques and international tax planning strategies that exploit
differences in tax regulations to manage their tax liability in a manner that
works against the tax collecting authorities where they do business.

On this page
 * What is base erosion and profit shifting?
 * What is the OECD Inclusive Framework?
 * OECD Pillar One summary
 * OECD Pillar Two summary


WHAT IS BASE EROSION AND PROFIT SHIFTING?

Base erosion and profit shifting (BEPS) is a tax planning strategy implemented
by multinational companies that involves exploiting gaps and mismatches in tax
rules to avoid paying tax, such as moving profits to low- or no-tax
jurisdictions where there is little or no economic activity. BEPS reduces tax
bases through deductible payments, such as interest or royalties.

While some of these practices are illegal, most aren’t. But the use of BEPS
practices can mean that countries – including developing countries, which rely
more heavily on corporate taxes – don’t receive the tax revenue they would have
otherwise. In fact, BEPS actions cost countries between $100 billion and $240
billion in tax revenue each year, according to the Organisation for Economic
Co-operation and Development (OECD).

Some countries have tried to navigate these digital taxation issues themselves
by levying digital services taxes (DSTs) to protect their tax base and tax
revenue from certain digital commercial activities that occur within their
jurisdiction. However, these DSTs can create the potential for double taxation,
and don’t address the underlying issue of tax law and rate differences between
jurisdictions.


WHAT IS THE OECD INCLUSIVE FRAMEWORK?

Since 2013, the OECD has led the coordinated global governmental response to the
challenges stemming from the rise of the digital economy. The scope of this BEPS
initiative reflects how dramatically the operating environment has changed.

The OECD, which brings together 38 member countries and a range of partners to
collaborate on key global issues, has been working with governments,
policymakers, and citizens around the globe to develop its OECD/G20 Inclusive
Framework on BEPS. Specifically, OECD and G20 member countries, along with
participating developing countries, aim to standardize international taxation by
establishing a “modern international tax framework to ensure profits are taxed
where economic activity and value creation occur,” the OECD notes.

The BEPS package “equips governments with the domestic and international
instruments needed to tackle tax avoidance” in addition to giving businesses
“greater certainty by reducing disputes over the application of international
tax rules,” according to the OECD.

Currently, the OECD/G20 Inclusive Framework members have agreed to a solution to
address these noted tax challenges through a two-pillar proposal, known as
Pillar One and Pillar Two.


OECD PILLAR ONE SUMMARY

Pillar One of the OECD Inclusive Framework establishes new nexus and profit
allocation rules and will require changes to both domestic tax law and double
tax treaties. It uses revenue sourcing rules to determine whether revenue
derives from a market jurisdiction, and profit allocation rules to allocate
profits to those market jurisdictions. Pillar One eliminates double taxation and
clarifies filing and payment requirements.


MULTILATERAL INSTRUMENT TO PREVENT BEPS

As part of Pillar One, the Multilateral Convention to Implement Tax Treaty
Related Measures to Prevent BEPS – also known as the Multilateral Instrument or
the MLI – supplements and modifies existing income tax treaties to eliminate
double taxation and remove the need for governments to bilaterally negotiate
international tax treaties. The MLI entered into force on July 1, 2018.

The MLI includes minimum standards, which are provisions that must be adopted by
every signatory to the MLI, as well as optional provisions. These mandatory
minimum standards seek to “tackle issues in cases where no action by some
countries would have created negative spillovers (including adverse impacts on
competitiveness) on other countries,” such as with the issues of dispute
resolution and combating harmful tax practices, according to the OECD.

Specifically, these minimum standards relate to:

 * Preferential tax regimes (Action 5)
 * The exchange of information on tax rulings (Action 5)
 * The prevention of treaty abuse (Action 6)
 * Reexamination of transfer pricing documentation (Action 13)
 * Dispute resolution (Action 14)

According to the OECD, more than 140 countries and jurisdictions are working to
implement the BEPS package’s 15 Actions to tackle tax avoidance, improve the
coherence of international tax rules, and ensure a more transparent tax
environment. As of Jan. 17, 2024, there are 102 signatories and parties to the
MLI.


WHAT’S THE ECONOMIC IMPACT OF PILLAR ONE?

Pillar One’s new nexus and profit allocation rules expand the taxing rights of
market jurisdictions regardless of physical presence. For instance, under the
draft nexus and sourcing rules for the OECD Pillar One Amount A, nexus is
triggered when, over a 12-month period, an in-scope multinational enterprise
derives at least €1 million in revenue from a market jurisdiction. For smaller
jurisdictions with a GDP of less than €40 billion, the nexus is €250,000.

Pillar One also establishes a fixed return for baseline marketing and
distribution activities and improves tax certainty through effective dispute
prevention and resolution mechanisms.

Pillar One reallocates the profits of approximately 100 of the world’s largest
and most profitable multinational enterprises to market jurisdictions: those
with global turnover of more than €20 billion and a profitability margin of more
than 10%, calculated using an averaging mechanism. The turnover threshold can be
reduced to €10 billion upon the successful implementation of the Pillar One
proposals, including the tax certainty aspects.


OECD PILLAR TWO SUMMARY

Pillar Two ensures multinational enterprises (MNEs) pay a global minimum tax of
15%, regardless of where the headquarters are located or the jurisdictions in
which the company operates. Pillar Two establishes this minimum effective tax
rate (ETR) for large MNEs through its Global Anti-Base Erosion (GloBE) rules –
two interlocking domestic rules known as the Income Inclusion Rule and the
Undertaxed Payments Rule – which calculate and impose additional top-up taxes if
the ETR falls below the 15% minimum.

Pillar Two is expected to bring in about $150 billion in additional global tax
revenues annually, along with the stabilization of the international tax system
and increased tax certainty for taxpayers and administrations.


HOW PILLAR TWO IS RESHAPING THE DIGITAL GLOBAL ECONOMY





Tax Law Analyst Alexis Sharp breaks down the importance of GloBE rules and the
Subject to Tax Rule, which are key components of the OECD’s Pillar Two.


WHO DOES PILLAR TWO APPLY TO?

Pillar Two applies to large MNEs that meet the requisite revenue threshold –
targeting approximately 2,000 corporations – and seeks to ensure that these MNEs
pay a minimum level of tax by applying the GloBE rules and Subject to Tax Rule.

The Subject to Tax Rule is a treaty-based rule that allows source jurisdictions
to impose limited source taxation on certain base-eroding payments between
related parties subject to tax below 9%. For example, if a jurisdiction applies
a 5% tax rate for royalty receipts, a 4% top-up tax could be collected by the
payer’s jurisdiction.

The GloBE rules apply to multinational enterprises and their subsidiaries that
have annual gross revenues of €750 million in the consolidated financial
statements of the Ultimate Parent Entity (UPE) in at least two of the four
fiscal years immediately preceding the relevant fiscal year. However, various
types of entities are exempt from these rules, including government entities,
international organizations, nonprofit organizations, pension funds, investment
funds, and real estate investment funds when they are the UPE.


WHEN WILL THE PILLAR TWO RULES GO INTO EFFECT?

Model rules to implement the global minimum tax were issued on Dec. 20, 2021. In
December 2022, the European Commission finalized a directive on Pillar Two
implementation with unanimous agreement from EU member states, requiring each to
transpose key aspects into domestic law by Dec. 31, 2023. The OECD
secretary-general previously acknowledged in May 2022 that practical
implementation was more likely from 2024 onward.

Country-by-country implementation of the Pillar Two rules vary widely, as the
GloBE rules need to be enacted and implemented through domestic legislation by
member countries. Implementation of the Subject to Tax Rule requires the
development of a model treaty provision and subsequent multilateral instrument.
The OECD published a progress report in July 2023 that included guidance on
model treaty language to enact the Subject to Tax Rule.

Notably, members of the Inclusive Framework aren’t required to adopt GloBE
rules. But if they do, they must implement and administer the rules consistently
with the outcomes provided for under Pillar Two. For instance, jurisdictions
that adopt GloBE rules will apply an effective tax rate test using a common tax
base and common definition of covered taxes to determine whether an entity is
subject to an ETR below the agreed 15% minimum tax rate in any jurisdiction
where it operates.

Nearly one-third of the more than 140 Inclusive Framework member jurisdictions
have either committed to implementing, taken steps toward implementation, or
enacted legislation to implement the framework.


HOW TO PREPARE FOR PILLAR TWO DEADLINES

With so many jurisdictions at various stages of implementing the OECD/G20
Inclusive Framework on BEPS two-pillar solution, tax professionals should start
their international tax planning now so they are equipped with the tools for
compliance as this massive framework goes into effect.

First, companies should confirm which countries are relevant to their
operations. Then, answer the following questions to track their progress toward
Pillar Two adoption and implementation:

 1. Have those relevant countries already adopted the framework?
 2. If a relevant country hasn’t adopted the framework, how might this affect
    the business’s operations and taxation?

Tax professionals may also want to consider undertaking high-level calculations
to determine the additional taxes that may be due upon the framework’s
implementation.

Second, multinational companies can consider their internal plans for gathering
information on taxation and related requirements. This may require establishing
a multifunctional team that goes beyond the tax department and includes
representatives from both the financial accounting and information technology
departments.


BLOOMBERG TAX SHORT CUTS: PREPARE FOR PILLAR TWO IMPLEMENTATION WITH OUR OECD
TWO-PILLAR WATCH PAGE





Are you prepared for Pillar Two implementation? Tax Analyst Alexis Sharp breaks
down key product features of our subscriber-only Pillar Two Watch Page that will
help you create a well-informed strategy when key details of the agreement are
released.


NAVIGATE DIGITAL SERVICES TAX CHANGES WITH CONFIDENCE

As the OECD Inclusive Framework goes into effect around the world, Bloomberg Tax
Research can help you stay ahead of any potential tax changes in the digital
economy. Download a collection of Practitioner Perspectives on Pillar Two for a
look into the status of Pillar Two in various countries around the world and the
multidimensional approach to the challenges posed by the global economy.

With global tax law and regulation changes always on the horizon, tax
professionals need the right corporate tax planning strategies to stay ahead of
cross-border developments and avoid unintended international tax consequences.
Request a demo to see how Bloomberg Tax Research can keep you ahead of the
shifting international tax landscape.


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OECD RELEASES REPORT ON PILLAR ONE – AMOUNT B

This OnPoint analyzes the recently released OECD Report on Pillar One – Amount B
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