Pillar One and Pillar Two: Sent from Pillar to Post?

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This is the second alert in the KWM series considering the future of the OECD Pillar One and Pillar Two initiatives.

Written by Jerome Tse (Sydney) and Amanda Kazacos (Sydney), with input and assistance from and thanks to KWM Partners, Tony Dong (Beijing), Markus Hill (Frankfurt), Jun Kang (New York) and Alberto Ruano (Madrid)

On 12 October 2020, the OECD released a Blueprint for each of the Pillar One and Pillar Two initiatives (Pillar One Blueprint and Pillar Two Blueprint, or together, the Pillar Blueprints) for public consultation. 

In doing so, the OECD pushed back on its earlier hope that the OECD participants would achieve global technical and political consensus by the end of this year.  This is not surprising given the world's focus on COVID-19 and the United States' Presidential election.

While the Pillar Blueprints outline many of the open issues with respect to the Pillar One and Pillar Two initiatives and provide some options for potential solutions to these technical issues, as this article summarises, the Pillar Blueprints do not yet provide mechanisms for the implementation of the initiatives nor address the fundamental policy divergence between jurisdictions, both of which may ultimately cause any consensus to be reached later than the now expected mid-2021 timetable, if at all. 

Pillar One BluePrint

Pillar One is designed to address the fact that digital services companies (particularly automated digital services (ADS) and consumer facing businesses (CFB)) are not being subject to tax in the jurisdiction in which they offer their services (the "market jurisdiction").

Scope of Amount A

Pillar One proposes to apply to ADS and CFB businesses and proposes definition of each.

The proposed definition of ADS businesses includes a positive and negative list of categories of services (e.g. social media platforms, online gaming and online search engines but not customised online teaching services), and a general definition to deal with future technological advancements.

The proposed definition of CFB does not rely on specific types of services with a "general definition" back up, but uses a more descriptive approach.  CFBs are those that generate revenue from the sale of goods and services of commonly sold to consumers.  The key elements in the definition are the identification of a "consumer", a "sale" of goods and services and a determination of whether the goods and services are "commonly sold" to customers. 

On top of these definitions, there are specific industries / sectors that are exempt from the scope of Amount A. These include the extractive and financial services industries.  By doing so, it remains to be seen whether the shift from the arm's length principle to the Pillar One proposal for some industries and not others will result in unintended consequences or competitive advantages/disadvantages between industries going forward.

Further, whilst there is significant detail on the design and implementation of Pillar One to ADS and CFB businesses, the Pillar Blueprints do not canvass how key policy differences between jurisdictions are to be resolved.  Generally speaking, European countries (such as the UK, France and Spain) are content with activities being limited to ADS, whereas it may be that the United States would require CFB to also be included in the relevant activities. This policy divergence is not surprising as the majority of multinational ADS businesses are headquartered in the United States. Without the inclusion of CFB businesses, the United States might have more to lose than other market jurisdictions.

Finally, the Pillar One Blueprint provides an alternative proposal to the scope of Amount A, being the ability for jurisdictions to "opt in" on applying Pillar One on a global basis, or what the Blueprint calls "a safe harbour implementation".  The United States' view is that this would avoid the political challenges of mandating changes to longstanding international tax principles.  Other jurisdictions are sceptical that an elective approach would succeed and consider it may encourage jurisdictions to introduce or increase the breadth and rate of unilateral measures.  They argue that the safe harbour would create inconsistencies and frustrate the objectives of Pillar One where multinational entities decided not to opt into the rules. 

Quantum of Amount A and Amount B

The Pillar One Blueprint proposes how residual profits might be allocated to different market jurisdictions. 

Amount "A" is designed to be a share of the "residual profits" of the business (i.e. that profit in excess of a defined base level of profits), which would be allocated to each market jurisdiction based on a three-step formula.   

  1. The residual profit would need to be identified. It is suggested this would be via a profits before tax to revenue ratio. 
  2. Those residual profits would need to be apportioned between those that should be allocated to market jurisdictions and those that should be allocated to other factors such as intangibles, capital and risk. The Blueprint proposes that this would be a fixed percentage. 
  3. An allocation key would distribute those residual profits allocated to market jurisdictions in step 2 between the market participants. The allocation key is the subject of some detailed discussions in Chapter 4 of the Pillar One Blueprint. 

Whilst there is significant detail on each of these steps in the 232-page document, we consider substantial work is required before Pillar One can move forward.  Some open issues include whether jurisdictions agree that the profit before taxes (PBT) to revenue ratio appropriate for step 1, what the fixed percentage should be in step 2, and whether market participants would be satisfied with the application of the chosen allocation key in step 3.  In other words, whilst the OECD has proposed a mechanism to quantify Amount A at a high level, the detail underpinning the three-step process may yet prevent any substantial consensus between the participants.

This same observation might be applied to Amount B.  Whilst the Blueprint details both a positive and negative list of what constitutes a "baseline marketing and distribution" activity, countries have different views on whether those lists should be broader or narrower. Secondly, the Blueprint further recognises that the standardised amount, which will be determined under the arm's length principle, may vary between industries.  Whilst a standardised amount would reduce compliance costs, consideration of what that amount should be for each industry may be difficult to agree.  Thirdly, in today's world where a business may operate in more than one industry/sector, it remains to be seen how Amount B would be applied.  Would the standardised amount be applied on an average basis or would the preparation of divisional accounts be required?  Finally, under one option discussed in the Pillar One Blueprint, Amount B would function as a rebuttable presumption in case the standardised amount did not reflect an arm's length remuneration for those marketing and distribution services.  In that case (and by way of example), it would be open for the taxpayer to assert a different amount having regard to comparable uncontrolled prices or transactions.

Pillar Two - GloBE

Pillar Two is the global anti-base erosion (GloBE) initiative and is designed to address perceived concerns about the shifting of profits to low or no tax jurisdictions. In essence, it is designed to allow jurisdictions to "tax back" amounts where amounts have not been subject to a global minimum income tax rate.

Minimum Tax Rate

The Pillar Two Blueprint, discusses in further detail the four proposed rules to ensure minimum taxation worldwide (for further detail see our previous alert). However, the fundamental feature of this initiative, being the minimum tax rate, has not been addressed. The minimum tax rate decided will have considerable impact on the viability of the Pillar Two proposed rules, particularly if the minimum tax threshold incorporates countries such as Ireland that have low but not nominal tax rates (as is currently in contemplation).

Co-existence of GILTI

Unlike Pillar One, Pillar Two does place the policy divergent views of jurisdictions at the forefront, by recognising that the United States has implemented a global intangible low-taxed income (GILTI), which may be seen as akin to the GloBE proposal. The Pillar Two Blueprint highlights that practically it is likely that GILTI and the GloBE initiative would have to co-exist. However, the co-existence of GILTI (and the base erosion and anti-abuse tax (BEAT) measures) and GloBE will create difficulties, for which no proposed solutions have been considered. By way of example, GILTI may be a substitute where the parent company is a United States company, but where the head company is a non-United States company, there has been no consideration of how GloBE and GILTI overlap to ensure that the rules apply in a coordinated manner and ensure that countries get their "fair share" of revenue. In addition, there are a range of unilateral taxes (including Australia's anti-hybrid rules), for which the interaction between these rules and GloBE should be considered.  These examples illustrate that the interaction between Pillar Two and each country's domestic tax regimes may be a broader concern for many (rather than just a few) countries.

Where to?

While the Pillar Blueprints go some way to achieving their policy objectives, there is still much work to be done.  The current revised timetable seems ambitious,[1] but for some countries and regions, that timetable is still too slow.  Spain has now passed a digital services tax (to come into force in 2021) and the European Parliament considering that where no consensus was reached on Pillar One by the end of 2020, it would "prepare a new proposal for a European digital tax."[2]  We wait to see the outcome of the public consultation to ascertain whether the Pillars will achieve consensus by mid-2021, or whether it is already too late to stop widespread unilateral action. 

This article is the second in a series of alerts on the Pillar One and Pillar Two initiatives (see previous alert here).

For further detail on the Pillar Blueprints we encourage you to contact us directly. 


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[1]    For example, the United States Treasury has called for the suspension of the OECD tax talks. However, the United States may resume its participation during the Biden administration. 

[2]     See European Parliament Briefing, "Digital taxation – State of play and way forward", March 2020 (

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