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In brief

After much anticipation, the OECD released the ‘Blueprint‘ for their Pillar Two proposal on 12 October as part of its two pillar package to deal with the increasing digitalisation of the economy.

The premise behind the Pillar Two proposal is simple, if a state does not exercise their taxing rights to an adequate extent, a new network of rules will re-allocate those taxing rights to another state who will.

This would be achieved through:

  • a new global minimum tax regime (‘GloBE‘) which aims to ensure a minimum effective tax rate across all jurisdictions; and
  • imposing a minimum level of taxation on certain payments between connected persons (the ‘Subject to Tax Rule‘).

A number of areas require further work and political agreement, not least of all what the minimum tax rates would be (the Blueprint suggests somewhere between 10% – 12% for the GloBE proposal and 7.5% for the Subject to Tax Rule).

However, one thing is clear, the Blueprint provides a framework to fundamentally reshape the international tax system in a way that is unlikely leave any group within its scope unaffected.

The Baker McKenzie Global Tax Team has undertaken an in-depth analysis of the ‘Blueprint’ for the Pillar Two proposal to produce a digestible summary of everything you need to know.


Pillar Two: Everyone’s problem

Pillar Two is the second prong of the OECD’s Inclusive Framework plan to realign the international tax framework to adequately address the challenges of an increasingly digitalised economy and the first thing you should know is that it has nothing to do with digitalisation.

Whereas Pillar One seeks to identify business models that are perceived to slip between the cracks of the existing international tax framework, Pillar Two is concerned about low tax outcomes. How those low tax outcomes are achieved is, on the whole, largely irrelevant.

The shipping industry appears to be the only sector that may be granted a carve-out as it is largely taxed through tonnage taxes which do not neatly align with corporate income tax principles upon which the GloBE regime is based (although may still be within the scope of the separate Subject to Tax Rule). Likewise, the usual tax advantaged investors with special status should also be carved out (Sovereign Wealth Funds, Pension Funds, Charities, etc.).

However, all other sectors are in the scope of Pillar Two.

Pillar Two: Interaction with Pillar One

Before we address the detail of the proposal, it is worth noting that Pillar Two is essentially independent of Pillar One. The only real material interaction is that taxes borne by virtue of new taxing rights granted under Pillar One are taken into consideration when calculating the effective tax rates (or ‘ETRs‘) of the jurisdictions in which MNE Groups operate.

Therefore, in theory, Pillar Two is capable of being implemented without agreement on Pillar One. Pillar One is arguably the more politically challenging as it entails states ceding existing taxing rights to so called market jurisdictions, whereas Pillar Two promises to be a tide that lifts all boats (whether jurisdictions like it or not) by setting a floor on acceptable ETRs.

However, states keen to reach agreement on Pillar One may play hardball on Pillar Two to ensure the two come together as a package. The political calculus may only be just beginning.

Pillar Two: GloBE & the Subject to Tax Rule

The initial public consultation on Pillar Two in late 2019 revealed that the proposal would be framed around four rules: an Income Inclusion Rule (IIR), an Undertaxed Payment Rule (UTPR), a Switch-Over Rule (SOR), and a Subject to Tax Rule (STTR).

The OECD has now added substantial technical detail to the proposal and set out how the rules interact with one another. Though requiring 248 pages of detailed technical analysis and examples in its ‘Blueprint’ document, once digested, the proposal is reasonably straightforward to understand at a high level (though the devil will of course be in the detail).

Pillar Two is comprised of two proposals which operate essentially independently of each other to ensure minimum levels of taxation of multinational enterprise groups (‘MNE Groups’):

  • a global minimum tax regime (the “GloBE rules” applied through the Income Inclusion Rule and Undertaxed Payment Rule, with support from the Switch-Over Rule as required); and
  • a minimum level of tax on certain payments between connected parties which are perceived to carry heightened base eroding potential (the Subject to Tax Rule).

The only interaction between the two is that the top-up tax imposed under the Subject to Tax Rule is taken into consideration in calculating ETRs under the GloBE rules. As such, whilst the Globe rules take up the bulk of the Pillar Two Blueprint, the Subject to Tax Rule operates in priority to the GloBE rules.


GloBE: EUR 750m threshold

Recognising the compliance costs of the computational heavy GloBE rules, the regime is intended to apply to MNE Groups with global revenue’s exceeding EUR 750m threshold, in line with current Country by Country Reporting requirements.

Whether or not jurisdictions would be free to implement the regime using a lower revenue threshold thereby capturing a broader range of MNE Groups has been the subject of some debate within the Inclusive Framework. The close interconnectivity required of jurisdictions by the GloBE rules necessitates uniform application internationally.

GloBE: Income Inclusion Rule

The global minimum tax regime imposed by the GloBE rules is principally imposed by the Income Inclusion Rule. This Rule broadly operates in a similar fashion to existing CFC regimes, however, unlike a lot of those CFC regimes it is solely concerned with low tax outcomes, not how taxpayers achieve those low tax outcomes.

The Income Inclusion Rule adopts a top down approach whereby the jurisdiction in which the Ultimate Parent Entity is resident has the primary right to exercise taxing rights over income in a low tax jurisdiction. If the Ultimate Parent entity is resident in a jurisdiction that has not implemented the Income Inclusion Rule, the taxing rights are passed down the chain of ownership until they reach an entity resident in a jurisdiction that has implemented it.

The exception to this rule are split-ownership scenarios where a certain percentage (the paper suggests 10%) or more of the equity interests (being interests that give rights to profits) in a constituent entity are held by persons outside the relevant MNE group. Where these scenarios arise, the GloBE rules operate to ensure as much income as possible is taxed through the Income Inclusion Rule by allocating initial taxing rights to the “intermediate” parent entity, i.e. the entity in the chain of ownership immediately prior to the point at which interests diverge.

The Blueprint also suggests that additional rules may need to be developed in order to ensure the “integrity and neutrality” of the Income Inclusion Rules is maintained. The Blueprint suggests this rule could apply to a scenario where a jurisdiction provides incentives to an MNE Group to relocate their Ultimate Parent entity to its jurisdiction and the incentives offered compensate the group for the additional tax payable under the Income Inclusion Rule. Tax-motivated inversions are another area where the Blueprint suggests further rules may need to be developed.

GloBE: Undertaxed Payment Rule

The Income Inclusion Rule is supported by the Undertaxed Payment Rule, which acts a backstop to deal with circumstances where the Income Inclusion Rule is unable, by itself, to bring low tax jurisdictions in line with the minimum rate.

The aim of Undertaxed Payment Rule is to take the as yet unaddressed under taxation of income in a low-tax jurisdiction and allocate the taxing rights over that income to other jurisdictions by:

  1. first assigning the top-up tax due to those group entities who make direct payments to the low-tax jurisdiction; and
  2. if necessary, assigning any remaining top-up tax to those group entities who do not make a direct payment to the relevant low-tax jurisdiction but are in a net-intragroup deduction position.

The Undertaxed Payment Rule acts in a supporting role to the Income Inclusion Rule, examples of when the Undertaxed Payment Rule would be triggered include where:

  1. Group entities are located in low tax jurisdictions which are owned directly and indirectly (in part or in full) by entities resident in jurisdictions that have not implemented the Income Inclusion Rule; or
  2. The jurisdiction in which the Ultimate Parent Entity of an MNE Group is resident is a low tax jurisdiction (in which case there are no entities in the chain of ownership that can apply the Income Inclusion Rule).

Which jurisdictions should be allocated taxing rights where there is interaction between the Income Inclusion Rule and the Undertaxed Payment Rule due to split ownership of a constituent entity can be complex. The Blueprint identifies a number of these potential interactions and recommends that additional rules be developed to address these scenarios.

GloBE: Switch-Over Rule

The Switch-Over Rule would be a mechanism for enabling jurisdictions to overturn treaty obligations where they have committed to exempting amounts attributable to a foreign permanent establishment under a double tax treaty agreed with another state.

The Switch-Over Rule is necessary because exempt branches are treated as constituent entities under the GloBE rules and therefore essentially treated like subsidiaries. This ensures that the income of exempt branches cannot be ‘blended’ with higher-taxed income in the ‘Head Office’ jurisdiction.

Under the top down approach applied by the Income Inclusion Rule, where no entity in the chain of ownership is resident in a territory that has implemented the Income Inclusion Rule, taxing rights could be handed to the Head Office jurisdiction of an entity to apply them to the income of a branch established in a low tax jurisdiction,

GloBE: Jurisdiction ETR

GloBEJurisdiction ETR – Overview

We have outlined how taxing rights over income in a low tax jurisdiction are assigned to other jurisdictions. However, the first key step under the GloBE rules is to calculate whether a jurisdiction is regarded as being undertaxed.

The critical component of this computation – what is the minimum acceptable ETR – has yet to be decided. Understandably the Inclusive Framework see that as a decision for the politicians to make, not the technocrats. The illustrative examples provided by the Blueprint have assumed minimum rates that range between 10% – 12%.

A notable feature of the GloBE design is that ETRs are calculated on a jurisdictional basis. This had been the subject of some debate amongst the Inclusive Framework, the alternative being to calculate on a global blended basis thereby allowing taxes paid in jurisdictions with tax charges in excess of the minimum rate to shield low taxed income.

A large portion of the Blueprint is dedicated to the computation of these ETRs. Broadly, the aim is to arrive at a fractional calculation for each jurisdiction comprised of Covered Taxes as the numerator and Covered Income as the denominator.

Pillar Two seeks to adopt a broad definition for what are considered as Covered Taxes with a view to avoiding any legalistic or technical analysis when computing ETRs. In doing so, Pillar Two emphasises the need to consider the form and intention of the tax, irrespective of the name and mechanics of how a tax is applied.

Covered Taxes are those that are applied to an entity’s income or profits, but with special rules to reflect the diversity of taxes applied across the world, particularly where taxes are applied in lieu of a corporate income tax (such as Saudi Arabian Zakat). Notably, DSTs are not considered to be Covered Taxes as the Blueprint considers that they are generally designed to apply to revenue in addition to corporate income taxes levied by a jurisdiction (and therefore in the OECD’s view fails to satisfy the “in lieu” test). As such, the threat of double taxation looms if Pillar One is not implemented in unison.

The calculation of Covered Income under the Blueprint suggests groups would need to prepare separate computations for GloBE purposes; the starting point being the profit or loss positon for accounting purposes subject to a limited number of adjustments which are unlikely to fully align with local corporate income tax calculations. The adjustments to the Tax Base used to compute the ETRs are for the most part to ensure that they are logically aligned with the Covered Taxes.

GloBEJurisdiction ETR – Substance based carve-out

Taking inspiration from GILTI’s deduction for qualifying business asset investment (QBAI), the GloBE tax base includes a formulaic substance based carve out calculated as a percentage of payroll costs and  a percentage of tangible asset depreciation. The rationale behind this is that the profits generated from tangible assets and personnel in a jurisdiction are less likely to pose a base erosion risk.

What percentages of payroll costs and tangible asset depreciation are taken into account in determining the carve-out is again a decision reserved for the politicians.

An ongoing area of discussion within the Blueprint is the impact of the carve out on Covered Taxes; whether Covered Taxes borne on Covered Income against which the carve-out is deducted should also be taken out of the GloBE tax base. A decision does not appear to have been reached on this point yet.

GloBEJurisdiction ETR – Use of losses

A critical element of the GloBE base, particularly given the current economic environment, will be the extent to which losses are taken into consideration. Losses arising within the regime are carried forward indefinitely and can be carried back where the jurisdiction in which they arise permits this for local tax purposes.

The Blueprint expressly acknowledges that GloBE losses are not expected to track local tax losses, so restrictions on the use of losses and time limited expirations for local tax purposes should not impact the GloBE position.

Interestingly, brought forward losses are only factored into the GloBE base of a jurisdiction if its ETR is below the minimum rate. Therefore, where losses are utilised for local tax purposes but the ETR remains above the minimum rate (e.g. a 50% loss restriction for local tax purposes in a jurisdiction with a high CIT rate) those losses would seemingly remain available for use in future period for GloBE purposes.

Whilst losses arising within the GloBE regime are carried forward indefinitely, it is unclear the extent to which pre-regime losses would be admitted into the regime. Earlier drafts of the Blueprint tentatively suggested a 3 year lookback period on entry into the regime. The version released on 12 October reserves judgement recognising the issue as an area requiring further work, with the suggestion that a simplified approach to computing eligible pre-regime losses is the preferred method, rather than retrospectively calculating GloBE tax bases.

GloBEJurisdiction ETR – Local tax carry forwards, IIR tax credit

The carry-forward rules are designed to smooth the ETR of the jurisdiction over a period of time, irrespective of whether fluctuations in the ETR arise from temporary or permanent differences. As such, the GloBE regime would operate in a similar fashion as the Alternative Minimum Tax that applied to US corporations prior to US tax reform in 2017. When tax is paid in a jurisdiction in excess of the minimum rate, the excess is carried forward as a “local tax carry forward”. This can be called upon when the jurisdiction’s ETR falls below the minimum rate, ensuring local tax volatility does not trigger a top-up tax liability in the low years.

Similarly, when a jurisdiction’s ETR is below the minimum rate which leads to a top tax charge being applied to its income under the Income Inclusion Rule, an IIR tax credit is generated up to the amount of top-up tax previously levied if that jurisdiction later incurs local tax in excess of the minimum rate.

Because the IIR tax credit is effectively a refund of minimum tax prematurely paid in a year where a jurisdiction appeared to be a low tax jurisdiction, the IIR tax credit can be offset against top-up tax liabilities arising in any jurisdiction.

Whilst both of these aspects of the GloBE rules will be welcome news for taxpayers, there is likely to be a time limit on their benefit, with the Blueprint suggesting a 7 year period for carrying forward excess local tax and looking back for IIR tax paid to create IIR tax credits.

GloBE: Top-up tax

GloBETop-up tax – Under the Income Inclusion Rule

The operation of the Income Inclusion Rule is relatively straight forward. Once a jurisdiction has been identified as undertaxed, the difference between its ETR and the minimum rate, expressed as a percentage, is applied to the appropriately identified parent entity’s share of the undertaxed income (e.g. if a wholly owned subsidiary has an ETR of 7%, assuming a minimum rate of 10%, top-up tax at 3% should be applied at the level of the parent on the subsidiary’s undertaxed income).

GloBETop-up tax – Under the Undertaxed Payment Rule – two step approach

Where the Income Inclusion Rule is unable to be applied to all of the income arising in a low tax jurisdiction, the Undertaxed Payment Rule kicks in. The way in which it imposes top-up tax is more complex, broadly doing so in a two-step approach (which the Blueprint refers to as allocation keys).

The first step captures group entities which have made direct payments to entities resident in the low tax jurisdiction. Payments of any description are relevant here. To the extent those paying group entities are resident in jurisdictions that have implemented the Undertaxed Payment Rule and are not also low tax jurisdictions, the taxing rights over the income arising in the low tax jurisdiction is allocated on a pro-rata basis.

If there is still top-up tax to be applied after the first step, the second step is applied. The second step would typically be necessary either because there are no group entities making direct payments which are resident in non-low tax jurisdictions which have implemented the Undertaxed Payment Rule, or because a cap has taken effect (discussed further below).

The second step shares the taxing rights of the remaining top-up tax required to be applied between group entities that are resident in non-low tax jurisdictions which have implemented the Undertaxed Payment Rule, and have net intra-group deductions. The top-up tax is allocated on a pro-rata basis by reference to those net intra-group expenses.

GloBETop-up tax – Under the Undertaxed Payment Rule – double cap protection

The Undertaxed Payment Rule applies two caps to protect against over taxation of subsidiary entities. The first cap ensures that the top-up tax imposed on an entity is not greater than the local tax effect of the payments which led to the top-up tax being allocated.

For example, an entity resident in a jurisdiction that applies a CIT rate of 20% and is caught under the first step making a direct payment of 100 to a low tax entity can only have a maximum of 20 top-up tax imposed upon them under the first cap. Similarly, under the second step, the maximum top-up tax allocable would be an entity’s net intragroup deduction multiplied by its local tax rate.

The second cap only applies where the Undertaxed Payment Rule is applied to entities resident in the same jurisdiction as the Ultimate Parent Entity. Where the Ultimate Parent Entity is resident in a low tax jurisdiction, the Undertaxed Payments Rule would always apply in the first instance as no other entity sits higher in the chain of ownership, and therefore there is no other jurisdiction to which taxing rights can be allocated under the Income Inclusion Rule.

Recognising that the Undertaxed Payments Rule is less accommodating, with no IIR tax credit to provide protection against timing differences, the second cap limits the top-up tax that can be applied under the Undertaxed Payment Rule to the Ultimate Parent Entity’s jurisdiction to the net amount of intra-group income it receives in the period tax effected at its local tax rate. As such, Pillar Two does not impact the taxation of third party income received in the Ultimate Parent Entity’s jurisdiction.

GloBE: Possible simplification options

A striking feature of the Blueprint is the sheer volume of computational complexity it imposes on MNE Groups. The proposals would fundamentally re-shape international tax compliance. In recognition of this, the Blueprint suggests the following possible simplification measures to reduce the compliance burden:

  1. Country-by-country reporting safe-harbour: An adjusted measure of the data currently produced for CbCR purposes to ascertain at a high level whether a jurisdiction’s ETR is below the minimum rate.
  2. De minimis profit exclusion: removing jurisdictions which generate less than a certain percentage (e.g. 2.5%) of an MNE Group’s profit and limiting the potential number of jurisdictional ETR calculations required (a maximum of 40 if a 2.5% de minimis is applied). This measure could also be structured as a fixed de minimis threshold (e.g. EUR 100,000), or a combination (the lesser of 2.5% of group profit and EUR 100,000.
  3.  Single jurisdictional ETR to cover several years: Where a jurisdiction’s ETR is above a certain threshold rate (which would be higher than the minimum rate), an ETR calculation would not be required for anywhere between 3 to 5 years.
  4. Tax administration guidance: working with tax administrations around the world post implementation to identify jurisdictions with ETRs consistently in excess of the minimum rate with a view to implementing pre-approved lists of low-risk jurisdictions that could enable all MNE Groups, or perhaps MNE Groups in certain sectors, to exclude these jurisdictions from their GloBE calculations.

GloBE: GILTI coexistence and US BEAT implications

Another area where the Blueprint acknowledges further work is required is the interaction between the GloBE rules and the US GILTI regime. The text of the Blueprint suggests the Inclusive Framework is willing to give way to GILTI allowing it to take priority over the GloBE rules on the proviso that the US does not subsequently water down the GILTI regime through a narrowing of its tax base or reducing the effective applicable rate.

The US GILTI regime is different in some key respects from the proposed GloBE rules.  First, GILTI treats all controlled foreign corporations as one CFC, permitting the netting of profitable and loss CFCs, as well as high taxed and low taxed CFCs.  Second, GILTI applies only to the return in excess of 10% of QBAI, which means the deemed ordinary return on hard assets is not subject to US corporate income tax.

For US headquartered groups this could potentially mean that the GloBE rules do not affect them at all, or more likely they would be allowed to remove income within the scope of GILTI from its GloBE base leaving them to compute GloBE on subsidiaries outside the scope of GILTI or subpart F.

A more difficult question is how the regimes interact where the US is an intermediate parent. Giving priority to GILTI would mean reversing the top down approach applied by the Income Inclusion Rule and ensuring the US always has priority taxing rights, regardless of where it sits in the chain of ownership.

The discussion of the GILTI co-existence issue within the Blueprint signs off with a plea to the US in relation to the operation of its Base Erosion and Anti-abuse Tax (BEAT) which potentially looks like the makings of a political deal. The quid pro quo of giving priority to GILTI would seem to be that the US switches off its BEAT tax in respect of payments that are subject to the Income Inclusion Rule.


The Subject To Tax Rule: Overview

The GloBE rules take up much of the text of the Blueprint. The Subject to Tax Rule needing just 19 pages to explain could have just as great an impact on MNE Groups’ operating structures.

The premise behind the Subject to Tax Rule is simple; namely, where a jurisdiction does not exercise its taxing rights over the receipt of certain payments to an adequate extent, the jurisdiction of the payer has the right to claw back those taxing rights, negating in part the relief it allows for the deduction of the payment for local tax purposes.

Unlike the Income Inclusion Rule or the Undertaxed Payment Rule, the Subject to Tax rule is not concerned with ETR; instead it looks to the nominal tax rate that applies to certain payments between connected persons.

The Subject To Tax Rule: Covered payments

The Subject to Tax Rule only applies to particular covered payments made between connected persons. Covered payments are those that are perceived to carry heightened base erosion and profit shifting risk:

  • Interest;
  • Royalties; and
  • Other payments for mobile factors such as capital, assets, or risks:
    • Franchise fees or other payments for the use of or right to use intangibles in combination with services (e.g. payments for the use of software where the provider also provides ancillary support);
    • Insurance or reinsurance premiums;
    • Guarantee, brokerage or financing fees;
    • Rent or any other payment for the use of right to use moveable property;
    • Payments for services such as marketing, procurement, agency or other intermediary services where their value primarily derives from the use of an intangible asset (e.g. a customer list).

Where a payment is comprised of multiple elements (e.g. a royalty plus a payment for service), the rule would only apply to the constituent parts that are within scope.

The Subject To Tax Rule: Nominal rate trigger, top up approach

The Subject to Tax Rule would apply where the recipient of a payment is subject to tax at an amount less than the nominal trigger rate. Where the rule applies, the payer jurisdiction would impose a ‘top-up’ withholding tax.

Like the minimum rate under the GloBE rules, what the nominal trigger rate should be is reserved for the politicians, though the Blueprint only uses a 7.5% rate in the illustrative examples it provides. As reflected in those examples, the nominal rate trigger is expected to be less than the minimum rate under the GloBE rules, on the basis that it is applied to gross income rather than net profits.

Whether a payment is subject to tax at less than the nominal rate would have regard to the tax rate directly applied (and, for this purpose, the taxes taken into account are proposed to be ‘covered taxes’ for the purposes of the OECD Model Tax Convention which may therefore exclude certain revenue-based taxes like digital services taxes), but also other contextual features of the recipient’s local tax system such as preferential rates or special exemptions, exclusions or reductions. Although, ‘general’ deductions not directly linked to the item or income or category of payee would not be relevant for the purposes of the Subject to Tax Rule

An example is provided of a tax system that applies a 20% CIT rate but exempts 80% of all royalty receipts. Here the Blueprint considers that the rate applied to royalties is 4%. As this is below the 7.5% nominal trigger rate used for illustrative purposes, tax equal to 3.5% of the payment can be collected by the payer’s jurisdiction.

The Blueprint also discusses the relatively complex interaction between the Subject to Tax Rule and existing credits or exemptions under bilateral treaties. The Blueprint suggests that, where the source jurisdiction applies a top-up tax, the jurisdiction of residence may need to proportionately limit the exemption or credit that it provides under the relevant treaty such that the combined tax rate in the residence and source jurisdictions is equal to the agreed minimum rate.

The Subject To Tax Rule: Excluded payments, excluded entities & the materiality threshold

The Blueprint proposes an exclusion for ‘low return payments’ in order to minimise compliance burden. This covers payments that are calculated by reference to the costs incurred by the payee or can be calculated on a cost plus basis where the margin is no higher than an agreed percentage (i.e. irrespective of the actual transfer pricing method applied).

On the other hand, certain entities or sectors may be excluded from the Subject to Tax Rule altogether. However, it is not clear whether these exclusions would align with those applied for the purposes of the GloBE rules, the Blueprint suggesting that this will be updated as ‘discussions develop’ with the ‘option to align the treatment’ with the GloBE exclusions.

Regarding materiality thresholds, unlike the GloBE rules, it is not yet clear whether the Subject to Tax Rule would apply to MNE Groups with less than EUR 750m of global revenue. The Blueprint suggests that micro, small and medium sized enterprises should be out of scope, noting the EU’s definition as a possible basis, but seems inclined not to scope out groups larger than this but below the EUR 750m threshold.

Other materiality thresholds suggested are a de minimis payment threshold (possibly requiring the Subject to Tax Rule to be assessed in retrospect) and a ratio threshold whereby covered payments are only within scope if they exceed a given ratio relative to the proportion of total expenditure (similar to the BEAT base erosion percentage).

The Subject To Tax Rule: Comparison to the BEAT

The US BEAT is broader than the Subject to Tax Rule in many respects.  The BEAT can potentially deny a deduction from a US corporation to a foreign related party if the payment gives rise to a deduction in the United States.  The BEAT does not look to the tax rate of the payee, nor does it take into account potential double and triple taxation if the payment is also taxed as GILTI or subpart F income.  A taxpayer subject to the BEAT (base erosion percentage of 3% or greater (or 2% for certain financial services companies)) can also lose credits, as foreign tax credits and most domestic business credits for domestic activities can increase their BEAT liability.


In terms of the implementation of the suggested rules, the Blueprint acknowledges that both the Subject to Tax Rule and the Switch-Over Rule would require changes to existing bilateral tax treaties. These could be implemented through bilateral negotiations and amendments to individual treaties or more efficiently through a multilateral instrument. Mutual agreement procedures could then apply to any disputes arising.

However, the Income Inclusion Rule and the Undertaxed Payment Rule could be implemented just through changes to domestic law. Further guidance and mechanisms would be developed to ensure consistent, comprehensive and coherent application of these rules and effective overall coordination of their application across multiple jurisdictions. This would include model legislation and guidance together with a multilateral review process.

Finally, the Inclusive Framework will also explore the development of a multilateral convention which could contain provisions for dispute prevention and resolution concerning the application of the GloBE rules as well as provisions for exchange of information between tax administrations.  It is worth noting the United States does not enter into multilateral tax conventions (other than information exchange).


The Pillar One and Two Blueprints are now public documents ready to be analysed and assessed by businesses. Their contents reflect an extraordinary amount of work undertaken by the Inclusive Framework, made all the more remarkable by the difficult circumstances 2020 has brought upon us.

It is not yet beyond doubt whether the Blueprints will become law, with the role of politicians in reaching consensus on the proposals just beginning. However, like the BEPS Action reports that came before them, the documents represent an evolution of the international tax framework that will influence tax policy for years to come.

Where we end up remains to be seen but we can be sure about one thing, at 11am (CEST) on 12 October 2020 International Tax changed forever.

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International Tax: Pillar One – Overview of ‘the Blueprint’

The Baker McKenzie Global Tax Team has undertaken an in-depth analysis of the ‘Blueprint’ for the Pillar One proposal to produce a digestible summary of everything you need to know.

To read our summary of the Blueprint for Pillar Two please click here.



Marnin Michaels is a partner in Baker & McKenzie´s Zurich office. He has been practicing for more than 15 years in the areas of tax and international private banking and handles insurance matters relating to tax investigations and wealth management. He counsels clients on US withholding tax and qualified intermediary rule, as well as money laundering avoidance legislation. Mr. Michaels was a member of the firms Steering Committee leading the US Department of Justice Initiative for Swiss Banks. In the end, the firm acted for 45 banks and the project won litigation firm of the year by American Lawyer Magazine.


Salim Rahim is the chair of the Firm's Global Transfer Pricing Group. He has extensive experience in transfer pricing matters, including transfer pricing planning, compliance, and tax controversy. He has represented clients in all administrative phases of a controversy. Salim has also represented companies in various alternative dispute resolution forums, particularly the Advance Pricing & Mutual Agreement Program. Salim is a frequent speaker on transfer pricing matters in seminars sponsored by various organizations and universities. He also participates in programs sponsored by Bloomberg BNA, Alliance for Tax, Legal and Accounting Seminars (ATLAS), Tax Executives Institute (TEI), International Tax Review, Organization for International Investment and the American Bar Association.


Clarissa Giannetti Machado Miras joined the Firm in 1999 and became partner in 2007 .
She is the Head of the tax practice group in Brazil and the Head of the Pro-Bono Committee, being a member of the Social Responsibility team of the firm. Her focus is tax consulting on corporate income and other federal taxes. Clarissa has extensive experience in the elaboration and analysis of global transfer pricing analysis and its effects vis-à- vis the local legislation. Clarissa has a wide breadth of experience in the assistance of clients for the development of efficient structures in M&A transactions, local and international restructurings, real estate and financing transactions. She also advises individuals on wealth management matters.
*Trench Rossi Watanabe and Baker McKenzie have executed a strategic cooperation agreement for consulting on foreign law.


Brendan Kelly is a partner in the Tax group, and based in Baker McKenzie’s Shanghai office. He has over 15 years of tax advisory experience. He is ranked as a leading tax lawyer by top legal directories, including Chambers Asia Pacific, PLC Which lawyer? and Legal 500 Asia Pacific. Prior to joining the Firm, Mr. Kelly worked as a partner in the Tax and Business Advisory Services Group at the Beijing office of one of China’s biggest accounting firms. His professional affiliations include serving on the editorial board of China Tax Intelligence—one of the premier China tax publications—and on the board of governors for the American Chamber of Commerce in Beijing.


Joshua D. Odintz is a partner in and on the management committee of Baker McKenzie’s North American Tax Practice Group. Joshua held high-level government positions with both the US Department of the Treasury and the Senate Finance Committee. He previously served as a Senior Advisor for Tax Reform to the Assistant Secretary at the US Department of the Treasury, where he advised Senior Treasury officials on tax reform options and issues. Joshua also served as the Chief Tax Counsel to the President’s National Commission on Fiscal Responsibility and Reform, and was instrumental in formulating the tax proposals that were contained in the Commission’s report, entitled the Moment of Truth. Additionally, Joshua served as the Acting Tax Legislative Counsel at the Treasury. Joshua is a frequent speaker at IFA, TEI, ABA Tax Section, NY State Bar Tax Section, Practicing Law Institute and Federal Bar Association tax meetings and conferences.


Caroline Silberztein is nominated by France on the list of independent persons of standing authorized to serve as arbitrators for the application of the European Arbitration Convention. She is a member of the United Nations Sub-Committee on Transfer Pricing and continues to be involved in policy dialogue with OECD and non-OECD countries. She is a visiting Professor in several European Universities. She was the Head of the OECD Transfer Pricing Unit from 2001 to 2011.