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136 members approve a revised statement which includes a plan for implementing the two-pillar solution

In brief

Today, 8 October 2021, 136 member jurisdictions of the OECD’s Inclusive Framework signed up to a revised Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy (the “Statement“). The Statement confirms a number of issues left outstanding from the previous statement on 1 July. Notably, it confirms the amount of residual profits to be redistributed under Pillar One, the rates of tax under the new Global Minimum Tax regime and subject to tax rule, the calculation of the substance‑based carve‑out, and the timing of the implementation of the plan. The Inclusive Framework has been able to reach near unanimous political agreement on the broad architecture of the Two-Pillar solution and will now turn to the technical challenges of agreeing the finer details ahead of publication of implementation instruments. The Statement indicates draft model legislation for Pillar Two should be expected by the end of November 2021, whilst the text of a multilateral convention to implement Pillar One is intended to be published in “early 2022.”

What has been agreed?

136 jurisdictions out of the 140 that make up the Inclusive Framework have agreed to the Statement, which communicates agreement on some of the key points that remained outstanding from the 1 July announcement, though there are still more issues to be worked through in the coming months

Notably, all EU states that are members of the Inclusive Framework have now agreed to the Statement; Ireland, Hungary, and Estonia all signed up in the last 24 hours having secured the concessions they were seeking in the final text. Notably, Cyprus, which is not a member of the Inclusive Framework, is now the only EU state whose support remains outstanding.

Four Inclusive Framework jurisdictions did not support the Statement today: Kenya, Nigeria, and Sri Lanka are joined by Pakistan, which previously supported the 1 July announcement.

The key components of the latest agreed position can be summarized as follows:

Pillar One

  • Pillar One scope remains unchanged: As previously indicated, the Pillar One regime will apply to MNE Groups with global consolidated turnover of more than EUR 20bn and a net profit margin of more than 10% (profit before tax / turnover). The statement indicates these figures will be calculated using an “averaging mechanism”, but does not provide any detail on how this would work in practice.
  • Potential for Pillar One scope to increase in the future remains: The revenue threshold may decrease to EUR 10bn, subject to successful implementation of tax certainty mechanisms, which will be determined by a review that is to be completed within 8 years from implementation of the Pillar One regime. 
  • Segmentation exception remains: In exceptional circumstances, an MNE Group may be required to apply the regime to a business segment separately disclosed within its financial statements, where the overall group is not otherwise subject to the regime.
  • Exclusions remain unchanged: “Extractives” and “Regulated Financial Services” will be excluded from the scope of Pillar One.
  • Amount A confirmed: 25% of an MNE Group’s residual profit (i.e. profit in excess of 10% of revenue) will be allocated to market jurisdictions with sufficient nexus using a revenue-based allocation key.
  • Nexus remains unchanged: Jurisdictions are eligible to receive allocations of profit under Amount A where the relevant MNE Group derives revenue of at least EUR 1 million from that jurisdiction (or at least EUR 250k for jurisdictions with a GDP of less than EUR 40 billion).
  • Work on Amount B continues: No agreement has yet been reached on the implementation and design of Amount B, which intends to simplify the arm’s length principle for baseline marketing and distribution activities. Work on Amount B is intended to be completed in 2022.
  • Draft legislation in 2022: Pillar One is intended to be implemented through a multi-lateral convention (MLC). The draft text of an MLC is expected to be published in early 2022, with the aim of a signing ceremony being held in mid-2022 so that the regime can take effect in 2023.
  • The MLC will require removal of all DSTs and other similar measures: The Statement confirms that parties to the MLC will be required to remove all Digital Services Taxes and other relevant similar measures with respect to all companies, and to commit not to introduce such measures in the future.
  • “Standstill” prevents implementation of new DSTs and other relevant similar measures: The Statement provides that no newly enacted Digital Services Taxes and other relevant similar measures are to be imposed on any company from 8 October 2021 until 31 December 2023 (or the date the MLC comes into force, if earlier). The Statement adds that as it concerns existing Digital Services Taxes and other relevant similar measures, the modality for their removal will be “appropriately coordinated”.
  • Some open issues: Today’s Statement leaves a number of significant Pillar One open issues unaddressed, including elaboration of the revenue sourcing rules, the design of the marketing and distribution profits safe harbour, the details for identifying surrender jurisdictions obligated to provide double taxation relief for Amount A allocations, the mechanics of the compliance procedures, and the definition of unilateral measures required to be removed.

Pillar Two

  • Minimum rate confirmed: The minimum effective tax rate under the new global minimum tax regime (referred to as the “GloBE rules“) will be 15%. The earlier reference to “at least 15%” was dropped from this statement.
  • Substance‑based carve-out confirmed with an extension of the transition period: The substance‑based carve‑out applied by the GloBE rules will initially exempt profits equal to a 10% return on payroll costs and 8% of the carrying value of tangible assets deployed within a jurisdiction. These fixed returns will reduce over a 10-year transition period: a 0.2% reduction each year for both elements for the first 5 years, with the fixed return on tangible assets decreasing by 0.4% for the second half of the transition period, whilst the fixed return on payroll reduces by 0.8%. After the end of the 10‑year transition period the fixed return will be 5% for both components of the carve-out.
  • Distribution tax timeframe confirmed: Taxes borne under distribution tax systems (such as that applied by Estonia) will be regarded as a Covered Tax in the year profits arise for the purposes of calculating the effective tax rate under the GloBE rules if the relevant earnings are distributed within 4 years.
  • GloBE rules remain unchanged: As previously indicated, the GloBE rules will consist of two interlocking rules: an Income Inclusion Rule (“IIR”) and an Undertaxed Payment Rule (“UTPR”), which will impose top-up tax with respect to the profits of constituent entities of an MNE group that have an effective tax rate in a jurisdiction that is below the minimum rate of 15%.
  • But implementation of the UTPR delayed: Implementation of the more complex UTPR will be delayed by 12 months, with the IIR expected to be effective in 2023 and the UTPR taking effect in 2024. MNE Groups that are in the early stages of their international operations will receive a reprieve from the UTPR of up to 5 years if their foreign tangible assets are less than EUR 50m and they operate in no more than 5 jurisdictions.
  • De minimis exclusion confirmed: A de minimis exclusion will apply for operations in jurisdictions that have revenue of less than EUR 10m and profits of less than EUR 1m. Further simplifications are intended to be introduced, including the development of safe harbours, to ensure the rules are administered on a proportionate basis.
  • GloBE threshold remains unchanged: The GloBE rules will apply to groups with revenues of EUR 750m or more, although jurisdictions are free to apply the IIR to groups with revenues below this threshold.
  • Previous exclusions remain: As communicated previously, international shipping income will be excluded from the rules based on the definition provided under the OECD Model Tax Convention. Likewise, Government entities, international organisations, non-profit organisations, pension funds, and investment fund structures are also intended to be excluded from the GloBE rules.
  • No clarity on GILTI co-existence: while the Statement refers to the need to ensure a level playing field requiring further consideration to be given to the co-existence with US GILTI, no further information has been provided on how the GloBE rules will interact with the US’s GILTI regime.
  • Implementation of the GloBE rules remains non-mandatory: As communicated previously, not all members of the Inclusive Framework are required to implement the GloBE rules, but those that do must implement and apply them on a basis that is consistent with the model rules that will be developed by the Inclusive Framework.
  • Subject to Tax Rule rate confirmed: The Subject to Tax Rule (STTR), which applies in priority to the GloBE rules, will reduce or eliminate treaty withholding tax relief on interest, royalty, and other forms of mobile payments that are subject to a nominal rate of tax in the payee jurisdiction of less than 9%.
  • Timing of model implementation instruments confirmed: Model legislation for the GloBE rules and a model treaty provision for the STTR are expected to be published by the end of November. A multilateral instrument for introducing the STTR into treaties is expected to be published by mid‑2022, and a framework for coordinated implementation of the GloBE rules (possibly to include a multilateral convention) will be developed by the end of 2022.
  • Some open issues: As under Pillar One, a number of open issues remain under Pillar Two after today’s Statement, including the methodology for sharing top­‑up taxing rights under the UTPR, the mechanisms for addressing timing differences in the ETR calculation, the interaction with GILTI, the scope of payments covered by the STTR and the nominal rate adjustments required to apply that rule, and the manner in which the rule coordination agreement will be implemented.

More work is to be expected in the coming months, shifting focus to local country implementation and finalizing details. The Statement is non-committal with respect to plans for consulting with stakeholders in light of the extremely ambitious proposed implementation schedule. As always, we will keep you informed on any new developments.


Mounia Benabdallah is a principal in Baker McKenzie’s International Tax Practice Group. She joined Baker McKenzie in 2006 and has practiced in the Firm’s offices in Amsterdam, Chicago and New York. As an attorney at law she is admitted to the Netherlands Bar. Mounia is repeatedly recognized as leading advisor in ITR’s Women in Tax Leaders guide. Because of her strong US focus, Mounia is based in New York and member of the Global Reorganizations Practice Group. Mounia mainly advises US multinationals on the interplay between US international tax law, European tax law and Netherlands tax law in global restructuring projects, with a strong focus on global (OECD BEPS) and European tax policy developments.


Mary Bennett is a Senior Counsel in Baker McKenzie's Tax Practice Group. She has more than 40 years of international tax experience, including 30 years of private practice as well as senior positions with the US Treasury and the Organization for Economic Cooperation and Development (OECD). Ms. Bennett advises companies on international tax planning, controversy, and policy matters. She has particularly deep experience in tax treaty, transfer pricing, and international dispute resolution issues. Ms. Bennett regularly assists clients on tax policy issues before the Treasury Department, Congress, the OECD, the EC, and the UN.


Nick Evans is a senior tax adviser in Baker McKenzie London office.

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