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October 12, 2020

OECD BEPS 2.0 blueprint reports released

The OECD Inclusive Framework on BEPS October 12 published "blueprints" responding to tax challenges arising from the digitalization — on Pillar One, dealing with the reallocation of taxing rights, and Pillar Two, introducing a global minimum tax — and said work will continue into the middle of 2021. For the first time in 11 months, the OECD also requested stakeholder comments on the two initiatives, opening a public consultation with comments due by December 14 (to

In a cover statement on the release of the blueprints, the 137 participating countries said, "We agree to swiftly address the remaining issues with a view to bringing the process to a successful conclusion by mid-2021 and to resolve technical issues, develop model draft legislation, guidelines, and international rules and processes as necessary to enable jurisdictions to implement a consensus based solution." The cover statement on the reports said, "despite their differences, and the COVID-19 pandemic, which has had an impact on the work," the members of the Inclusive Framework "have made substantial progress towards building consensus." The ongoing work will be discussed during the next meeting of G20 Finance Ministers and Central Bank Governors on October 14.

Angel Gurría, OECD Secretary-General, said during a news conference that the project remains a priority in the time of COVID because countries will view as good sources of revenue companies that not only didn't suffer but thrived during the pandemic. "Those are going to be the targets" of countries looking for resources to "make ends meet," he said. Unilateral digital services taxes (DSTs), retaliatory tariffs, and resulting trade tensions — which has been a political pattern seen over the past year or more — will result in further losses of GDP. That "would have been bad pre-COVID, but now it would be quite unacceptable," the Secretary-General said.

Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, said COVID took a toll in terms of the amount of attention countries were able to devote and the dynamic of the negotiations, preventing the type of sideline conversations between officials that can facilitate agreement. Still, with the release of the reports, it is the first time something like a common tax base worldwide is being created, he said.

Of great interest regarding the project is how it will proceed based on the result of the US presidential election. The current administration this summer urged a pause in the OECD negotiations to develop a new regime for taxing local profits of global companies under Pillar One, while it endorsed and urged the work on Pillar Two to continue. The Secretary-General said today that regardless of the results of the November 3 election, the process will be able to move forward. He said the United States has been working with OECD officials and added technical comments and expertise to the work and are part of what was being presented.

More politically sensitive decisions on Pillars One and Two are referred to in the cover statement on the public consultation. It is accompanied by specific questions that the OECD would like to see addressed in public comments. However, the consultation document, referring to Pillar One and Pillar Two, states that "there are a number of open issues on key features of the solutions that can only be resolved through political decisions and discussions are ongoing within the membership of the Inclusive Framework to resolve these pending issues." It adds the questions being addressed to the public are "on the technical aspects of the Blueprint that may help to reduce cost and complexity and improve tax certainty in the administration of Pillar One for both tax administrations and taxpayers alike."


The key elements of Pillar One are a new taxing right for market jurisdictions over a share of residual profit calculated at an MNE group (or segment) level (Amount A); a fixed return for certain baseline marketing and distribution activities taking place physically in a market jurisdiction, in line with the ALP (Amount B); and processes to improve tax certainty through effective dispute prevention and resolution mechanisms.

The calculation and allocation of Amount A will be delivered through a formula that will involve:

  • Step 1: A profitability threshold to isolate the residual profit potentially subject to reallocation and limit any interactions between Amount A and the remuneration of routine activities under conventional transfer pricing rules.
  • Step 2: A reallocation percentage to identify an appropriate share of residual profit that can be allocated to market jurisdictions under Amount A ("allocable tax base").
  • Step 3: An allocation key to distribute the allocable tax base amongst the eligible market jurisdictions.

The three-step formula to determining the Amount A quantum could be delivered through two approaches: a profit-based approach or a profit margin-based approach, the report said.

The blueprint on Pillar One represents a substantial advancement in the technical workings of Amounts A and B and around the process for tax certainty since the Inclusive Framework released its last report on Pillar One in late January. The countries said they would now focus on resolving remaining political and technical issues, including those around scope, quantum, the choice between mandatory and safe harbor implementation, and aspects of the new tax certainty procedures with respect to Amount A, and the scope and form of new and enhanced tax certainty procedures for issues beyond Amount A.

Pillar Two is designed to ensure that large internationally operating businesses pay a minimum level of tax regardless of where they are headquartered, or the jurisdictions in which they operate. The principal mechanism is an income inclusion rule (IIR) — which, based on traditional controlled foreign company (CFC) rule principles, triggers an inclusion at the level of the shareholder where the income of a controlled foreign entity is taxed at below the effective minimum tax rate — and an undertaxed payments rule (UTPR) acting as a backstop. The minimum threshold rate has not yet been agreed to, but some participants have indicated it might be set around 12.5%. The UTPR is complemented by a switch-over rule (SOR) that "removes treaty obstacles from its application to certain branch structures and applies where an income tax treaty otherwise obligates a contracting state to use the exemption method." A fourth rule, called the subject to tax rule (STTR) would apply in the context of bilateral tax treaties and could serve to increase withholding rates on certain cross-border payments from high-tax to low-tax jurisdictions.

The report said the use of a country-by-country reporting (CbCR) threshold will exclude small and medium enterprises operating in more than one jurisdiction, and a EUR 750 million revenue threshold will put between 85% and 90% of MNE Groups outside the scope of the rules. "This, in turn, reduces the pressure on Inclusive Framework on BEPS members to provide carve-outs from the GloBE rules for SMEs that benefit from targeted domestic tax incentives," the report said.

Further technical work is required prior to finalization, which will also require political agreement on design features like the subject to tax rule and the GloBE rules including carve-outs, blending of high and low tax rates, rule order and tax rates where, at present, diverging views continue to exist, the report said.

The reports are available here:

Pillar One

Pillar Two

The cover statement is available here.


Contact Information
For additional information concerning this Alert, please contact:
Washington Council Ernst & Young
   • Any member of the group, at (202) 293-7474.