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February 11, 2022

OECD releases Pillar One public consultation document on draft nexus and revenue sourcing rules

Executive summary

On 4 February 2022, the Secretariat of the Organisation for Economic Co-operation and Development (OECD) released a public consultation document with draft rules on nexus and revenue sourcing in connection with Pillar One of the OECD/G20 project on Addressing the Tax Challenges Arising from the Digitalisation of the Economy (the so-called BEPS 2.0 project).

Pillar One involves the development of new nexus and profit allocation rules that assign a greater share of the taxing rights over global business revenue to the market jurisdictions. These new nexus rules are intended to apply solely for purposes of determining whether a jurisdiction qualifies for profit re-allocation under Amount A of Pillar One and are not intended to affect the nexus determination for any other tax or non-tax purpose.

Under the draft model rules included in the consultation document, nexus in a particular jurisdiction is determined based solely on revenue arising there and revenue is to be sourced on a transaction-by-transaction basis using a reliable indicator or, as a back-stop, a specified allocation key. Different sourcing rules, indicators and allocation keys are provided for the different categories of revenue that are identified in the draft rules (e.g., sale of finished goods, advertising services).

The consultation document includes footnotes describing the further explanation that will be provided in the commentary that will support the model rules.

The consultation document indicates that it is a working document released to obtain input from stakeholders. The release of the document does not reflect consensus of the Inclusive Framework member jurisdictions on the substance of the document. The OECD invites comments on the draft rules to be submitted in writing by 18 February 2022.

Detailed discussion


The OECD has been considering tax issues related to the digitalization of the economy since the outset of the original Base Erosion and Profit Shifting (BEPS) project in 2013. In 2019, the OECD launched the BEPS 2.0 project, which consists of Pillar One on new nexus and profit allocation rules and Pillar Two on global minimum tax rules.1 There are 141 jurisdictions participating in the BEPS 2.0 project through the Inclusive Framework.

In 2021, agreement was reached on key parameters of both pillars and an implementation plan.2 Of the 141 jurisdictions, 137 members of the Inclusive Framework have joined this agreement.

With respect to Pillar One, the agreed components include the following:

  1. The scope of Amount A will be multinational enterprises (MNEs) with global turnover above €20 billion and profitability above 10%, calculated using an averaging mechanism.
  2. Under Amount A, 25% of "residual profits," defined as profit in excess of 10% of revenue, will be allocated to market jurisdictions where the in-scope MNE has nexus using a revenue-based allocation key.
  3. A new special purpose nexus rule will permit allocation of Amount A to a market jurisdiction when the in-scope MNE derives at least €1 million (or €250,000 for certain smaller jurisdictions) in revenue from that jurisdiction.
  4. Revenue will be sourced to the end market jurisdictions where goods or services are used or consumed. In applying the sourcing rules, an in-scope MNE must use a reliable method based on the MNE's specific facts and circumstances.

In December 2021, the OECD announced plans to release Secretariat working documents in the coming months on the separate building blocks of Amount A in order to obtain stakeholder input. In addition, the OECD announced that for Amount B of Pillar One, a public consultation document is to be issued in mid-2022, with a public consultation event to follow the comment period.

On 4 February 2022, the OECD released a public consultation document on the nexus and revenue sourcing rules in connection with Amount A of Pillar One. The document includes draft model rules that once finalized will be the basis for the substantive provisions of the multilateral convention, as well as a template for domestic legislation, through which Amount A will be implemented. The document also includes in footnotes descriptions of the additional information to be contained in the commentary that will support the model rules.


Under the draft model rules, the nexus test is met for a period if the revenue of a Covered Group arising in a jurisdiction is equal or greater than €1 million for jurisdictions with annual Gross Domestic Product (GDP) equal to or greater than €40 billion, and €250,000 for jurisdictions with annual GDP of less than €40 billion. The nexus test applies solely to determine whether a Group Entity of a Covered Group is liable to tax charged in accordance with the Amount A rules in a given jurisdiction. It has no other tax or non-tax implications for any Group Entity of the Covered Group.

For purposes of the model rules, the term "revenue" refers only to revenue derived from third parties.

Revenue sourcing

The revenue sourcing rules are used to determine where revenue arises for purposes of Amount A. Under the draft model rules, revenue must be sourced on a transaction-by-transaction basis. Moreover, all revenue is required to be sourced.

The consultation document indicates that the transaction-by transaction approach will be explained in the Commentary. A transaction is the item that generates income. If there are different items or services contained in one invoice or contract and goods or services are sold in different jurisdictions in that one invoice or contract, then the allocation of the revenue must be in proportion to the revenue earned in each market, rather than an equal split. If the contract specifies different prices for the different locations, then these pricing differences must be taken into account.

The draft model rules set out categories of revenue. A transaction is categorized based on its ordinary character. A transaction comprising different elements that fall under more than one category is categorized based on its predominant character. A transaction that does not fit within any category of revenue is sourced according to the most analogous category of revenue. Revenues from supplementary transactions may be sourced according to the revenues from the main transaction.

The draft model rules set forth a series of revenue categories. The main categories are:

  • Sale of finished goods
  • Sale of digital goods
  • Sale of components
  • Provision of services
  • Licensing or sale of intangible property
  • Sale or lease of real property
  • Government grants
  • Non-customer revenues

These categories are further broken down into sub-categories.

For each category and subcategory of revenue, the draft model rules provide indicators to identify the source of the revenue and specify allocation keys to be applied if no reliable indicator is available. An indicator is considered reliable if it satisfies two requirements:

  1. The indicator must produce results that are consistent with the sourcing rule for the transaction at issue
  2. The indicator must meet at least one of the following reliability tests:
    1. The indicator is relied upon by the Covered Group for commercial purposes or to fulfill legal, regulatory, or other related obligations
    2. The indicator is verified by information provided by a third party that has collected the information pursuant to its own commercial, legal, regulatory or other obligations
    3. That indicator and one or more indicators included in the sourcing rule identify the same jurisdiction
    4. The indicator is verified in another manner that is functionally equivalent to the above tests

When there is no reliable indicator, the draft model rules provide for the use of an allocation key. An allocation key may only be used where the relevant revenue sourcing rule for the category of revenue allows it. The allocation key only applies to the jurisdictions that are eligible after the application of the knock-out rule, which requires the identification of jurisdictions where it can be reasonably assumed that revenues did not arise.

In order to allocate all revenue, the draft model rules provide that when the Covered Group does not have information available to apply any indicator and no allocation key is provided in the relevant revenue sourcing rule, the Covered Group must use the global allocation key. The consultation document indicates that the global allocation key will allocate revenues based on a ratio such as share of final consumption expenditure or GDP, subject to further development.


The consultation document states that the draft model rules are intended to balance the need for accuracy with the need to limit compliance costs. There will be detailed record-keeping requirements, based on a systemic-level review rather than a requirement to retain and supply information from every transaction. The document describes this as meaning showing a clear, intelligent internal control framework demonstrating the conceptual approach to revenue sourcing, how the necessary data is obtained and that there are sound internal checks to monitor the accuracy of that data. Finally, the document indicates that these requirements are to be further elaborated in the standardized documentation requirements that will be part of the model rules, and will be designed in conjunction with tax administrations and businesses.

The evaluation of whether the revenue sourcing approach used by a Covered Group is acceptable to the tax authorities involved will be embedded in the dispute prevention and resolution mechanism that will be developed by the Inclusive Framework. As a consequence, the Lead Tax Administration or Tax Certainty Panel in such process may conclude that the indicators used are not reliable, and that the specified allocation key or the global allocation key should be used.

Opportunity to comment

Comments on the public consultation document may be submitted by 18 February 2022 and all written comments received will be made publicly available.


Application of the draft model rules would have significant implications for companies that are in scope of Pillar One Amount A, including with respect to the development or adaptation of information systems, and could create substantial uncertainty. The release of the public consultation document is an opportunity for companies to provide input on the practical effects of the draft rules.

The consultation document is the first of a series of consultation documents that the OECD is expecting to release in the coming months. Companies that could be in scope of Pillar One Amount A should monitor these developments closely. Companies may also want to watch for the public consultation document on Amount B of Pillar One that the OECD has indicated will be released in mid-2022.


For additional information with respect to this Alert, please contact the following:

Ernst & Young Belastingadviseurs LLP, Rotterdam

Ernst & Young Belastingadviseurs LLP, Amsterdam

Ernst & Young Limited (New Zealand), Auckland

Ernst & Young LLP (United States), Washington, DC



1 For additional information see EY Global Tax Alert, OECD's new insights describe growing support on comprehensive changes to international tax policy, beyond digital, dated 29 January 2019; EY Global Tax Alert, OECD opens public consultation on addressing tax challenges arising from digitalization of the economy: time-sensitive issue impacting all multinational enterprises, dated 14 February 2019; EY Global Tax Alert, OECD hosts public consultation on document proposing significant changes to the international tax system, dated 18 March 2019; EY Global Tax Alert, OECD workplan envisions global agreement on new rules for taxing multinational enterprises, dated 3 June 2019; EY Global Tax Alert, OECD releases BEPS 2.0 Pillar One Blueprint and invites public comments, dated 19 October 2020; and EY Global Tax Alert, OECD releases BEPS 2.0 Pillar Two Blueprint and invites public comments, dated 19 October 2020.

2 See EY Global Tax Alert, OECD releases statement updating July conceptual agreement on BEPS 2.0 project, dated 11 October 2021; and EY Global Tax Alert, OECD announces conceptual agreement in BEPS 2.0 project, dated 1 July 2021.