OECD announces global deal on international tax reform with its Two-Pillar solution

The OECD announced on Friday that a global deal on reform of the international tax system has been agreed to between 136 jurisdictions of the “Inclusive Framework.” The Inclusive Framework includes the US, China and late joiners Ireland and Hungary.  

The OECD’s announcement provides detail on a number of key gating issues that the Inclusive Framework still needed to decide on to be able to reach a deal.  It does not, however, deliver any detailed updates to the original Blueprints of the Two-Pillar solution.  In addition, the OECD sets out a detailed implementation timeline aiming to have parts of the plan ratified in 2022 and effective as early as 2023. The implementation timeline identifies a number of new work streams to facilitate the execution of the plan, such as (among others) a Multilateral Convention to implement Pillar 1.

The global deal is mostly in line with the originally presented Blueprints of the Two-Pillar solution as presented in October 2020 and per the clarifying statements of the OECD in July 2021. 

Pillar 1

Pillar 1 will apply to all business in scope without a distinction between digital and non-digital businesses.

Amount A will be applicable to multinationals with a global revenue in excess of €20 billion and a profit margin in excess of 10 percent. In total, 25 percent of the profit in excess of the 10 percent margin will be allocated to market jurisdictions with revenues in excess of €1 million (nexus) based on newly developed sourcing rules. The agreement on Pillar 1 will require all members of the Inclusive Framework to remove domestic Digital Services Taxes and other relevant similar measures.  The guidance confirms that Amount A of Pillar 1 will only be applicable to some of the most sizeable companies in the world.

Pillar 1 Amount A will be implemented by means of a to be developed Multilateral Convention which is intended to be finalized early 2022 and available for ratification during 2022. The OECD will also provide detailed guidance on any necessary changes to domestic rules as part of the implementation of the Multinational Convention.

The Multilateral Convention is intended to operate separate from tax treaties and to address inconsistencies with existing treaties with respect to the taxation of Amount A.  It is unclear whether the United States Senate will be able to ratify a multilateral tax treaty. The Biden Administration may explore another pathway by asking Congress to enact the necessary changes legislatively as part of US domestic tax law, thereby providing an alternate pathway that would circumvent regular order treaty ratification practices in the Senate. 

Amount B, applicable to all companies irrespective of size, will aim to provide more certainty and standardization of the arm’s length principle in relation to marketing and distribution activities. There will be more work done on the design of Amount B, which is expected to be completed by 2022 and implemented not before 2024.

Pillar 2

Pillar 2 aims to ensure that all companies, no matter where they are headquartered or where they do business, pay a minimum level of tax.  As expected, the OECD announced today that the minimum tax is set at 15 percent and that all companies with global revenues in excess of €750 million are within scope of the minimum tax rules.

At the heart of the minimum tax rules is the Income Inclusion Rule. The rule allows the jurisdiction of the ultimate-parent company of a multinational to levy the minimum tax in so far it has implemented a qualifying Income Inclusion Rule as per Pillar 2.  In Friday’s announcement, the OECD reiterated that consideration will be given to the conditions under which the US GILTI regime will co-exist with the minimum tax of Pillar 2.  Although this is not an affirmative statement that GILTI will be a qualifying Income Inclusion Rule, the OECD may reasonably hold back its final guidance on the issue until the current US legislative process around changes to the GILTI rules is finalized. We continue to believe that consensus on GILTI as a qualifying Income Inclusion Rule is crucial to the success of Pillar 2.

It is interesting to observe that the detailed implementation timeline is not so detailed when it comes to implementation of the minimum tax. The OECD indicates that Pillar 2 should be brought into law in 2022 and be effective as per 2023.  However, in the detailed timeline the OECD merely indicates that an implementation framework that facilitates the implementation of the minimum tax will be developed by the end of 2022.  We expect the OECD to provide more guidance on this matter.

The Subject to Tax Rule (STTR) is a treaty-based rule which allows jurisdictions to levy a withholding tax on payments to certain low taxed jurisdictions.  The STTR precedes the Income Inclusion Rule and the OECD aims to have a multilateral instrument ready mid-2022 to allow for a swift ratification and implementation of the STTR shortly thereafter.  The minimum tax rate for the STTR is set at 9 percent.

Next steps

The OECD has identified a number of workstreams to work out some of the details of the Two-Pillar solution and to implement it. For the moment, it is unclear if and when the OECD will provide updates on the workstreams it has identified.

On October 13 and October 20, respectively, the OECD will present its global tax deal in Washington to the G20 Finance Ministers meeting and in Rome to the G20 leaders summit.

For companies that are within the scope of Pillar 1, a meaningful modelling exercise of the impact of these rules can now be performed. This may include taking into account the removal of existing digital taxes in the jurisdictions which have implemented these unilaterally.

For US multinationals within the scope of Pillar 2, there is still some lingering uncertainty in the absence of guidance in relation to the GILTI being a qualifying income inclusion rule and more importantly the overall impact of potential US tax reform (notably, modifications to the US corporate and the GILTI rates).  However, the framework of the minimum tax is now firmly set. Therefore, as companies assess the impact of potential US tax reform, the impact of Pillar 2 and the minimum tax should also be considered.  

For companies that are not within scope of Pillar 2, with less than €750 million global revenue, there is now more certainly around the international landscape going forward.

We will continue to monitor these developments and update you accordingly. Please do not hesitate to reach out to the authors or your usual DLA Piper contact if you have any questions.

Learn more about this rapidly evolving area of law by visiting our Global Tax Reform focus page.

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