OECD publishes a statement of the final versions of Pillar 1 and Pillar 2

For the past 1,5 years, the OECD has worked intensively to revise the international tax system. The project has been divided into two so-called pillars (Pillar 1 and Pillar 2) and the OECD has continuously presented discussion drafts of the pillars’ content. For more information about the OECD’s previous versions of the pillars, please see our previous posts:

OECD publishes a new Pillar one draft regarding digital taxation

Pillar Two – A global solution to ensure taxation of income transferred to low-tax jurisdictions

OECD released the Reports on the Pillar One and Pillar Two Blueprints

On 1 July 2021, the OECD together with the G20 members agreed that Pillar 1 and Pillar 2 should be implemented and an overview of the pillars final design was published in a statement. Below is a summary of both Pillar 1 and Pillar 2 based on this statement.

It should be noted that  the statement is only an overview and some details are still not published or determined. The remaining details are expected to be finalized in October 2021.


Pillar 1

Pillar 1 can be said to consist of three parts: amount A; amount B; and dispute resolution mechanisms. While amount A and the dispute resolution mechanisms are explained below, no details have been released about amount B (simplification rules for certain routine activities, such as distribution). According to the OECD, more information regarding amount B will be published at the end of 2022.

Four observations and news in the statement

1. Less companies will be covered by Pillar 1

In previous drafts, Pillar 1 covered a majority of MNEs (but fewer sectors) and the OECD has continuously adjusted the scope to less MNEs but more sectors. In the final version, MNEs with a global turnover of more than 20 billion euros (may be reduced to 10 billion euros at a later stage), and a profit margin (profit before tax/turnover) of more than 10% will be covered by Pillar 1.

2. Amount A – share of profit to be redistributed and to which market jurisdictions have been presented

One of the objectives with Pillar 1 is to ensure that MNEs pay tax in the countries where they operate, i.e. in the so-called market jurisdictions, by allocating a certain share of the profit (amount A) to these markets regardless of whether the MNE has a physical presence there or not.

However, if a MNE is covered by Pillar 1 in accordance with point number 1 above, it does not necessarily mean that the MNE has to redistribute profits to the market jurisdictions. In order for redistribution to be relevant, it is also required that:

–     The MNE derives at least 1 million euros in revenue from the market jurisdiction, or

–     If the market jurisdiction has a GDP below 40 billion euros, the MNE’s revenue in the market jurisdiction only need to amount to at least 250,000 euros.

If a MNE meets all the above requirements, part of the profit should be redistributed. Basically, the calculation incurs that 20-30% of the residual profit, defined as profit in excess of 10% of revenue, shall be reallocated to the market jurisdictions where revenue exceeds the thresholds above.

The plan is that amount A will be effective from 2023.

3. One entity in the MNE shall report and manage the redistribution of profits

To simplify the MNE’s administration and streamline the process, one entity will be allowed to manage the process related to amount A for the entire MNE.

4. Dispute resolution mechanisms will be introduced, and unilateral measures should be removed

While waiting for the OECD’s measures, some countries have chosen to implement their own measures, such as sales tax for certain sectors (digital service tax). These should be removed when implementing the OECD pillars. At the same time, binding dispute resolution mechanisms will be implemented to deal with potential double taxation.


Pillar 2

Pillar 2 intends to counteract corporate structures where profits are moved to countries with low taxation, and to counteract a “race to the bottom” between different countries’ level of corporate tax. Pillar 2 should be brought into law in2022with effect in 2023.

Pillar 2 consists of:

–     GloBE-rules

o  Income inclusion rule. This means that the parent company can be taxable for its subsidiary’s low-taxed income (top-up tax).

o  Undertaxed payment rule. Means that deductions can be denied for income that is not covered by the income inclusion rule

–     Subject to tax

o  Means that a country has the right to levy withholding tax on payments made to a MNE , where the payment will be taxed below a certain minimum level.

Four observations and news in the overview

1. The GloBE rules are optional for countries to implement

The GloBE rules will have the status of a common approach. This means that the Inclusive Framework (IF) members are not obliged to adopt the GloBE rules, but if they choose to do so, they must implement and manage the rules in a manner consistent with Pillar 2. They shall also accept the application of the GloBE rules applied by other IF members, including, for example, the application of simplification measures.

2. MNEs with a turnover of 750 million will be included – but there are exceptions

The GloBE rules will apply to MNEs with a turnover of 750 million euros. Countries are free to apply the income inclusion rule to MNEs with headquarters in their country even if they do not meet the threshold. However, some organizations or entities are not subject to the GloBE rules, such as government entities, non-profit organizations, pension and investment funds.

3. The minimum tax level for the GloBE rules is set at at least 15%

Consensus has been reached between a majority of IF members and the minimum level for the GloBe rules is proposed to be at least 15% per jurisdiction.

4. Exceptions to the GloBE rules

The GloBE rules contains a formulaic substance carve-out,, meaning that under certain conditions it will be possible to exempt income from the application of the rules. The exemption will be based on the carrying value of tangible assets and payroll.

It is further stated that the GloBE rules will contain a so-called de minimis exclusion, which opens up for countries where MNEs have only a small part of its total profit (before tax) to be exempt.


Our comment

Although the final details of Pillar 1 and Pillar 2 have not yet been published by the OECD, we can already see some differences from the previous drafts, which gives an indication of ​​what the final results will be. One noticeable difference is the threshold for Pillar 1 which has been raised considerably. Consequently, fewer companies will be covered by the final Pillar 1 than in the previous versions.

For Pillar 2, the G20 countries have agreed that 15% is a reasonable minimum level for corporate tax, which most EU countries have also agreed to. However, there are additional parts that we have to wait for, such as how the profit under amount A should be distributed and the framing of the simplification rules for amount B in Pillar 1. For Pillar 2, it will be of great interest to see how the countries will agree on rules regarding the tax base and the above-mentioned exceptions.

The incorporation of the pillars will have a major impact on international tax and the in-scope MNEs. It is therefore important to begin to consider the impact and examine what measures may need to be implemented to make future compliance as simple as possible.

If you would like to discuss any of the points raised above or have any questions about how your company may be affected, feel free to contact us!

Mikael Jacobsen
Senior Partner, Transfer Pricing