The Two-Pillar solution – What are the key developments?

We look here at recent key developments on the two-pillar solution and the statement published by the OECD/G20 Inclusive Framework last October, which dealt with a number of key aspects of global tax reform as set out in the OECD BEPS 2.0 proposals.

Pillar One
The OECD announced in early February that the Inclusive Framework would be launching a public consultation on Pillar One by releasing working papers in tranches, in order to keep within the tight timetable for implementation currently scheduled for 2023.   

Amount A - Profit allocation and nexus rules
The first of those working papers was released on 4 February 2022.  It considers draft rules on profit allocation and nexus rules in order to give a new taxing right to market countries under Pillar One, known as "Amount A".  The OECD described this consultation as containing "the first building blocks under pillar one for which public input will be sought…" The consultation period for this working paper came to a close on 18 February 2022.    

The practical effect of Amount A, following implementation, is that certain companies will be liable to pay tax on a portion of residual (or non-routine) profits earned from activities in relevant market countries, even though they lack sufficient physical presence in that particular country. In broad terms, companies falling within scope of the Amount A rules include MNEs with: (a) global turnover exceeding €20bn; and (b) profitability exceeding 10%.

Amount A includes a nexus test and source rules for covered groups. The consultation details the requirements that must be met in order for these respective tests to be satisfied.  The full text for the consultation can be found here.

Amount B – Baseline marketing and distribution activities 
"Amount B" under Pillar One, aims to standardise the remuneration of related party distributors that perform "baseline marketing and distribution activities" with a goal to:

1. simplify the administrative process associated with transfer pricing rules and reducing costs connected to such administrative burdens 
2. improve tax certainty for both the taxpayer and tax administrations. The OECD plan to issue the public consultation paper on Amount B in mid-2022, with a public consultation event to follow.

Pillar Two 
Turning to Pillar Two developments, which are moving at a much faster pace in comparison to Pillar One, the Model Rules for the domestic implementation of a 15% global minimum tax, were published on 20 December 2021. Work on the publication of an Implementation Framework on the draft rules is underway. The Framework will seek to aid the coordinated implementation of the GloBE rules under Pillar Two, to address both administrative and compliance issues, including potential simplifications and safe harbours.

We expect the OECD to open a public consultation towards the end of February 2022, with an event to subsequently be held in March. Following the consultation, OECD anticipate publishing the Implementation Framework by the end of 2022. It is worth noting that there have been some reservations about the draft Model Rules.  In particular in relation to the ambitious timescales and administrative burdens arising from their implementation.  

From an EU perspective, in December 2021, the Commission published a draft directive for implementing Pillar Two and the Global Anti-Base Erosion (GloBE) rules at a domestic level.  With this being so close to the publication of the draft Model Rules by the OECD, certain EU member states have expressed concern about the EU rushing ahead of the Implementation Framework, at the risk of missing out on improvements and simplifications to the rules, which we anticipate arising following the outcome of the consultation process and Implementation Framework.  

These issues, in terms of implementation of the rules at a domestic level, ambitious timescales and administrative burdens associated with the rules, will inevitably be subject to further scrutiny in the months ahead and we will be monitoring developments and providing further updates as matters progress. Some other notable BEPS and international tax developments are listed in the table below - 

For more information on this please contact Rebecca Dorrington or any member of A&L Goodbody's Tax Team.