Agreement on OECD pillar 1 and 2 proposals (as refined by the US initiative)

As of 13 July, 132 of 139 jurisdictions (including Bermuda, Cayman Islands, BVI, Switzerland, and the Bahamas) agreed to the OECD Pillar 1 and 2 proposals as refined by the US initiative.  The seven that did not were: Ireland, Estonia, Hungary, Barbados, Kenya, Nigeria, Sri Lanka.  The OECD press release can be found here and the statement summarising the agreement can be found here as well as the report to the G20.  This follows the earlier G7 (of which the US is a member) communique indicating agreement on the broad outline (see here).  There are still details to be finalised, but the OECD aims to finalise the remaining issues and implementation by October 2021.

The agreed proposals provide that pillars 1 and 2 will take effect from 2023 along as outlined further below.  The reactions of and possible impacts on several jurisdictions are also covered below.  There is evidently still a lot of work to do in a short timescale to get these measures implemented.

Implications for business

The short time proposed for implementing these major reforms to international tax systems appears very demanding.  Despite the announcements of widespread agreement amongst Government officials, there is still the job of agreeing on the finer detail. This includes the mechanisms to prevent double counting and double taxation as well as the form and mechanics of dispute prevention and resolution. Whilst the OECD will provide implementation support through draft legislation this will still need to be passed in each jurisdiction.

While there is broad agreement on the outline proposals, many will be interested in this detail to fully understand the range of exemptions and how any apportionment may work in practice.

Significant extra revenue has been projected for Revenue Authorities from the OECD initiative.  It remains to be seen how accurate this additional tax revenue forecast is and the extent to which the outcome will just be a redistribution of tax revenues.  This outcome will surely influence the future design of Pillar One and its rollout through reduced revenue thresholds.  As taxes on corporates are in reality an intermediary tax on the consumer and the employee it will be interesting to see how much of the additional tax burden MNEs are willing to absorb in order to remain competitive.

All businesses should be analysing the implications of the proposed changes on the systems, supply chains, and pricing policies and be ready to react.  Mazars is ready to assist you in preparing for these developments and assessing how the markets are reacting.  We have significant experience in helping clients design and implement systems to meet a range of business and regulatory reporting requirements, including for tax.  For a further discussion please get in contact with your usual Mazars contact or a member of the Mazars International Tax team.

Pillar 1 (profit allocation based on revenue)

Those within scope for reallocation of part of their profit to other jurisdictions based on revenue will be Multinational enterprises (MNEs) with global turnover above 20 Bn euros and profitability above 10% (i.e. profit before tax/revenue).  Subject to successful implementation, the turnover threshold will be reduced to 10 Bn euros after seven years. Extractives and Regulated Financial Services are excluded (we await further detail).

The profit to be reallocated will be based on financial accounting income with some adjustments.  The rules could apply to segments of an MNE where a segment meets the scope rules.

There will only be an allocation of profit to a market jurisdiction if sales in that jurisdiction exceed 1m euros (250k euros for jurisdictions with GDP below 40bn euros).  The amount to be apportioned will be between 20-30% of the residual profit, defined as profit in excess of 10% of revenue.  There will be a revenue-based allocation key with sourcing based on where goods or services are used or consumed (the detailed methodology is still to be developed).

Where the profits of the MNE are already taxed in the market jurisdiction, a ‘marketing and distribution profits safe harbour’ will cap the residual profits allocated.  Double taxation of profit allocated to market jurisdictions will be relieved using either the exemption or credit method.

The application of the arm’s length principle to in-country baseline marketing and distribution activities will be simplified and streamlined, with a particular focus on the needs of low-capacity countries. This work will be completed by the end of 2022. 

There will be coordination between the application of the new international tax rules and the removal of all Digital Service Taxes and other relevant similar measures on all companies. 

Pillar 2 (global base erosion -GloBE- rules consisting of income inclusion rule, undertaxed payment rule, and subject to tax rule)

The GloBE rules (which apply after STTR) consist of:

  • an Income Inclusion Rule (IIR) imposing a top-up tax on parent entities in respect of low taxed income of a constituent entity, and;
  • an Undertaxed Payments Rule (UTPR) denying deductions or requiring an equivalent adjustment for low-tax income not subject to tax under an IIR.

The GloBE rules will apply to MNEs that meet the 750 million euros country by country reporting threshold.  It will apply where the minimum tax rate is less than an agreed figure, to be not less than 15% (the minimum tax rate is not yet agreed).  There will be a de-minimis exemption and a ‘carve-out’ to exclude an amount of income that is at least 5% (in the transition period of 5 years, at least 7.5%) of the carrying value of tangible assets and payroll.  Further details can be found in the outline agreement.  In addition, the GloBE rules will not apply to international shipping.

Countries will be free to apply the IIR to MNEs headquartered in their country even if they do not meet the threshold.  There is no obligation to apply the GloBE rules, but there is a requirement to accept their application by other inclusive framework members.

If there is an agreement, the subject to tax rule (STTR) will operate will apply to interest, royalties, and a defined set of other payments.  It will apply by being incorporated into bilateral treaties with developing inclusive framework members on request.  The taxing right will be limited to the difference between the minimum rate (to be set between 7.5% and 9%) and the tax rate on the payment.

Reactions and implications for certain jurisdictions


The Irish Government has previously estimated it could lose corporate tax revenue of €2 bn a year (or 20% of its corporate tax revenue) if the minimum tax rate was reduced to 15% (for example see here). Ireland is vigorously defending its 12.5% rate, but is looking at contingency measures should it not be able to do so (see here). 

One view might be that tax is not the only reason for the location of the business, and if a business is already located in Ireland there may be some resistance to moving, subject to how the Government handles other pressures on its economy (such as housing, other infrastructure, and education.


While Switzerland has accepted the proposals, it remains interested in how pillar 1 and 2 rules are finalised, its finance ministry commenting: “As far as the minimum tax is concerned, the solution adopted must be balanced in terms of tax rate and tax base,” (e.g. see here).  That news report indicates the Swiss finance ministry will be submitting proposals seeking to guarantee the country’s attractiveness as a business location.


A large part of the international business located in Bermuda might be expected to come within the definition of financial services and so be excluded from pillar 1 reallocation.  Even so, the Bermuda Government remains interested in shaping how the rules apply to their situation ( see here). 

Other jurisdictions

Reactions of other jurisdictions to the OECD 1 July announcement, including the UK and US, can be found, for example, here. The US has apparently submitted a position paper to the EU proposing that the planned EU digital levy be delayed (see here), though the European Commission will delay the presentation of this proposal until October (see here).  It appears the US will only sign up to the OECD proposals if other countries withdraw their national tech taxes including EU initiatives.