OECD Two Pillar solution: next steps

The OECD/G20 Inclusive Framework on BEPS has agreed an Outcome Statement containing a package of measures to take forward the remaining elements of the Two Pillar solution to address the tax challenges arising from digitalisation of the economy. As well as setting out an agreed framework to progress the Two Pillar solution the Outcome Statement also commits members to refrain from imposing new digital services taxes or similar measures before 31 December 2024.

Background

Following several years of discussions at the OECD concerning fundamental changes to the international tax landscape to deal with problems created by the digital economy, political agreement was reached in June 2021 on a two pillar approach, involving: revised profit allocation and nexus rules (Pillar One); and a global anti-base erosion proposal for a minimum level of taxation (Pillar Two). This was followed by the publication of a "Statement on a Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy" containing broad details of the agreed components of the Pillars and an implementation plan. In December 2021, the OECD published model rules to assist in the domestic implementation of the Pillar Two minimum global tax rate of 15%. The Pillar Two model rules are designed to provide governments with a template for implementing Pillar Two.

The Outcome Statement

The Outcome Statement sets out the next steps to progress both Pillar One and Pillar Two. The next steps will involve the following elements:

• A Multilateral Convention (MLC) to be developed by the Inclusive Framework, which allows jurisdictions to reallocate and exercise a domestic taxing right over a portion of MNE residual profits (Amount A of Pillar One). The MLC will be accompanied by an Explanatory Statement that will set out the common understanding of the MLC. The Outcome Statement indicates that the Inclusive Framework will publish the text of the MLC upon resolution of a small number of specific remaining issues on which a few jurisdictions have expressed concerns;
• A proposed framework for the simplified and streamlined application of the arm’s length principle to in-country baseline marketing and distribution activities (Amount B of Pillar One), where input from stakeholders is requested on certain aspects prior to finalisation;
• The Subject-to-Tax Rule (STTR) together with its implementation framework, which will enable developing countries to update bilateral tax treaties to “tax back” income on certain intra-group income where such income is subject to low or nominal taxation in the other jurisdiction;
• A comprehensive action plan will be prepared by the OECD to support the swift and co-ordinated implementation of the Two-Pillar Solution, coordinating with regional and international organisations.

In a significant development, jurisdictions have also agreed in the Outcome Statement to refrain from imposing new digital services taxes or similar measures on any company before 31 December 2024, or the entry into force of the MLC if earlier, provided the signature of the MLC has made sufficient progress by the end of the year.

Next Steps

It is intended that the technical work of the Inclusive Framework will continue so that the MLC can be opened for signature in the second half of 2023. The MLC should enter into force during 2025, allowing for the domestic consultation, legislative, and administrative processes applicable in each jurisdiction.

Further work on Amount B of Pillar One is intended to be completed by the end of 2023, with a public consultation to be launched during July 2023 running until 1 September. The Inclusive Framework plans to approve a final report on Amount B and incorporate key content into the OECD Transfer Pricing Guidelines by January 2024. The Outcome Statement indicates that further work will be undertaken on the following aspects of Amount B:

• ensuring an appropriate balance between a quantitative and qualitative approach in identifying baseline distribution activities;
• the pricing framework, including in light of the final agreement on scope;
• the application of the framework to the wholesale distribution of digital goods;
• country uplifts within geographic markets; and
• the criteria to apply Amount B utilising a local database in certain jurisdictions.

The agreed documentation relating to the STTR will be published in July 2023 taking the form of a STTR model provision and commentary, with the Multilateral Instrument implementing the STTR to be released and open for signature from 2 October 2023. Inclusive Framework members that apply nominal corporate income tax rates below 9 per cent to intra-group interest, royalties and a defined set of other payments will implement the STTR in their treaties with developing Inclusive Framework members when requested to do so.

The OECD will also prepare a comprehensive action plan to support the swift and co-ordinated implementation, with additional support and technical assistance to enhance capacity for implementation by developing countries.