Update to Pillar One timeline and Pillar Two guidance

The OECD has published a statement updating the timetable for finalisation of the Multilateral Convention (MLC) for the implementation of the Pillar One agreement. The proposal is that the MLC should now been finalised by March 2024 with a signing ceremony taking place by the end of June 2024.  

In addition, further guidance has been published on the application of the Pillar Two rules.

The two pillar solution to address the tax challenges arising in a globalised and digitalised economy involves proposed changes to update key elements of the international tax system. Pillar One involves revised profit allocation and nexus rules and Pillar Two involves global anti-base erosion rules (GloBE) for a minimum global tax rate of 15%.

Pillar One

In particular, the Pillar One rules will apply to multinational enterprises (MNEs) with global turnover above €20bn and profitability (profits before tax) above 10%. Amount A of Pillar One has been developed to provide jurisdictions in which consumers and users are located (market jurisdictions) a new taxing right over a portion of the residual profits of these largest and most profitable MNEs. Very broadly, it reallocates 25% of the MNE's profits in excess of 10% of its revenues to market jurisdictions in which the MNE satisfies the quantitative nexus test. These profits will be allocated in proportion to the amount of revenues the MNE derives from those jurisdictions as determined by revenue sourcing rules.

In October 2023, the OECD published a text of the MLC together with its Explanatory Statement on Amount A of Pillar One. The MLC requires ratification by at least 30 States accounting for at least 60% of the ultimate parent entities of MNEs initially expected to be in-scope for Amount A. Once these minimum conditions are met, the States that have ratified can decide when the MLC will enter into force. However, the MLC was not opened for signature at that point. For further information on the MLC, see our earlier Insights article.

The OECD has now recognised that work to resolve remaining differences remains to be done and will need to continue into 2024. This includes work on the standstill on new Digital Service Taxes and other relevant similar measures. As a result, the timeframe to finalise the text of the MLC has been moved back to the end of March 2024 at latest, with a view to hold a signing ceremony by the end of June 2024.

Pillar Two

In relation to Pillar Two, the OECD/G20 Inclusive Framework on BEPS has published further administrative guidance.

This Administrative Guidance published by the Inclusive Framework includes further clarifications on a number of areas of the GloBE Rules, including guidance on:

• the application of the transitional CbCR Safe Harbour
• the definition of revenues for purposes of determining whether MNEs are within scope of the GloBE rules
• transitional relief to file the GloBE Information Return and notifications for in-scope MNEs that have short Reporting Fiscal Years
• applying the GloBE Rules in situations where there are mismatches between fiscal years or financial and tax years of group entities
• allocating taxes arising in a blended CFC tax regime when some group entities do not compute their effective tax rate under the GloBE Rules and
• the simplified calculations Safe Harbour for non-material group entities.

The Administrative Guidance will be incorporated into a revised version of the Commentary that will be released in 2024.