Background to the global consensus on the two-pillar solution to address the tax challenges arising from the digitalisation of the economy
2015
Action 1 of the OECD/G20 Base Erosion Profit Shifting (BEPS) project considered addressing the tax challenges of the digital economy and following two years of consultation, the final BEPS report on Action 1 was published as one of the 15 actions in October 2015.
2017
At the time, the OECD said that they would come back to address the tax challenges of the digital economy in 2020, after reviewing the implementation of the other BEPS measures. However, following substantial public debate, the OECD Task Force on the Digital Economy was given a renewed mandate for their work on tax and digitalisation in January 2017.
2018
The OECD Task Force on the Digital Economy published the Tax Challenges Arising from Digitalisation – Interim Report 2018 in March 2018.
2019
In January 2019, the OECD published a further Policy Note setting out proposals under consideration by members of the Inclusive Framework on BEPS to reform the international tax framework. The Institute responded to the public consultation held in March 2019.
The OECD held a public meeting in Paris on 13/14 March 2019, which focussed on the key issues identified in the written submissions received as part of the consultation process.
In May 2019, the OECD/G20 Inclusive Framework on BEPS adopted a Programme of Work, setting out a framework to reach a global consensus on how to address the tax challenges arising from the digitalisation of the economy.
The Work Programme involved two pillars:
Pillar One considered the development of a “new taxing right” that would change existing profit allocation and nexus rules. This work sought to readjust the balance between jurisdictions where valuable intangible assets are owned and the markets where the users and consumers are based.
Pillar Two considered the global anti-base erosion (GloBE) proposal that would allow jurisdictions to “tax back” in circumstances where other jurisdictions have not exercised their primary tax rights, or the payment has been subject to low levels of taxation. This work intersected with the work to develop a new taxing right under Pillar One and attempted to define an effective minimum tax rate.
The document acknowledged that a consensus-based solution needs an early political steer, informed by an economic analysis and an impact assessment of the proposals.
Towards the end of 2019, the OECD published two public consultation documents:
- Secretariat Proposal for a “Unified Approach” under Pillar One, in October 2019
- Global Anti-Base Erosion Proposal (“GloBE”)– Pillar Two, in November 2019
The OECD invited interested parties to provide comments on both public consultation documents and held two public consultation meetings in Paris on 21-22 November 2019 and 9 December 2019. The Institute responded to the public consultations held on both Pillar One and Pillar Two.
2020
Multilateral efforts to reach a consensus-based solution continued throughout 2020, with Working Party meetings conducted remotely due to the COVID-19 pandemic. Virtual plenary meetings of the OECD/G20 BEPS Inclusive Framework were held in July and in October 2020.
In October 2020, the OECD delivered the technical reports on the Pillar One Blueprint and Pillar Two Blueprint. Both reports were agreed at a meeting of the OECD/G20 Inclusive Framework on BEPS on 8-9 October 2020, together with a Cover Statement.
The Blueprints for Pillar One and Pillar Two reflected the progress that had been made by the 137 members of the Inclusive Framework on BEPS to progress technical solutions to agree new allocations of taxing rights between jurisdictions to reflect the digitalised economy (Pillar One) and to agree global anti-base erosion rules for a minimum effective tax rate to address remaining BEPS challenges (Pillar Two).
On 12 October 2020, the OECD published a public consultation document on the Reports on the Pillar One Blueprint and Pillar Two Blueprint and invited interested parties to provide comments on both Blueprints before the end of the year. The Institute responded to the public consultation held on the Reports on the Pillar One and Pillar Two Blueprints in December 2020.
2021
The OECD/G20 Inclusive Framework on BEPS held a public consultation virtual meeting over two days, on 14 and 15 January 2021 to discuss the key themes and comments received from stakeholders in response to the public consultation on the Reports on the Pillar One and Pillar Two Blueprints undertaken in December 2020.
On 4 to 5 June 2021, G7 Finance Ministers met and reached an agreement on the key elements of international tax reform designed to address the tax challenges of the digitalisation and the globalisation of the economy.
Subsequently, on 1 July 2021, 130 member countries of the OECD/G20 Inclusive Framework on BEPS agreed a Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy (the July Statement). Following the publication of the July Statement, then Minister for Finance, Paschal Donohoe T.D., stated that Ireland has fully supported the Pillar One proposals. The Minister also expressed broad support for the agreement on Pillar Two but noted Ireland’s reservation on the proposal for a global minimum effective tax rate of ‘at least 15%’. As a result of this reservation, he confirmed that Ireland was not in a position to join the consensus and did not sign the Statement. However, confirmed that Ireland would continue to constructively engage in further discussions and technical work in the lead up to achieving a comprehensive agreement in October.
On 20 July 2021, the Department of Finance launched a public consultation on Ireland’s approach to the international tax proposals being discussed at the OECD/G20 BEPS Inclusive Framework and, specifically, in relation to how Ireland’s approach to those proposals can continue to support economic growth and prosperity. In a press release on 7 October 2021, the Minister for Finance, announced he had received Government approval to join the OECD Inclusive Framework agreement. Minister Donohoe confirmed the proposed minimum effective tax rate of ‘at least 15%’, which Ireland had reserved its position on in July, had been set to a precise rate of 15%.
Minister Donohoe confirmed he had received assurances from the European Commission that the proposed EU Directive to transpose the OECD agreement would be faithful to the agreement and not go beyond the international consensus. The Minister also confirmed he had received assurances from the Commission that maintaining the 12.5% corporation tax rate for businesses out of scope of the OECD agreement did not present any difficulties.
On 8 October 2021, the Inclusive Framework published the revised Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy (the updated October Statement). The updated October Statement contained clarifications on some of the key outstanding issues from the Statement published in July, including, as noted above, most importantly from an Irish perspective, setting the effective tax rate for the purposes of the Income Inclusion Rule (IIR) and the Undertaxed Payment Rule (UTPR) at a precise rate of 15%. 136 out of 140 Inclusive Framework member countries, including Ireland, joined in the updated Statement. As of 9 June 2023, there were a total of 139 member jurisdictions participating in the agreement
On 21 October 2021, the UK, Austria, France, Italy, Spain and the US announced the terms of an agreement, referred to as the “Unilateral Measures Compromise” on the transition from existing Digital Services Taxes (DSTs) to the new multilateral solution on Pillar One agreed by the OECD/G20 Inclusive Framework. The joint statement noted under the Unilateral Measures Compromise, the UK, Austria, France, Italy, Spain and countries which had all enacted Unilateral Measures before 8 October 2021, were not required to withdraw their Unilateral Measures until Pillar One takes effect.
However, to the extent that taxes that accrued to the UK, Austria, France, Italy, Spain and with respect to existing Unilateral Measures during a defined period after political agreement is reached, and before Pillar One takes effect, exceed an amount equivalent to the tax due under Pillar One in the first full year of Pillar One implementation (pro-rated to achieve proportionality with the length of the Interim Period), such excess will be creditable against the portion of the corporate income tax liability associated with Amount A, as computed under Pillar One in these countries, respectively.
As part of the Unilateral Measures Compromise, the US agreed to terminate proposed trade actions and commit not to impose further trade actions against the UK, Austria, France, Italy, Spain, and with respect to their existing DSTs until the end of the Interim Period. The US and Turkey agreed that the same terms that apply under the Unilateral Measures Compromise shall apply as between the US and Turkey with respect to Turkey’s Digital Service Tax and the trade actions by the US regarding the Digital Service Tax.
On 20 December 2021, the OECD published the Pillar Two Global Anti-Base Erosion (GloBE) Model Rules (the Model Rules) which provide for a co-ordinated system of taxation that imposes a top-up tax on profits arising in a jurisdiction whenever the effective tax rate, determined on a jurisdictional basis, is below the minimum rate of 15%. The Model Rules consist of two interlocking domestic rules: an Income Inclusion Rule (IIR), which imposes top-up tax on a parent entity in respect of the low taxed income of a constituent entity; and an Undertaxed Payments Rule (UTPR), which denies deductions or requires an equivalent adjustment to the extent the low tax income of a constituent entity is not subject to tax under an IIR. The Model Rules are intended to be a template which individual countries can use to translate the Pillar Two GloBE rules into their domestic law as from 2022.
On 22 December 2021, the European Commission proposed a directive to implement the Pillar Two GloBE Rules into EU law. The proposal closely followed the GloBE Rules, however, it extended the scope of the GloBE Rules to large-scale purely domestic groups, in order to ensure compliance with EU fundamental freedoms.
2022
Throughout 2022, the Inclusive Framework consulted with stakeholders on a number of aspects of Pillar One, with the consultation on Amount A of Pillar One occurring in stages. The Inclusive Framework released the following OECD Secretariat Working Documents on the separate building blocks of Amount A over the course of 2022:
- Draft Model Rules for Nexus and Revenue Sourcing
- Draft Rules for Tax Base Determinations
- Draft Rules for Scope under Amount A
- Extractives Exclusion
- Draft rules for Regulated Financial Services Exclusion
- A Tax Certainty Framework for Amount A
- Tax certainty for issues related to Amount A
- Progress Report on Amount A of Pillar One
The Institute responded to the public consultation held on Pillar One – Amount A: Draft Model Rules for Nexus and Revenue Sourcing in February 2022. The fourteenth plenary meeting of the Inclusive Framework took place in October 2022 and during the meeting, delegates agreed to release a Progress Report on the Administration and Tax Certainty Aspects of Amount A of Pillar One for public consultation. The Institute responded to the public consultation held on the Progress Report on the Administration and Tax Certainty Aspects of Amount A of Pillar One in November 2022.
As part of the Two-Pillar Solution agreed in October 2021, Amount B of Pillar One provides for a simplified and streamlined approach to the application of the arm’s length principle to in-country baseline marketing and distribution activities, with a particular focus on the needs of low-capacity countries. The Inclusive Framework progressed work on Amount B of Pillar One during 2022, in particular on proposals to simplify the application of the arm’s length principle with respect to certain activities. A public consultation document was published on 8 December 2022, outlining the main design elements of Amount B in order to obtain input from stakeholders on the technical aspects of Amount B.
The OCED released the Commentary to the Pillar Two Global Anti-Base Erosion Model (GloBE) Rules and a public consultation to inform the development of the Implementation Framework to facilitate the co-ordinated implementation and administration of the GloBE Rules in March 2022. The Institute issued a Tax Policy and Reps Bulletin to members on 15 March 2022 which included further details on the Commentary and the consultation. The Institute responded to the public consultation held on the Pillar Two GloBE Implementation Framework on 11 April 2022. The OECD held a public consultation meeting on the Pillar Two GloBE Implementation Framework on Monday, 25 April 2022. The general consensus from the feedback to the public consultation was that stakeholders want clarity and simplification.
The proposed EU Pillar Two Minimum Tax Directive was the subject of discussion at the Economic and Financial Affairs Council (ECOFIN) with the French Presidency putting forward a compromise text for consideration in advance of a meeting of ECOFIN on 15 March 2022. The compromise text extended the proposed deadline for transposing the Directive into national law from 31 December 2022 to 31 December 2023. It also included a proposal for a derogation for a limited period to 31 December 2025 from the mandatory application of the IIR and the UTPR to be available on an optional basis for EU Member States in which no more than 10 ultimate parent entities are located.
The Institute responded to the Department of Finance’s public consultation on the Pillar Two Minimum Tax Rate Implementation on 22 July 2022. The purpose of the consultation was to seek the views of stakeholders on the transposition of Pillar Two into Irish law and to consider any challenges in that regard.
Throughout 2022, European finance ministers discussed the proposed EU Pillar Two Minimum Tax Directive to implement the Pillar Two GloBE Rules into EU law at ECOFIN, to ensure a global minimum level of taxation for multinational groups in the EU. The EU Pillar Two Minimum Tax Directive was adopted on 14 December 2022. The Directive is required to be transposed into the national law of Member States by the end of 2023 and will apply for accounting periods beginning on or after 31 December 2023.
On 20 December 2022, the Inclusive Framework released an implementation package, relating to the Pillar Two GloBE Rules, consisting of the following elements:
- Guidance on Safe Harbours and Penalty Relief;
- A public consultation document on the GloBE Information Return; and
- A public consultation document on Tax Certainty for the GloBE Rules.
2023
The Institute responded to the Pillar Two consultations on the GloBE Information Return and Tax Certainty for the GloBE Rule on 3 February 2023.
The Inclusive Framework released the Agreed Administrative Guidance for the Pillar Two GloBE Rules in February 2023 and July 2023 to assist governments with the implementation of the new international tax rules which will ensure MNEs are subject to a 15% effective minimum tax rate. The aim of the Administrative Guidance is to ensure co-ordinated outcomes and greater certainty for businesses as they move to apply the global minimum corporate tax rules from the beginning of 2024.
The Inclusive Framework confirmed it would continue to release further Agreed Administrative Guidance on an ongoing basis, to ensure that the GloBE Rules continue to be implemented and applied in a co-ordinated manner. The Inclusive Framework also continued its work on developing the model provision for the Subject to Tax Rule under Pillar Two and the related multilateral instrument to assist in its implementation.
The technical work relating to Pillar One continued in 2023 with members of the Inclusive Framework aiming to finalise a new Multilateral Convention by end-2023, for entry into force in 2024.
The Inclusive Framework agreed an Outcome Statement on the Two‐Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy on 11 July 2023 which summarises a package of deliverables developed by the member countries to address the remaining elements of the Two‐Pillar Solution.
You can read more here about the transposition of the EU Minimum Tax Directive by Ireland in Finance (No. 2) Bill 2023; and the timeline for the implementation of Amount A and Amount B as outlined in the Outcome Statement agreed by the Inclusive Framework on 11 July 2023.