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Tax Challenges of Digitalisation of the Economy

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 which formed part of the BEPS package in October 2015.


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. Discussions among member countries of the G20/OECD Inclusive Framework on BEPS (‘the Inclusive Framework’) on how to address the tax challenges of the digitalisation of the economy culminated with the publication of two detailed ‘Blueprints’ in October 2020 on potential rules for addressing nexus and profit allocation challenges (known as ‘Pillar One’) and for global minimum tax rules (known as ‘Pillar Two’).


Political agreement on key aspects of this two-pillar solution was finally reached by the G7 and G20 in June 2021 and 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). Ireland did not sign the Statement and reserved its position on a global minimum effective tax rate of “at least 15%”.


On 8 October 2021, the Inclusive Framework published a 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 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%. 137 out of 141 Inclusive Framework member countries, including Ireland, joined in the updated October Statement.


You can read more about the background to reaching a global consensus on addressing the tax challenges arising from the digitalisation of the economy here.

Current Developments

Following the publication of the July Statement, the Minister for Finance, Paschal Donohoe T.D., stated that Ireland had fully supported the Pillar One proposals in recognition of the way in which business is conducted has evolved and that the taxation system must evolve with it. The Minister also expressed broad support for the agreement on Pillar Two but he 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. The Institute responded to the public consultation in September 2021.

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. The announcement was made in advance of a meeting of the members of the Inclusive Framework the following day to endorse a revised Statement of agreement on the two-pillar solution which was put forward in July.

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%. Noting the importance of this revision for Ireland, Minister Donohoe said, ‘‘ The agreement provides that the minimum effective rate for multinationals with an annual revenue in excess of €750 million is 15%. We have secured the removal of ‘at least’ in the text. This will provide the critical certainty for Government and industry and will provide the long-term stability and certainty to business in the context of investment decisions.”

The Minister stated he had received assurances from the European Commission that the proposed EU Directive to transpose the OECD agreement will 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 does not present any difficulties.

On 8 October, the OECD confirmed that following the meeting of the Inclusive Framework, 136 member countries (out of a total of 140) had endorsed a revised Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy (the updated October Statement) which was proposed in July. Mauritania subsequently joined the Inclusive Framework on 4 November as its 141st member and also joined the two-pillar plan bringing the total number of jurisdictions participating in the agreement to 137.

The updated October Statement confirms the global minimum corporate tax rate under Pillar Two is set at 15%, with the reference to ‘at least’ removed from the updated text.

With Ireland, Estonia and Hungary joining the agreement, it is now supported by all OECD countries and all EU Member States that are part of the Inclusive Framework.  Kenya, Nigeria, Pakistan, and Sri Lanka have not joined the agreement. Pakistan had signed the Statement published in July but did not endorse the updated October Statement. Cyprus, which is not a member of the Inclusive Framework, is the only EU Member State which has not joined the international tax agreement.

The updated October Statement was endorsed by the G20 Finance Ministers and Central Bank Governors on 13 October and subsequently by the G20 Leaders at their summit in Rome at the end of October.

Key components of the two-pillar solution

The key components of the two-pillar solution as described in the updated October Statement are set out below. Pillar One deals with the reallocation of certain profits from large multinational enterprises (MNEs) to market jurisdictions (i.e., where sales arise) whereas Pillar Two refers to a global minimum tax.

Pillar One

  • In-scope companies for the purposes of the new taxing right (Amount A) are MNEs with global turnover over €20 billion and profitability above 10%, calculated using an averaging mechanism. This threshold will be reduced to €10 billion following a review which will be carried out after seven years and is contingent on successful implementation.
  • Extractives and regulated financial services are excluded from the scope of Amount A.
  • Amount A may be allocated to a market jurisdiction where an in-scope MNE derives at least €1 million revenue in that jurisdiction, however, this threshold will be set at €250,000 for smaller jurisdictions.
  • The amount to be allocated to market jurisdictions is 25% of residual profit (which is defined as profit in excess of 10% of revenue) using a revenue-based allocation key.
  • The profit or loss of a MNE will be determined by reference to the financial accounts with a small number of adjustments. For example, losses will be carried forward.
  • A marketing and distribution profits safe harbour will cap the Amount A allocation to market jurisdictions where residual profits are already taxed. Details regarding the scope of the safe harbour have yet to be clarified.
  • Mandatory and binding dispute prevention and resolution mechanisms will be available to avoid double taxation in relation to Amount A.  However, an elective binding dispute resolution mechanism for issues related to Amount A will be available for certain developing economies.
  • No further detail has been provided on the design or scope of Amount B. Amount B is intended to standardise the remuneration of related party distributors that perform “baseline marketing and distribution activities” in the market jurisdiction. The Statement notes work on Amount B will be completed by the end of 2022 and that 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.
  • Tax compliance will be streamlined (including filing obligations) and will allow in-scope MNEs to manage the process through a single entity.
  • A Multilateral Convention (MLC) will be implemented which will require all parties to remove all Digital Services Taxes and other relevant similar measures with respect to all companies, and to commit not to introduce such measures in the future.
  • No newly enacted Digital Services Taxes or other relevant similar measures will be imposed on any company from 8 October 2021 and until the earlier of 31 December 2023 or the coming into force of the MLC.

 Pillar Two

Pillar Two comprises:

  • two interlocking domestic rules, known as the Global Anti-Base Erosion (GloBE) rules that encompasses 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 Payment 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, and
  • a treaty-based rule, referred to as the Subject to Tax Rule (STTR).

Unlike Pillar One which will be implemented through a newly developed Multilateral Convention, the GloBE rules will have the status of a common approach. This means Inclusive Framework members are not required to adopt the rules. How the US minimum tax on global intangible low-taxed income, known as GILTI, will co-exist with the GloBE rules has yet to be clarified.

Key elements of the GloBE rules are:

  • The rules will apply to MNEs that meet the €750 million Country-by-Country Reporting threshold.
  • Government entities, international organisations, non-profit organisations, pension funds or investment funds that are Ultimate Parent Entities of an MNE group or any holding vehicles used by such entities, organisations or funds will not be subject to the GloBE rules. International shipping income is also excluded.
  • The GloBE rules will provide for an exclusion from the UTPR for MNEs in the initial phase of their international activity.
  • The rules will impose a top-up tax using an effective tax rate test calculated on a jurisdictional basis.
  • There will be a common definition of covered taxes and tax base determined by reference to financial accounting income with agreed adjustments.
  • The minimum tax rate for the purposes of the IIR and the UTPR will be 15%.
  • The GloBE rules will also provide for a formulaic substance based carve-out that will exclude an amount of income equal to 5% of the carrying value of tangible assets and payroll. A transition period will apply during which 8% of the carrying value of tangible assets and 10% of payroll will initially be excluded, declining gradually over a ten-year period to 5%.
  • The GloBE rules will provide for a de minimis exclusion for those jurisdictions where the MNE has revenues of less than €10 million and profits of less than €1 million.

The updated October Statement confirms the STTR will apply to interest, royalties and a defined set of other payments made from a developing country to an Inclusive Framework member that applies nominal corporate income tax rates below the STTR. The additional tax which may be payable will be limited to the difference between the minimum rate of 9% and the tax rate on the payment.  The STTR will be incorporated into bilateral treaties between countries at the request of the developing country member of the Inclusive Framework.

Unilateral Measures Compromise

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 notes under the Unilateral Measures Compromise, the UK, Austria, France, Italy, Spain and countries which have all enacted Unilateral Measures before 8 October 2021, are not required to withdraw their Unilateral Measures until Pillar One takes effect.

However, to the extent that taxes that accrue 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 agrees 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.

Next Steps

An implementation plan for both pillars is set out in the Annex of the updated October Statement.

A Multilateral Convention (MLC) in respect of Pillar One is being developed and will be opened for signature in 2022, with effective implementation in 2023.  The OECD will develop model rules for bringing Pillar Two into domestic legislation during 2022, to be effective in 2023, with the UTPR coming into effect in 2024.

The European Commissioner for Economy, Paolo Gentiloni, has confirmed the European Commission will swiftly put forward a directive to implement Pillar Two in the EU once the OECD has finalised the model rules under the pillar. The Commission will also carefully examine whether a directive is needed in respect of Pillar One to ensure its consistent and effective implementation at EU level.

OECD Documents and Links

November 2021 – Members of the OECD/G20 Inclusive Framework on BEPS joining the October 2021 Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy as of 4 November 2021 

October 2021 – OECD Secretary-General Tax Report to G20 Finance Ministers and Central Bank Governors

October 2021 – OECD Brochure on Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy

October 2021 – Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy 

July 2021 – OECD Podcasts – Global digital tax deal: A multilateral solution to end corporate tax avoidance

July 2021 – OECD Secretary-General Tax Report to G20 Finance Ministers and Central Bank Governors

July 2021 – Statement on a Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy

January 2021 – Public consultation meeting on the Reports on the Pillar One and Pillar Two Blueprints

October 2020 – Public Consultation Document – Reports on the Pillar One and Pillar Two Blueprints – 12 Oct to 14 Dec 2020

October 2020 – Report on the Pillar One Blueprint

October 2020 – Report on Pillar Two Blueprint 

October 2020 – Cover Statement by the OECD/G20 Inclusive Framework on BEPS on the Reports on the Blueprints of Pillar One and Pillar Two

October 2020 – Tax Challenges Arising from Digitalisation – Economic Impact Assessment

October 2020 – OECD Secretary-General Tax Report to G20 Finance Ministers and Central Bank Governors

October 2020 – Addressing the Tax Challenges Arising from the Digitalisation of the Economy – Highlights

October 2020 – Tax Challenges Arising from Digitalisation – Top 10 Frequently Asked Questions

November 2019 – OECD public consultation document requesting input for work on Global Anti-Base Erosion Proposal (“GloBE”)

October 2019 – OECD public consultation document requesting input for work on Secretariat Proposal for a “Unified Approach” under Pillar One  

March 2019 – OECD BEPS public consultation meeting on the tax challenges of digitalisation

February 2019 – OECD public consultation document Addressing the Tax Challenges of the Digitalisation of the Economy

October 2017 – OECD public consultation document requesting input for work regarding the tax challenges of the digitalised economy

November 2017 – OECD BEPS public consultation meeting on tax challenges of digitalisation

The OECD’s dedicated webpage on Action 1 Tax Challenges Arising from Digitalisation

Irish Tax Institute Analysis

September 2021 – Response to Department of Finance Consultation on OECD International Tax Proposals

December 2020 – Response to OECD Consultation on the Pillar One and Pillar Two Blueprints

December 2019 – Response to OECD Consultation on the Global Anti-Base Erosion Proposal (“GloBE”) – Pillar Two

November 2019 – Response to OECD Consultation on the Secretariat Proposal for a “Unified Approach” under Pillar One

An Institute delegation visited Paris on 28 November 2019 to meet with officials from the OECD to discuss their ongoing programme of work to develop a consensus solution to the tax challenges arising from the digitalisation of the economy.  During the meeting, the delegation highlighted the key points raised in the Institute’s response to the public consultation on Pillar One, relating to proposed new nexus and profit allocation rules to user/market jurisdictions that would not be dependent on physical presence.  The delegation also discussed technical issues relating to the Global Anti-Base Erosion (GLoBE) proposal (or minimum tax rate) under Pillar Two.

March 2019 – OECD submission regarding the Tax Challenges Arising from the Digitalisation of the Economy

An Institute delegation visited Paris on 6 February 2018 to meet with officials from the OECD and from Ireland’s Permanent Representation to the OECD and UNESCO to discuss the ongoing work of the OECD Task Force on the Digital Economy and the challenges facing Ireland relating to taxing the digital economy.

October 2017 – Response to the OECD request for input regarding the tax challenges of the digitalised Economy