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Background to the global consensus on the two-pillar solution to address the tax challenges arising from the 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 in October 2015.

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.

The OECD Task Force on the Digital Economy published the Tax Challenges Arising from Digitalisation – Interim Report 2018 in March 2018.

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.

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.

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).  Ireland did not sign the July Statement and reserved its position on a global minimum effective tax rate of “at least 15%”.

On 8 October 2021, the Inclusive Framework published 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%. 136 out of 140 Inclusive Framework member countries, including Ireland, joined in the updated Statement. 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.

You can read more here about the position adopted by Ireland to the July Statement; the rationale for the subsequent change in Ireland’s position in October; and the key components of the two-pillar solution to address the tax challenges arising from the digitalisation of the economy as outlined in the updated October Statement.