OECD Races Toward Completing Final Report on Digital Economy: But two fundamental 'pillars' present structural challenges.

AuthorTien, Gene

The Organisation for Economic Co-operation and Development (OECD) is racing toward meeting an ambitious target by the end of the year that could radically change the way all multinational enterprises (MNEs) are taxed.

The target--a final report--was set forth in January 2019 under the cover of addressing the digital economy. (1)

However, the two fundamental "pillars" of this project are far broader than that. As the OECD's base erosion and profit shifting (BEPS) project concluded that it is impossible to ring-fence the digital economy, the OECD is now setting the foundation of the new international tax system that reaches far beyond the digital economy with a global anti-base erosion (GloBE) framework, known as Pillar Two. (2) So, what will happen at the end of this sprint to the finish? It may be meaningful to look at the current state of Pillar Two, and the developments under Pillar One, before looking at our future international tax system.

Because much of the attention in 2020 has focused on Pillar One, the pillar that initially addresses digital taxes, many MNEs have taken the view that this 2020 work stream is irrelevant to their business. This view may seem understandable if one's business is not primarily digital or consumer facing. However, it misses a critical point: that key elements of both Pillar One and the global minimum tax framework/GloBE will affect all MNEs, and further input will be key to whatever consensus-based solution will be produced for Pillar Two.

The Sprint

During its May 2019 meeting, the Inclusive Framework adopted a Programme of Work, which set forth the design of two pillars for completion by the end of 2020. (3) These two pillars were designed to provide a consensus solution to address the challenges of taxation in the digital economy under Pillar One and to address what the Inclusive Framework called the challenges in the remaining issues under BEPS under Pillar Two. (4) The proposals in Pillar One address nexus and transfer pricing, whereas the proposal under Pillar Two is an exploration of "strengthening the ability of jurisdictions to tax profits where the other jurisdiction with taxing rights applies a low effective rate of tax to those profits." (5)

In the fall of 2019, the OECD and the Inclusive Framework published more detailed consultation documents regarding Pillars One and Two in their proposal for a "unified approach" under Pillar One (6) and GloBE under Pillar Two. (7) Commentators had an opportunity to provide written and oral comments at the consultations, which amounted to two days of consultation for Pillar One and one day for Pillar Two. In January 2020, the OECD released a statement on its progress to date that contained additional details, mostly about Pillar One, as well as a timeline to achieve key policy features of a consensus-based solution to Pillar One by July 2020 and to produce a final report on the technical details of the Inclusive Framework's consensus-based solution by the end of 2020. (8) The progress note on Pillar Two was meaningfully limited to the last annex, which briefly discussed the key design work streams on the constituent pieces that build up the GloBE proposal.

State of Pillar Two


On January 31, 2020, the OECD conducted Tax Talks #14 to discuss the Inclusive Frameworks statement concerning the status of progress toward implementing the unified approach for Pillar One and the status of GloBE under Pillar Two. In this statement, the members of the Inclusive Framework affirmed their commitment to reach an agreement on a consensus-based solution by the end of 2020, with a focus on improving tax certainty. Furthermore, the statement detailed that significant work remains in each of the four sections of GloBE.

As for the effort needed to develop the two pillars, GloBE is surprisingly underdeveloped in light of the OECD's 2020 target. GloBE is a major sea change in the approach that governments will need to take when contemplating corporate income taxation. Unlike Pillar One, which is clearly tied to the first BEPS Action Item, (9) Pillar Two exists as a wholly separate approach that fundamentally creates a new highly interconnected international minimum corporate income taxation system. The four components of the GloBE proposal are: (10)

  1. an income-inclusion rule that would tax the income of a foreign branch or a controlled entity if that income was subject to tax at an effective rate that is below a minimum rate;

  2. an undertaxed-payments rule that would operate by way of a denial of a deduction or imposition of source-based taxation (including withholding tax) for a payment to a related party if that payment was not subject to tax at or above a minimum rate;

  3. a switchover rule to be introduced into tax treaties that would permit a residence jurisdiction to switch from an exemption to a credit method where the profits attributable to a permanent establishment (PE) or derived from immovable property (which is not part of a PE) are subject to an effective rate below the minimum rate; and

  4. a subject-to-tax rule that would complement the undertaxed-payments rule by subjecting a payment to withholding or other taxes at the source and adjusting eligibility for treaty benefits on certain items of income where the payment is not subject to tax at a minimum rate.


During the OECD's January 31, 2020, Tax Talks, Pascal Saint-Amans, director of the Centre for Tax Policy and Administration at the OECD, admitted the timeline was highly ambitious. (11) Annex Two in the statement indicated that, whereas Pillar One had numerous competing proposals with respect to the elements needed to be completed in the unified approach, the four individual elements under Pillar Two had already been identified and agreed on in the Programme of Work. Saint-Amans reaffirmed the OECD's end-of-2020 commitment to have a final report on the technical details of Pillar Two, with several key policy features to be discussed at the OECD plenary meeting on July 1 and 2.

Annex Two briefly summarized the progress on the elements of GloBE with a focus on the first of the elements as it related to the income-inclusion rule. The approach for this element pulls from controlled foreign company (CFC) rules to require shareholders to account for a proportionate share of a corporation's income at a minimum top-up rate. The statement indicates that "extensive work" is underway to evaluate the use...

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