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04 February 2020 / news


On 31 January 2020 the OECD/G20 Inclusive Framework (IF), consisting of 137 members published another statement addressing the tax challenges arising from the digitalisation of the economy.

In its statement the IF expresses its strong support to reach a consensus-based long-term solution by the end of 2020 for the challenges arising from the digitalisation of the economy, affecting a multitude of companies well beyond the digital economy. Recognising that the current work is on a ‘without prejudice basis’ and that still a lot of work needs be done, the IF members are committed to the ambitious goal to reach an overall agreement within the mentioned time frame. The statement is accompanied by two other documents, being (i) an outline of the Architecture of a Unified Approach on Pillar One (Outline), and (ii) a Progress Note on Pillar Two (i.e. GloBE Proposal). You can find the full package of documents here.

Outline of the Architecture of a Unified Approach for Pillar One

The Outline draws significantly on the Secretariat’s Proposal for a Unified Approach under Pillar One that was published for public consultation in October 2019 (please see our Tax Flash and our response to the Public Consultation. Taking into account the many comments provided in the consultation by various stakeholders (e.g. the need to minimize complexity and focus on simplifications) the IF agreed on the Outline, which will form the basis for the negotiations for the implementation of Pillar One.

The Outline contains some updates and changes compared to the Secretariat’s Proposal, the most significant of which are:

Scope: Two types of businesses will fall within the scope of the new taxing right:
(i) Automated Digital Services, i.e. the provision of automated digital services that are provided on a standardised basis to a large population of customers or users such as social media platforms or online search engines (ADS) and
(ii) Consumer Facing Businesses, i.e. businesses that generate revenue from the sale of goods and services that are commonly sold to consumers such as clothes and branded foods (CBF).

The Outline furthermore states that intermediate products and components (that are processed into goods commonly sold to customers) should not fall within the scope of the new taxing right. Specific industries considered to be excluded from the new taxing right are extractive industries plus other producers and sellers of raw-materials (even if those products are sold to consumers) and Financial Services.

It is anticipated that the proposed segmentation would give rise to scoping issues and a substantial administrative burden.

Thresholds: Besides a revenue threshold, two specific additional thresholds are considered. The revenue threshold could be the same as the CbC-reporting threshold, in which case only multinational groups with a revenue exceeding EUR 750 million would fall within the scope of the new taxing right. The other specific thresholds under consideration relate to a carve-out threshold for the total aggregate in-scope revenue and a de minimis rule for allocated profits under the new taxing right. The considered thresholds should limit disproportionate filing and administrative burdens.

Nexus: For multinationals in scope, a new nexus rule will be created based on indicators of a significant and sustained engagement with market jurisdictions. For that purpose a local in-scope revenue threshold is considered that should be met over a period of years that is proportionate to the relevant market size. For ADS this revenue threshold should be the only test, though for CFB additional factors will be considered, such as the existence of a multinational’s physical presence in the market jurisdiction or targeted advertising directed at the market jurisdiction.

Interaction between Amount A, B & C, as identified in the Secretariat’s Proposal for a Unified Approach. The Outline describes that the interaction between Amount A (allocating residual profits) and Amount B (allocating routine profits) will not be of a significant nature. Interactions between Amount A and Amount C (allocating additional return) however are likely to occur in various areas, such as comparability adjustments or differing interpretations of the arm’s length principle. The Outline notes that these interactions should not give rise to double taxation due to the existence and/ or introduction of mechanisms for the elimination of double taxation. Various options are considered for these mechanisms as well as the mechanisms for dispute resolution, as the opinions of various countries still differ in this respect.

In our view it is not convincing that the overlap between Amount A and Amount B will be not be significant. Furthermore, we note that some countries will be affected more than others by the elimination of double taxation. Therefore, we anticipate that this will be an important topic of the negotiations.

Quantum of Amount A. In contrast to the traditional transfer pricing “separate entity” approach, the calculation of Amount A will be based on a measure of profit derived from the consolidated group financial accounts. According to the IF, profit before tax is the preferred measure to assess this. After determining the quantum of Amount A, it will be necessary to distribute Amount A among the eligible market jurisdictions based on an agreed allocation key. This allocation key will be based on sales.

The option for implementation of Pillar One on a ‘Safe Harbour’ basis. In response to the letter from the US Treasury of 3 December 2019, the option of the implementation of Pillar One on a ‘Safe Harbour’ basis will be further explored and considered. A definitive decision however will not be made until agreement has been reached on all other elements for the implementation of Pillar One.
The Outline is accompanied by a decision tree to illustrate what multinational companies would fall within the scope of the new taxing right.

Progress Note on Pillar Two

In contrast to Pillar One, Pillar Two was not based on multiple alternatives. As such, the technical work on Pillar Two is in a further stage than the work on Pillar One, but also on Pillar Two significant work still remains to be done (please see our Tax Flash on Pillar Two here). The Progress Note provides a summary of the different components of the GloBE Proposal and an update on the status of work relating to the specific key issues. Key issues that need to be agreed on relate, amongst others, to the design of the carve-outs (substance based), the order in which the GloBE-rules apply and the design of the minimum tax rate test.


An important step will be the IF members’ meeting on 1-2 July 2020, during which it is intended to reach agreement on the key policy features for the solution which would form the basis for a political agreement.

It remains to be seen what kind of consensus will be reached on Pillar One and Pillar Two by the end of this year. At this stage it is also not clear yet whether consensus would be reached on Pillar One and Pillar Two together or whether that would happen separately. . We are closely monitoring the developments scheduled for this year.

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