An overview of the OECD’s Base Erosion and Profit Shifting 2.0 Pillar One blueprint


OECD releases BEPS 2.0 Pillar One blueprint on the allocation of taxation rights between jurisdictions and invites public comments


On 12 October 2020, the Organization for Economic Cooperation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting released two detailed “blueprints” in relation to its ongoing work to address the tax challenges arising from the digitalization of the economy. The OECD welcomes comments on the proposals by 14 December 2020, and will hold a virtual public consultation meeting in mid-January 2021.

This article considers the Pillar One blueprint, proposals which address the allocation of taxing rights between jurisdictions and considers various proposals for new profit allocation and nexus rules. The blueprint contains three elements:

(a)  New taxing rights for market jurisdictions over a share of the (deemed) residual profits of a multinational enterprises group (MNE) or segment of such a group (Amount A)

(b)  A fixed return for certain baseline marketing and distribution activities taking place physically in a market jurisdiction (Amount B)

(c)  Processes to improve tax certainty through effective dispute prevention and resolution mechanisms

Looking ahead, the blueprint references the need for the framework to focus on the remaining political and technical issues, including issues related to scope, quantum, the choice between mandatory and safe harbour implementation, the new tax certainty procedures with respect to Amount A, and enhanced tax certainty procedures for issues beyond Amount A.

Amount A


Regarding the scope of Amount A, two types of tests would apply, namely, the activity and threshold tests.

The activity tests are designed to capture those MNEs that participate in a sustained and significant manner in the economic life of a market jurisdiction, without necessarily having a commensurate level of taxable presence in that market under existing nexus rules. This covers MNEs in either or both of the following categories: automated digital services (ADS) and consumer-facing businesses (CFB).

ADS are generally defined as services that are both automated (i.e., the provision of the service to a particular user requires minimal human involvement) and digital (i.e. provided over the Internet or an electronic network). It was noted in the blueprint that ADS could be provided remotely and to markets where the MNE has little or no infrastructure to a large number of customers (or users).

The definition of ADS is comprised of positive and negative lists of activities and a general definition. The positive list includes online advertising services, sale or other alienation of user data, online search engines, social media platforms, online intermediation platforms, digital content services, online gaming, standardized online teaching services and cloud computing services.

An activity on the negative ADS list is not an ADS activity. The negative list includes customized professional services, customized online teaching services, online sales of goods and services other than ADS, revenue from the sale of a physical goods irrespective of network connectivity, and services providing access to the Internet or other electronic networks.

If an activity is not on either list, the general definition applies. The general definition is included as a supplement to the two lists to account for the rapidly changing nature of digitalized business models.

CFB are businesses that generate revenue from the sale of goods and services of a type commonly sold to consumers, including those selling indirectly through intermediaries and by way of franchising or licensing. To be considered a CFB, the MNE should be: (i) the owner of the consumer product/service and holder of the rights to the connected intangible property (including franchisers and licensers); or (ii) the “retailer” or other contractual counterparty of the consumer.

The following activities are specifically excluded from Amount A: certain natural resources; certain financial services; construction, sale and leasing of residential property; and international airline and shipping businesses. For activities that may be both ADS and CFB, the ADS definition applies.

The threshold tests for Amount A are divided into (i) a global revenue test and (ii) a de minimis foreign in-scope revenue test.

The €750 million threshold that is used for country-by-country reporting purposes would be used under the global revenue test. Under the de minimis foreign in-scope revenue test, revenue from the in-scope activities (i.e. from ADS or CFB) should be determined first. Then, one should check if this revenue is related to “foreign” activities. The blueprint uses a threshold of €250 million in an example illustrating this test.

In order to deliver a solution in 2020 in accordance with the original G20 mandate, some jurisdictions advocated for a phased implementation with ADS coming first.

As an alternative to an activities-based test for scope, the United States has proposed implementing the new taxing right on a “safe harbour” basis, which would enable an MNE to elect on a global basis to be subject to Pillar One. Many jurisdictions have expressed scepticism about such an approach.


The blueprint sets out different nexus rules for ADS and CFB. For ADS, nexus would be established by exceeding a market revenue threshold. Because through the provision of ADS, MNEs can participate in the economic life of market jurisdictions without a physical presence, a revenue threshold is the only test to establish nexus for ADS.

For CFB, the nexus standard requires a significant and sustained engagement in the market jurisdiction beyond mere sales. The “plus factor” is a subsidiary or permanent establishment (PE) that carries out activities in the market jurisdiction that are connected to in-scope sales. This plus factor would entail a physical presence test with relevant sales-related activities.

Further work on the nexus requirements will relate to the decision whether to apply a temporal requirement to avoid the effects of isolated or one-off transactions and consideration of the possible use of a lower nexus standard for smaller developing countries and higher thresholds for large markets.

Revenue sourcing

The sourcing principles differ between ADS and CFB – and these broad categories are further subdivided based on business model. Each type of activity has its own set of sourcing rules, supported by a range of specific indicators. The blueprint also provides guidelines on documentation requirements, including the MNE’s internal control framework.

Tax base determinations

MNEs are permitted to rely on the Generally Accepted Accounting Principles (GAAP) used by the ultimate parent entity (UPE) in preparing consolidated financial accounts, provided this standard produces equivalent or comparable outcomes to International Financial Reporting Standards (IFRS). Profit before tax from the consolidated profit and loss statement prepared based on IFRS should in general be used as the starting point for the calculation.

To account for losses, the Amount A tax base rules will apply consistently at the level of the group or segment irrespective of whether the outcome is a profit or loss. Any losses arising from a taxable period will be preserved and can be carried forward to subsequent years through an “earn-out” mechanism. Losses from one segment will not be available to offset losses in another segment.

Profit allocation

The Amount A formula is comprised of three distinct components rather than based on the arm’s length principle:

Step 1: A “profitability threshold” to isolate residual profits potentially subject to reallocation.

Step 2: A “reallocation percentage” that defines the share of residual profits (actual profits minus the profitability threshold), or allocable tax base, that is allocated to market jurisdictions.

Step 3: Use of an allocation key to allocate the allocable tax base among the eligible market jurisdictions.

The allocation key (step 3) defines the mechanism for allocating the Amount A profit to eligible market jurisdictions (i.e. jurisdictions with Amount A nexus). The allocation is based on in-scope revenues and could be implemented through either a profit-based or profit margin approach.

The issue of double counting

Amount A is an overlay to the existing income tax system, and interaction with that system could lead to duplicative taxation. Specifically, if the existing system already allocates residual profits to market jurisdictions, such profits may be taxed twice through regular transfer pricing rules and again through Amount A.  Accordingly, a “marketing and distribution profits safe harbour” is included in the blueprint as an option.

The safe harbour attempts to address situations to which the Pillar One rules were not intended to apply. This would be particularly relevant for decentralized businesses that realize residual profits in a large number of entities and jurisdictions. The title of the safe harbour suggests that this issue of existing in market residual profits is only relevant for CFB. However, it is not clear why the same should not apply to ADS business models where in market residual profits are realized and taxed.

Amount B

Amount B is intended to standardize the remuneration of related party distributors that perform “baseline marketing and distribution activities” in a manner that is aligned with the arm’s length principle. These rules are intended to simplify the administration of transfer pricing rules and reduce compliance costs, while also enhancing tax certainty and reducing controversy. Amount B will apply to entities or PEs with existing nexus, and as such is not related to the new nexus rules of Amount A. Importantly, the scope limitations of Amount A relating to the activity tests and threshold tests are not applicable to Amount B.

The controlled transactions in scope of Amount B could consist of (i) the purchase of products from related parties for resale to unrelated customers predominantly, and the associate performance of baseline distribution activities; and (ii) the performance of baseline marketing and distribution activities in the state of residence, transacting or dealing with a foreign associated enterprise.

Amount B would apply to distribution activities that according to the accurate delineation of the transaction would be characterized as a routine distributor. Marketing and distribution activities will be identified as in- or out-of-scope activities by reference to defined “positive lists” and “negative lists” of qualitative factors. These lists include examples of functions, assets and risks that would be (positive list) and would not be (negative list) expected of a distribution entity with baseline activities. Certain quantitative factors would also be used to further support the identification of in-scope activities. The current intention is for Amount B to apply to a relatively narrow scope of entities that would generally be characterized as a routine distributor in relation to a controlled transaction, excluding commissionaires and sales agents. However, some inclusive framework members want to explore the feasibility of broadening the scope.

The quantum of Amount B and thereby the remuneration for the baseline marketing and distribution activities will be determined using the transactional net margin method. A rebuttable presumption may be introduced for cases where evidence is provided that another transfer pricing method is the most appropriate method to use.

Amount B would be implemented through domestic law or regulations. The blueprint indicates that existing treaties can resolve disputes over Amount B. Where there is no treaty in place, a new treaty-based dispute resolution mechanism may be required.

Tax certainty and dispute resolution

Regarding Amount A, a mandatory binding dispute prevention process that aims to address in advance potential issues regarding Amount A was proposed – such as the correct delineation of business lines and calculation of profits, the existence of nexus, or the identification of paying entities. The process would be based on an MNE’s self-assessment that would be reviewed by a representative review panel in the first instance and, if no agreement can be reached at that stage, by a determination panel in the second instance. The agreement reached in this process would be binding on all relevant tax administrations and on the MNE.

The tax certainty approach beyond Amount A includes a number of steps, including dispute prevention, use of the existing mutual agreement procedure (MAP), as well as a new mandatory binding dispute resolution mechanism. For developing countries, elective binding dispute resolution is contemplated.

Finally, the inclusive framework is exploring a mandatory binding dispute resolution for MAP cases that remain unresolved after an agreed period. The inclusive framework would agree on the defined period after which the dispute resolution mechanism would be triggered and the mutual agreement would be submitted to a panel of experts (a determination panel) who would reach a decision.

Implementation and administration

The blueprint indicates that the implementation framework for Pillar One is yet to be developed. This will require action across three different aspects: domestic law, public international law and guidance to supplement these two elements.

On the key question of removal of unilateral measures, it is expected that any consensus agreement will require a commitment for such removal. However, no implementation guidance on this has been developed yet.


The proposals under Pillar One represent a substantial change to the tax architecture and go well beyond digital businesses or digital business models. These proposals could lead to significant changes to the overall international tax rules under which businesses operate. It is important for businesses to follow these developments closely in the coming months and to consider engaging with the OECD and policymakers at both national and multilateral levels on the business implications of these proposals. Businesses also should evaluate the potential impact of these proposed changes.

If no agreement can be reached by mid-2021, it is expected that many countries will introduce digital services taxes. Moreover, countries could introduce other elements of the Pillar One architecture through their domestic legislation, such as for example a variation of Amount B. If there is no coordinated global agreement, this would be expected to lead to a rise in double taxation and controversy.

This article is a summary of an EY Global Tax Alert, released on 19 October 2020, the authors were:

Ernst & Young Belastingadviseurs LLP, Rotterdam

  • Ronald van den Brekel (Partner, ITTS)
  • Marlies de Ruiter (Partner, ITTS)
  • Maikel Evers (Executive Director, Other Tax)

Ernst & Young Belastingadviseurs LLP, Amsterdam

  • David Corredor-Velásquez (Senior Manager, ITTS)
  • Konstantina Tsilimigka (Senior, ITTS)
  • Roberto Aviles Gutierrez (Staff, ITTS)

Ernst & Young LLP (United States), Global Tax Desk Network, New York

  • Jose A. (Jano) Bustos (Partner, ITTS)
  • Joana Dermendjieva (Senior Manager, ITTS)
  • Jean-Charles van Heurck (Senior Manager, ITTS)

Ernst & Young LLP (United States), New York

  • Michael Lukacs (Partner, ITTS)

Ernst & Young LLP (United States), San Jose

  • Channing Flynn (Partner, ITTS)

Ernst & Young LLP (United States), Seattle

  • Anne Welsh (Partner, ITTS)

Ernst & Young LLP (United States), Washington, DC

  • Barbara M. Angus (Partner, ITTS)
  • Rebecca O Burch (Executive Director, Other Tax)
  • Mike McDonald (Executive Director, ITTS)
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