On October 8, 2021, Organization for Economic Co-operation and Development (‘OECD’)/G20 Inclusive Framework (‘IF’) has issued statement on Two-Pillar solution to Address the Tax Challenges Arising from the Digitalisation of the Economy. Global political consensus was broadly achieved as out of the 140 countries of the IF engaged in negotiations, 136 signed on to the Two-Pillar proposal. Notably, Ireland, Estonia, and Hungary gave their approval after initially staying out of the agreement in July, however Kenya, Nigeria, Pakistan, and Sri Lanka in the end decided not to opt for the measure.  The proposal follows a general outline that has been under discussion since 2019. There are two “Pillars” of the reform.


Pillar One  is focused on enlarging as well as replacing the traditional rule of “nexus” as widely recognized and followed in international tax practice, thereby enabling a jurisdiction to levy income tax on a foreign enterprise dealing with its economy, beyond physical presence. The design of Pillar One is split into two sections — Amounts A and B. Amount A reallocates a fraction of in-scope residual profit of multinationals toward market jurisdictions. Whereas, Amount B provides an arms-length principle for marketing and distribution function.


Pillar Two includes a global minimum tax, with the aim of addressing the remainder of the Base Erosion Profit Shifting (‘BEPS’) challenges. Pillar Two ensures a global minimum tax rate of 15% on corporate income. It includes two interlocking domestic rules [together known as Global anti-Base Erosion Rules (‘GloBE rules’)] and then a third rule i.e., Subject to Tax rules (‘STTR) for tax treaties


The statement provides for the completion and implementation of the above proposals by 2023 through Multilateral Convention (‘MLC’), which appears to be enormous task considering numerous open ended items. Countries like India may need to evaluate the efforts involved in achieving a consensus on the proposed rules vis-à-vis likely gains resulting from same and also considering the impact of removal of equalization/ other similar measures, which again is a matter of further discussion. In any case, one can expect further changes in the rules before they are finally implemented and therefore it is important to ‘wait and watch’ the developments with keen eyes.


In the newsflash, we have described the components of each pillar and other clarifications provided in the statement.

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