Newsflash: OECD Announces Pillar 1 & 2 Agreement

On October 8, 2021, the Organization for Economic Cooperation and Development (OECD) published a statement announcing that 136 of the 140 Inclusive Framework members have agreed to a global tax deal addressing the tax challenges related to the digitalization of the economy.  Below is a high level summary of the key provisions of the agreement.  

Nexus:

- Special purpose nexus rule to be adopted to allow Amount A.

- Applies when in-scope MNE derives >EUR 1m revenue in a jurisdiction.

- For jurisdictions with GDP <EUR 40b, revenue threshold is EUR 250k.

Pillar One:

- 25% of profits above 10% PBT margin reallocated to market jurisdictions.

- Companies with revenues of EUR 20b+ in scope.

- Revenue threshold to reduce to EUR 10b over time.

- Extractives and regulated financial industry out of scope.

- Multilateral convention to be signed in 2022, effective 2023.

- Amount B deferred to 2022.

Pillar Two:

- 15% global minimum tax agreed.

- Language allowing for >15% rate removed.

- Carve-outs providing exemptions related to tangible assets and payroll.

- Companies with global revenues of EUR 750m+ in scope.

- Jurisdictions with sales <EUR 10m and profits <EUR 1m exempt.

- GloBe rules effective as of 2023.

Dispute Resolution:

- Mandatory binding arbitration for Amount A.

- Elective binding dispute resolution allowed for certain developing countries.

Unilateral Digital Services Taxes:

- Agreement calls for unilateral DSTs to be eliminated.

- The timing and transition details of the repeal of existing DSTs have not yet been agreed.

All OECD and G20 countries have now signed on to the agreement.  The four Inclusive Framework members did not sign on to the agreement are Kenya, Nigeria, Pakistan, and Sri Lanka.