On July 1, the OECD/G20 Inclusive Framework on base erosion and profit shifting (BEPS) released a statement outlining political and technical agreement on many features of Pillar 1 and Pillar 2, which reflect ongoing efforts made towards reaching a multilateral, consensus-based solution to the tax challenges arising from the digitalization of the economy. This agreement was endorsed by the G20 following its July 9-10 meeting. As of July 14, 132 of the 139 members of the Inclusive Framework have approved the agreement.

The July statement follows the release of detailed “blueprints” on Pillars 1 and 2 in October 2020. The statement provides high-level detail on the design of each pillar, but does not include the level of technical detail provided by the blueprints, and some areas remain open for further consideration. A detailed implementation plan will follow in October 2021.

The statement reflects the influence of proposals from the Biden administration, and may affect some companies in the energy, natural resources, and chemicals (ENRC) sectors in ways that could not have been anticipated when the blueprints were first released. The comments below consider what the consensus solution outlined in the statement might mean for these ENRC sectors.


The ENRC sectors includes chemicals and performance technologies, oil and gas, power and utilities, and renewable energy. Companies in these sectors can be challenged by volatile commodity prices and a shifting economic, regulatory, and competitive landscape.

  • The chemicals and performance technologies industry has been revitalized by booming US shale production, and the resulting abundant supply of low-cost feedstock may drive global expansion.
  • The oil and gas industry has had many ups and downs in recent years. Despite challenges that include upstream volatility, midstream constraints, and industry consolidation, shifting customer demands and new technologies are opening up opportunities for oil and gas companies to explore.
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  • Energy suppliers are balancing a competing set of demands from customers, regulators, and employees. Technology is helping to revolutionize how businesses can meet their various needs, if organizations can find the capital to make the investment.
  • The adoption of wind, solar and other renewables is accelerating as costs fall, reliability increases, and global interest in reducing carbon emissions continues to climb. Capacity is increasing, but demand for further increases persists.
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Insights on Pillar One: Profit Allocation and Nexus

Amount A – New taxing right allocating profits to market jurisdictions based on a formula 

  • The Pillar 1 blueprint proposed that “natural resources” would be carved out. This was intended to cover activities related to non-renewable extractives, including petroleum as well as renewable energy products (such as biofuels, biogas and green hydrogen). As such, most upstream and midstream activities, including commodity trading, were proposed to be excluded.
  • Following a proposal from the Biden administration, the July statement from the Inclusive Framework adopted a simplified quantitative approach to determining the scope of Amount A.
This approach would apply to no more than 100 of the largest and most profitable MNE groups, and would not be limited to automated digital services or consumer facing businesses. The statement provides an exclusion for “extractives.” but does not offer any detail.
  • While some natural resources companies would certainly benefit from the extractives carve-out, it remains unclear whether the scope of the carve-out will match what was proposed in the Pillar 1 blueprint. For instance, it is not certain whether renewable energy, midstream, and commodity trading businesses would fall within the carve-out.

Amount B – Standard arm’s length remuneration for routine marketing and distribution services 

  • Amount B would not be subject to the Amount A limitations. This would mean that related party baseline marketing and distribution activities in the ENRC sector would be in scope (i.e., where there is resale and routine distribution). This would include related party wholesalers and retailers. However, the full scope of Amount B is still being debated within the Inclusive Framework, where some countries are pushing for a broader range of activities being covered (for example, commissionaire structures and sales agents). The recent statement provides that work on Amount B is ongoing, but has been placed on a separate track, with completion expected by the end of 2022. The statement does not contain any substantive detail on Amount B.
  • Because some ENRC companies often have projects in numerous countries throughout the world, companies should keep abreast of developments in this area. While traditional definitions of distribution would not typically capture most ENRC project operations throughout the world, it will be important to closely monitor discussions around the definition of marketing and distribution for Amount B purposes. Of course, chemical and specialty products companies with traditional related party distributors could be impacted by Amount B, depending on whether they are considered to perform baseline marketing and distribution activities. ENRC companies with any kind of routine sales, marketing, or distribution operations should carefully monitor developments as work on Amount B proceeds.

Dispute prevention and resolution – enhancing tax certainty

  • The Pillar 1 blueprint laid out a detailed, multi-tiered dispute prevention mechanism for Amount A. The July statement does not provide detail, but does state that in-scope companies will have access to mandatory binding dispute prevention and resolution mechanisms for Amount A and related issues, including transfer pricing and business profits disputes. However, developing countries with low levels of mutual agreement procedure (MAP) activity may be permitted to opt out of the mandatory processes.
  • It is unclear whether the two-tiered panel system envisioned in the blueprint remains under consideration. That system would have provided for certainty, but its complexity created a number of pain points, particularly around timing.
  • The Pillar 1 blueprint provided that Amount B would be subject to mandatory binding dispute resolution, but only as a last resort after the ordinary MAP process has been exhausted. The statement does not address this proposal.
  • As of the publication of the Pillar 1 blueprint, the Inclusive Framework was exploring whether a mandatory binding dispute resolution or mandatory non-binding dispute resolution (e.g., mandatory mediation) would be appropriate for taxpayers outside the scope of Amount A. The statement does not address this, and at this point, it is unclear whether an agreement on Pillar 1 would include provisions on tax certainty for these taxpayers.

Insights on Pillar Two: Global Minimum Taxation

Within the ENRC sectors, companies vary significantly in terms of their business structure, tax structure, and the level of taxation to which they are subjected. This typically involves either incentives or special tax regimes, which could result in higher or lower taxation relative to companies outside the sector.

Therefore, Pillar 2, which aims to apply a minimum level of taxation, will have disparate effects among ENRC companies. For example, an oil and gas company which is highly taxed may not be subject to Pillar 2, whereas companies with significant income in low tax jurisdictions are highly likely to be subject to Pillar 2. We set out below the areas of potential complexity.

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  • Rate: The Pillar 2 blueprint did not endorse a minimum tax rate for Pillar 2, but early speculation generally centered around 12.5% as a model for an acceptable minimum. The statement endorsed a minimum rate of at least 15%, and negotiations for a potentially higher rate continue. If the rate were ultimately set at 20%, for example, Pillar 2 could have a significantly different impact on ENRC companies.
  • GILTI co-existence: The co-existence of Pillar 2’s GloBE rules is a key issue for US businesses. The statement notes that consideration will be given to how GILTI will co-exist with the GloBE rules, but the technical details of any coordination mechanism have not yet been revealed. For companies in the oil and gas sector, GILTI’s foreign oil and gas extraction income (FOGEI) exception could complicate this interaction. There are various Biden administration proposals that would modify the GILTI regime. If GILTI is amended to apply on a country-by-country basis, this would also affect its co-existence with Pillar 2.
  • Carve-outs: The Pillar 2 blueprint and the statement both propose a formulaic carve-out to exclude a fixed return for substantive activities. Payroll and tangible assets are proposed to be indicators of substantive activities. According to the Pillar 2 blueprint, the tangible assets component would include property, plant and equipment (PPE) and natural resources (including oil and gas deposits and mineral deposits) in a jurisdiction. The carve-out for PPE and natural resources would be based on the depreciation of the PPE and the depletion of the relevant natural resources, respectively. Assuming that this remains the case, natural resources companies would clearly benefit from the inclusion of natural resources in the carve-out, while other asset-intensive ENRC businesses such as mining and chemical companies would also benefit from the inclusion of depreciation.
  • Financial accounting standards: The use of financial accounting standards as the starting point for calculating the tax base for a jurisdiction could result in the understatement or overstatement of the ETR in jurisdictions where the accounting standards vary from those in the parental jurisdiction. This is especially true for some segments of the ENRC sector where specific accounting policies may apply, such as natural resources (e.g., successful efforts or full cost methodologies or where production sharing contracts apply specific policies).
  • Covered taxes: The Pillar 2 blueprint considers that taxes on activities such as the exploration and production of oil and gas (irrespective of whether or not they apply in addition to a generally applicable income tax) would fall within the general definition of a covered tax. Resource levies closely linked to extractions (e.g., imposed on a fixed basis or on the quantity, volume or value of the resources extracted rather than on net income or profits) may not be treated as covered taxes. As such, there is a risk that certain taxes paid by mining and oil and gas companies may not be covered taxes, and thus the risk of additional taxes applying under Pillar 2 is increased.
  • Permanent differences: It is proposed that certain adjustments will be made to the tax base for permanent differences, using an agreed set of principles, although the July statement does not contain any detail on what these adjustments would be. Jurisdictions often provide significant incentives to certain businesses in the ENRC sector, including both natural resources and renewable energy companies, that may be treated as permanent differences from an accounting perspective. The failure to take these into account under Pillar 2 may result in the ETR for a jurisdiction being understated and it would be helpful if these incentives could be white listed where they are deemed acceptable regimes.
  • Timing differences: Timing differences for businesses operating in the ENRC sector are often substantial, as it is capital intensive. Jurisdictions often offer incentives in the form of immediate expensing of capital expenditure or accelerated depreciation. The Pillar 2 blueprint discusses options for potentially addressing common timing differences (e.g., adjusting for certain deferred tax liabilities) and highlights the need to avoid creating additional complexities. However, it is not currently clear what approach will ultimately be adopted and this will be critical to clarify in order to understand the impact on the ENRC sector.
  • Transitional rules and carry-forwards: For many ENRC businesses, volatility in commodity prices can result in significant fluctuations in returns. Natural resources companies are subject to significant upfront exploration and development costs. How losses are carried forward and excess taxes paid in prior years (including prior to the start date of Pillar 2) are recognized will be particularly important for the ENRC sectors, especially in the context of repayments of tax. This may also create additional complexities arising from the need to track carry-forward losses and excess taxes for each jurisdiction.
  • Dispute resolution: Although there are a number of Pillar 2 interactions that may result in double taxation, little attention has been paid to the challenges that Pillar 2 controversies are likely to pose. The Pillar 2 blueprint’s suggestion that the existing MAP infrastructure will be able to effectively handle these disputes appears overly optimistic.

As noted above, there are several complexities in applying BEPS 2.0 principles to the ENRC sectors. It is recommended that companies in the sector keep a watchful eye as matters progress in order to understand how the rules will be implemented in practice and the resultant impact on ETRs.

How KPMG can help

Within the ENRC sectors, companies face a shifting economic, regulatory and competitive landscape and often vary significantly in terms of their business and tax structures. KPMG can help you understand, communicate and evaluate the appropriate actions around BEPS 2.0 that take into consideration the complexities of your industry. KPMG’s BEPS 2.0 Model is built on the KPMG Digital Gateway, a single-platform solution that gives organizations access to the full suite of KPMG Tax and Legal technologies.

By combining KPMG’s technology investments with sector-specific professionals, you can stay ahead of the implications of these initiatives with recommendations specific to your industry. We can help you identify potential impacts and possible responses, develop communications plans and help empower you to support your next steps.

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