Pillar Talk – Pillar One of BEPS 2.0

In this first of two articles, Andrea Tolley reviews some of the main issues for multinationals arising from ‘Pillar One’ of BEPS 2.0.

Andrea Tolley reviews some of the main issues for multinationals arising from ‘Pillar One’

The July 2021 statement of the OECD / G20 Inclusive Framework (IF) on BEPS 2.0 gave us much to think about. In this first of two articles, Andrea Tolley, Transfer Pricing Partner at KPMG in the UK, highlights some of the main issues from her ‘Pillar Talk’ LinkedIn blog posts covering Pillar One. This is the new proposed regime for reallocating a portion of multinationals’ taxable profits among their market jurisdictions. Much of the previous uncertainty has been clarified, though a lot still remains. Digital Services Taxes (DSTs) are also to be repealed as part of the overall plan (though we are unsure when). It is also clear that the growing contention since BEPS 1.0 that it is impractical to demarcate a separate ‘digital’ economy from everything else has won the day.

Andrea’s first post ‘Scope: so much for digital’ picks up the evolving rules determining the scope of the regime. The IF thought long and hard about how to target their reallocation and nexus rules. We saw extensive definitions of the targeted industries supplemented by positive and negative tests set out at great length in the ‘Blueprint’ containing the draft (and so far only) detailed plans. It wasn’t going to work. Too much complexity, too many objections, too many opportunities for unintended consequences. So now the rules cover just about any industry, with groups in the picture if they’re big and profitable enough. At the moment, this means very big indeed, but there is a plan to bring down the threshold, and who’s ruling out more reductions in future?

Andrea Tolley

Partner, Head of Transfer Pricing Corporates

KPMG in the UK


The next article ‘A nexus event: the impact of a revenue threshold’ looks at the tax from the other direction: once you’ve worked out who pays it, the question then is who receives it. Again, we can welcome the clarity compared to earlier plans. Taxing rights for a jurisdiction are established by the level of sales therein: once you hit €1 million, you’re in. If you’re selling in smaller jurisdictions, €250,000 of local sales is enough. End of story? Not quite, as sales ‘in’ a jurisdiction are traced to where the goods or services are used or consumed, so sales via third party distributors and the like to an ultimate customer elsewhere, may pose data availability questions. Andrea flags the key questions to ask when dealing with these.

But wait! Don’t you . . .forget about ‘B’. Amount B, the standardised return for ‘baseline’ marketing and distribution activities has been parked, with further details expected next year. The idea is to provide a simple and foreseeable return for activities seen as straightforward, but the functions performed and risks managed can vary significantly even here. The arm’s length principle is a well-understood and long-standing method for dealing with these variables. The proposals that any new amount B return could be varied by industry, and could be a rebuttable presumption, could be taken as a tacit admission that perhaps arm’s length pricing isn’t such a bad idea after all. And if some proponents come to champion an alternative, it is questionable how much enthusiasm will exist for yet another round of negotiations after the lengthy efforts needed to get this far.

Lastly, we have ‘Unilateral digital taxes: Live and let die?’. It isn’t surprising to see a commitment to let DSTs die: the US in particular remained firmly opposed, with some commentators seeing these measures as unfairly singling out US tech multinationals. The countries that had introduced these measures called them ‘temporary’, until multilateral consensus could be reached. It is likely that securing consensus on the Pillar One proposals means holding these jurisdictions to their word. However, there is an interesting twist with this one. The IF statement referred to “other relevant similar measures” that would also face the chop. What might these be? Andrea offers some possibilities, but we will need to wait for the G20 meeting in October to see whether any other taxes will be left to die.

So there we are: Pillar One of the Two Pillar approach to reforming the international taxation system. We have come a long way from the old system of physical presence, through digital business taxation, to new nexus rules for most industries. But even with this, there are perceived flaws in international taxation that need to be resolved. Pillar Two seeks to blunt the incentives to exploit these by imposing a global minimum level of tax. More Pillar Talk to come.