The OECD's two-pillar solution: Reshaping international taxation for the digital age

5 minute read
26 June 2023

The OECD's comprehensive two-pillar solution is designed to reform international tax rules and address the tax challenges arising from globalization and digitalization.

Pillar 1: Profit allocation to market jurisdictions

Pillar 1 targets around 100 of the largest and most profitable multinational enterprises (MNEs), encompassing those with gross revenues exceeding €20 billion and profitability surpassing 10 per cent. Its primary objective is to allocate profits to the countries where these MNEs generate revenue and serve their customers, referred to as "market" jurisdictions.

The framework also incorporates safe harbor rules for sales and marketing activities and mandates the removal of digital services taxes and other relevant measures by participating countries. Utilizing a revenue-based allocation key, Pillar 1 allows for taxation in market jurisdictions regardless of an MNE's physical presence in that jurisdiction, relying on the transaction between the MNE and the customer as a basis for the transaction – referred to as the "nexus."

Pillar 1 comprises two components: Amount A and Amount B. Amount A redistributes 25 per cent of the MNEs' profits exceeding 10 per cent of their revenues to market jurisdictions in which the MNEs meet the nexus test. Market jurisdictions receive a new taxing right over these residual profits if the MNEs derived over €1 million in revenue in that jurisdiction, or €250,000 in jurisdictions with lower GDPs. Amount B establishes a routine return for related party distributors involved in baseline marketing and distribution activities. It is aimed at streamlining the arm's length principle and reducing compliance burdens.

Pillar 2: Introduction of a global minimum tax rate

Pillar 2 introduces a minimum effective tax rate of 15 per cent on the profits of large MNEs with annual revenues of €750 million or more. This pillar relies on the global anti-base erosion (GloBE) rules, which offer a standardized calculation method for income across jurisdictions. Additionally, Pillar 2 introduces the "subject to tax rule," allowing source jurisdictions to levy up to 9 per cent tax on royalties, interest and other payments to jurisdictions with lower tax rates.

The calculation process for Pillar 2 involves five steps. First, the scope of MNEs is determined, distinguishing between those in and out of the framework's purview. Next, the GloBE income is calculated for each jurisdiction or constituent entity. These calculations are aggregated to provide an overall view of the MNE's activities and income. The third step involves attributing taxes to the income of each entity, taking into account various income inclusion rules provided in the OECD's guidance. Fourth, the effective tax rate is calculated, and if necessary, a top-up tax is applied to ensure compliance with the 15 per cent minimum tax rate. Finally, the allocation of the top-up tax is determined by either the inclusion rule or, in its absence, the under-taxed profits rule, on a formulaic basis.

Progress and implementation

Scheduled for mid-2023, work on the multilateral convention to implement Pillar 1 is still ongoing. However, its ratification in many countries may face hurdles, particularly in the United States, which is home to many of the target MNEs. Other countries have expressed concerns regarding potential revenue impacts resulting from the removal of digital sales taxes and the limited benefits they will derive from the Pillar 1 proposal.

On the other hand, Pillar 2's implementation is progressing more swiftly. In February 2023, the OECD published administrative guidance on the implementation of the global minimum tax. The OECD considers this guidance the final piece of work on the GloBE rules, with individual countries now responsible for implementing the guidelines.

Canada's commitment

Canada has affirmed its commitment to implementing the two-pillar framework. If the multilateral convention for Pillar 1 does not come into force by January 1, 2024, Canada is prepared to impose the Digital Services Tax. This tax would be applicable to revenues earned as far back as January 1, 2022. Furthermore, Canada intends to release draft legislative proposals for implementing the primary charging rule and a domestic minimum top-up rule, applicable to taxation years beginning on or after December 31, 2023.


The OECD's two-pillar solution represents a significant step forward in transforming international tax rules to address the challenges arising from globalization and digitalization. While progress varies between Pillar 1 and Pillar 2, international consensus is being sought to ensure a fair and equitable allocation of profits across jurisdictions. As the details of these reforms are finalized, it is crucial to stay informed about future announcements from the OECD, as the global tax landscape continues to evolve in response to the digital era.

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