A new global taxing right: Report on the “Statement by the OECD/G20 Inclusive Framework on BEPS on the Two-Pillar Approach to Address the Tax Challenges Arising from the Digitalisation of the Economy”

In January 2020, the OECD/G20 Inclusive Framework on BEPS, a group of 137 countries including Canada, endorsed a statement, which affirmed their commitment to build a global solution to the tax challenges created by the digitalisation of the economy.  This work has been underway since 2015 and is slated to be finalized by the end of 2020.

The statement, itself a political expression of on-going commitment, was accompanied by additional documents which, provide an outline of the “architecture” of the currently agreed upon Unified Approach under Pillar One, a programme of work descriptions, details on the multinational enterprises (“MNEs”) that will be impacted by the initiatives under Pillar One, and a progress report on Pillar Two work (collectively the “January 2020 Statement”).  The biggest development presented in this set of documents is the architecture of the Pillar One solution, including a clarified explanation of a new taxing right for market jurisdictions.


In 2015, the OECD identified the tax challenges of the digitalisation of the economy as Action 1 of the Base Erosion and Profit Shifting (“BEPS”) Action Plan.

The work under Action 1 responds to tax challenges of the digitalisation of the economy, which result from three key phenomena:

  1. scale without mass – the possibility of having substantial economic activity in a jurisdiction without any physical presence;
  2. reliance on intangible assets – the increased economic importance of intangibles such as computerised information (software and databases); innovative property (copyrights, designs, trademarks, and R&D); and economic competencies (brand equity, social networks, aspects of advertising and marketing); and
  3. the centrality of data – the increased value belonging to data, including consumer data.

The emergence of these phenomena raises the question of whether our current international income tax rules remain appropriate, observing that new intangible value drivers have eroded the need for physical proximity to target markets and undermined the existing profit allocation and nexus rules.

Particularly impacted are market jurisdictions as now MNEs can derive value within a market jurisdiction, yet associated profits are beyond the reach of the market jurisdiction’s taxation rights.  For example, Facebook derives value from the French market but has no traditional nexus in France – i.e. no permanent establishment – and as a result France has no ability to receive tax revenue from the value that Facebook derives from its digital presence in France.

The effects of the digitalisation of the economy are not limited to the new types of economic activity. In addition, digitalisation, and the decreased reliance on physical presence in a jurisdiction where value is derived, has facilitated profit shifting.

In January 2019, the Inclusive Framework published a Policy Note, which among other things, divided the work under Action 1 into two distinct groups or “pillars”.  Pillar One concerns nexus and profit allocation and works toward the creation of new taxing rights for market jurisdictions. Pillar Two takes up the more general BEPS goal of  preventing the shifting of profits to low-tax jurisdictions and aims to ensure a  minimum level of taxation.

Unified Approach to Pillar One

The January 2020 Statement, provided an outline of the “architecture” of the Unified Approach to Pillar One, which is designed to expand the taxing rights of market jurisdictions. 

The Unified Approach identifies three types of taxable profit that can be allocated to a market jurisdiction:

  • Amount A – a share of residual profit allocated to market jurisdictions using a formulaic approach applied at an MNE group level, which applies regardless of physical presence and reflects profits associated with the active and sustained participation of a business in the economy of a market jurisdiction.
  • Amount B – a fixed remuneration based on the arm’s length principle (“ALP”) for defined baseline distribution and marketing functions that take place in the market jurisdiction.
  • Amount C – any additional profit where in-country functions exceed the baseline activity compensated under Amount B.

Under the Unified Approach, in practice, an MNE would first apply the ALP-based profit allocation rules (including Amounts B and C) to determine an initial allocation of profit between entities and jurisdictions.  The relevant Amount A would then be allocated to eligible market jurisdictions as an overlay or partial override to the ALP-based profit allocation rules.

Amount A creates a new “formulaic” taxing right, whereas Amounts B and C are based on the existing profit allocation rules (including reliance on physical presence) and on the traditional ALP.

Amount A is to operate within specific parameters; it will only apply to large MNE groups which meet a new nexus test in a market jurisdiction, in-scope businesses, and an agreed quantum of profit. 

Businesses In-scope

Amount A will be most relevant to two board categories of businesses:

  1. Automated digital services – businesses that provide automated and standardised digital services remotely to customers in markets using little or no local infrastructure – e.g. online search engines, social media platforms, cloud computing services.
  2. Consumer facing businesses – businesses that generate revenues from the sale of goods and services of a type commonly sold to consumers  – e.g. branded foods, franchise models, clothes, automobiles.

Of significance, the January 2020 Statement explicitly excludes certain types of businesses from the scope of the Unified Approach. 

  • Sales of intermediate products and components;
  • Extractive industries and other producers and sellers of raw materials and commodities (for example the sale of sacks of green coffee beans would not be in-scope but the sale of branded jars of coffee would be);
  • Financial services, including insurance activities; and
  • Airline and shipping businesses.

New Nexus Rule

For MNEs with in-scope businesses, a new nexus rule will be created based on indicators of “significant and sustained engagement” in a market jurisdiction. 

The primary evidence of significant and sustained engagement will be the generation of in-scope revenue over a period of years, calibrated to the size of a market.

  • For automated digital business a revenue test will be the only threshold require to create nexus.
  • For other in-scope business further work remains to be done to establish any additional factors – such as targeted advertising directed at the market jurisdiction; yet at this point the Unified Approach is clear that no new nexus will be created where a MNE is merely selling consumer goods into a market jurisdiction without a sustained interaction with the market.

The Amount A – Quantum

Amount A will be based on profit before tax derived from the consolidated group.  This departs from traditional transfer pricing which operates on a separate entity approach.

The Unified Approach will, but does not yet, include loss carry-forward rules, which will operate in the calculation of Amount A.

The calculation of Amount A will be based on a formula, which will identify the portion of the residual profits to be allocated to eligible market jurisdictions. While it is settled that Amount A will only apply to a the portion of profit that exceeds a certain level of profitability, additional details on this formula remain to be worked out.

Once the quantum of Amount A is determined the next step will be to distribute Amount A among the eligible market jurisdictions based on an agreed “allocation key”. For example, for online advertising the allocation will aim to deem Amount A to the jurisdiction where the advertising is viewed rather than the jurisdiction where the advertising is purchased.  Again, details on the allocation key remain to be worked out.

Safe Harbour

In December 2019, the United States  – home of important MNE tech giants – expressed political support for a multilateral solution, but suggested that Pillar One be implemented on a ‘safe harbour’ basis.

Under this alternative approach a MNE group would be subject to the Unified Approach only by electing-in.  The January 2020 Statement indicated that the Inclusive Framework would consider the feasibility and implications of the safe harbour approach and itemized multiple issues raised by the approach.

Double Taxation

The explanation of the Unified Approach recognizes that traditional methods for the elimination of double taxation do not fit comfortably within the Unified Approach and that any method for eliminating double taxation will require identifying the entity or entities which are liable and then applying a double tax relief method – e.g. exemption, credit or corresponding adjustment.  Specific details on this remain to be worked out.

Dispute Resolution

The Unified Approach purports that disputes will be reduced by the mechanical calculation of Amount A.  More specifically, it is anticipated that disputes will be prevented since Amount A is to be calculated according to mechanical rules based on clearly articulated formulae and detailed guidance.  It is this potential for taxpayer certainty that is intended to entice MNEs to elect into the Unified Approach.

Beyond this, the January 2020 Statement recognises the need for a new approach to dispute prevention and resolution – for Amounts A, B and C. While no details on what such a process would look like are provided, the January 2020 Statement does commit to its development.


The further development of the new taxing right under Amount A faces significant hurdles.  A good deal of technical work remains, including the determination of the formula itself. To date many questions remain unanswered – for example, how will the quantum of Amount A be weighted to account for divergent degrees of digitalisation, what is the level of profitability above which Amount A will applied, and what portion of the residual profit will go to a market jurisdiction.  Additionally there needs to be a commitment among Inclusive Framework members to implement the Unified Approach and to withdraw from any unilateral actions.

Ultimately the technical work and the consensus building required to reach the goal of a consensus based solution are substantial, especially given the 2020 deadline.