How OECD Pillar One could change international tax processes for MNCs


The Organisation for Economic Co-operation and Development (OECD) published a Secretariat Proposal for a Unified Approach under Pillar One in early October 2019. The OECD is targeting a consensus solution by end of 2020, and an agreement on the unified approach outline by January 2020. If ultimately agreed, this will drastically change the international tax landscape for multinational companies.

Background on OECD initiatives

The OECD’s Base Erosion and Profit Shifting (BEPS) project introduced tools to mitigate tax avoidance and double non-taxation. It studied how disjointed tax rules were being exploited and recommended improvements to the international tax system to address perceived deficiencies. The BEPS project delivered 15 actions and 4 minimum standards. More than 130 countries joined as Members of the BEPS project, including all OECD members and G20 countries that are non-OECD members.

BEPS 2.0

The BEPS Action 1 Report identified the digital economy as an area of focus. Driven by these findings, the OECD members identified two proposals framed as ‘complementary pillars’.

Pillar One aims to provide new methods for profit allocation and revise nexus rules (i.e., change the taxation rights of countries), whereas Pillar Two aims to introduce a global anti-base erosion mechanism ensuring multinational enterprises pay a minimum level of tax.

This article focuses on Pillar One and briefly introduces Pillar Two.

Pillar One – Unified Approach

The OECD’s Secretariat Proposal identified two international tax elements that appeared to be failing to address the taxation challenges imposed by the digital economy: (i) determination of permanent establishment (PE) rules; and (ii) transfer pricing rules.

The proposal recommended introducing new rules to bolster existing PE and transfer pricing provisions in respect of the digital economy. The new rules generally aim to grant taxing rights based on significant economic presence (nexus) and introduce a primarily formula-driven profit allocation rule.  

Scope of Pillar One

Pillar One is focused on customer-facing businesses (generally referred as businesses that generate revenue from supplying consumer products or providing digital services that have a consumer-facing elements) and targets large multinational enterprises. As such, highly digitalized businesses such as Apple, Amazon, Facebook and Google, as well as non-digital businesses such as Starbucks that interact with final customers would be subject to the new rules.

The OECD is considering whether to exempt certain industries such as the extractive, commodity, and financial industries. However, we expect any carve outs to be limited so as to not unduly constrain the impact of these recommendations. 


The OECD’s nexus proposal aims to address the limitations of existing PE rules. Specifically, the nexus proposal recommends granting taxation rights to countries and jurisdictions regardless of whether or not businesses have a local physical presence (a key test of PE rules). Instead, it considers the location of the business’ users or customers. This is a completely different approach than existing domestic and treaty PE rules which are generally based on physical presence.

Pillar One proposes using gross sales (i.e., sales to local customers) as a threshold to grant taxation rights. This proposal effectively uses gross sales as a proxy for significant economic presence and adds a new layer of complexity to the established physical presence test. 

Three-tiered profit allocation

To address the perceived limitations of current transfer pricing rules, the OECD proposed a three-tiered profit allocation approach.

Granting new taxation rights under the proposed nexus rules is an important first step in addressing the taxation challenges created by the digital economy. However, unilaterally granting taxation rights creates the risk of double taxation due to differing approaches to calculating taxable income, or due to taxing the same income in multiple jurisdictions. Therefore, Pillar One further proposes a method to allocate profits amongst taxation jurisdictions.

The proposal introduces three possible types of taxable profit that may be allocated to a market jurisdiction:

‘Amount A’ gives market jurisdictions where users are located taxation rights up to a portion of the non-routine profit of a consolidated group.

‘Amount B’ allows market jurisdictions to impose tax on profits generated from associated routine activities such as local marketing and distribution. Consideration is also given for a fixed return to simplify transfer pricing governance.

‘Amount C’ considers additional returns warranted by the existing transfer pricing rules for other activities/functions not captured in Amount A or Amount B.

Practical challenges

The Pillar One proposal identifies outstanding questions, including:

  1. Defining routine activities under Amount B;
  2. Agreeing on scale or amount of profits, timing, and thresholds;
  3. Treatment of losses; and
  4. Interactions with existing tax rules.

Answering the above questions is necessary to reach an effective unified approach. Failure to meet a unified approach may result in countries unilaterally imposing their version of a ‘digital tax’. This can create uncertainty and greater operating costs for multinational entities.

In early November 2019, the OECD released a public consultation document for Pillar Two. Pillar Two presents four elements to address actual or perceived shifting of profits to no or low-tax jurisdictions. The four components currently include: 1) An income inclusion rule; 2) An undertaxed payments rule; 3) A switch-over rule; and 4) A subject to tax rule. The goal of the combined four elements is to create a regime for a ‘minimum tax’.

The combined effect of Pillar One and Two is expected to significantly increase global tax revenue. However, certain countries stand to lose and others to gain. For example, the United States features a concentration of large digital companies targeted by these proposals. Depending on their current tax structures, the implementation of Pillar One and Two could result in overall lower tax revenue for the United States from these entities. Therefore, reaching consensus amongst all member countries will be difficult.

Lastly, while the ‘Unified Approach’ considers initiatives to relieve compliance and minimize uncertainty for taxpayers, potential increases in tax liabilities and administrative costs may outweigh any compliance benefits.

Current tax changes in Canada

For Canada to adopt the proposed changes, fundamental adjustments to our current domestic laws and tax treaties will be required. These would include changing the definition of ‘carrying on business’ in Canada to incorporate the new nexus concepts, revising or introducing exceptions to existing transfer pricing rules, and amending tax treaties’ PE rules.

Notwithstanding the above, Canada is currently considering implementing a unilateral measure. As noted in our previous Tax Alert on 2019 Post-Election Review of Potential Tax Changes, the Liberal Party of Canada promised to impose a 3 per cent tax on the income of businesses in certain sectors of the digital economy. This tax would replicate the French digital tax (which was passed into law on July 11, 2019) and would act as a value-added tax that applies to companies that: (i) provide advertising services and digital intermediation services; (ii) have worldwide revenue of at least $1 billion; and (iii) have Canadian revenues of more than $40 million. It remains to be seen whether Canada will proceed with this unilateral digital tax if Pillar One and Two are implemented.

Monitor ongoing international tax developments

The OECD’s BEPS proposals have and will continue to change global tax planning and compliance. Multinational corporations should continue monitoring developments and any potential impacts to their businesses.


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Maria Severino

National Tax Leader

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