Agreement on Global Tax Reform: What Happened and What's Next

Holland & Knight LLP

Holland & Knight LLP


  • The Organization for Economic Cooperation and Development (OECD)/G-20 Inclusive Framework on Base Erosion and Profit Shifting (IF) on July 1, 2021, issued a Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy (Statement) that 130 of its 139 members had agreed on a way forward to address the tax challenges arising from the digitalization of the economy. (Subsequently, Peru supported the Statement.) The Statement contains the agreed upon components of the Pillar One (nexus and profit allocation rules) and the Pillar Two (global minimum tax rules) framework, which will be followed by a resolution of remaining issues and a detailed implementation plan by October 2021.
  • Significantly, the countries supporting the global tax revision plan included nearly all developed countries (inclusive of the G-7 member countries and G-20 member countries other than Estonia, Ireland and Hungary), leading developing countries such as Brazil, China, India and jurisdictions commonly used for international tax planning, such as Bermuda, the Cayman Islands, Singapore and Switzerland. Ireland, while supporting the agreement, did not sign the Statement because of its reservation with respect to a global minimum tax of "at least 15 percent." The eight countries that have not signed the Statement are Estonia, Hungary, Kenya, Nigeria, Saint Vincent and the Grenadines, and Sri Lanka.
  • The G-20 Finance Ministers are scheduled to consider the Statement at their upcoming meeting this week (July 9-10), in Venice, Italy. Between now and October, the IF will have to grapple with the numerous technical issues as to how Pillar One and Pillar Two will function and obtaining concurrence from the eight countries that did not sign the Statement. Moreover apart from the technical issues, political issues remain to be resolved, particularly in the European Union and the United States. So, while the 131-country agreement reflects a major step forward, time will tell whether the IF countries ultimately will approve and adopt this bold initiative to revamp the international tax system.

Addressing the tax challenges arising from the digitalization of the economy has been a top priority of the Base Erosion Profit Shifting (BEPS) project of the Organization for Economic Cooperation and Development (OECD)/G-20 Inclusive Framework (IF)1 since 2015. Attempts to reach consensus on the architecture of the Pillar One and Pillar Two blueprints issued by the IF on Oct. 12 2020, had stalled because of the complexity, ambiguity, technical issues, tax uncertainty and resource issues (for businesses to comply and governments to administer the new initiatives) contained in the original proposals. Further complicating the situation was the position of the previous administration and the uncertain position of the United States prior to the election in November 2020.

All of that changed after the election. A combination of events had the effect of refocusing and reinvigorating the IF to move the project forward. These included the supportive statements by senior Biden Administration officials to reengage with the IF (and drop the Pillar One safe harbor proposal), the announcement of the Made in American Tax Plan and the associated multilateral outreach of the Made in America Tax Plan for other nations to adopt a robust minimum tax, and the April 8, 2020, U.S. Department of the Treasury proposal to the Steering Group of the Inclusive Framework Meeting to revise, simplify and link the Pillar One and Pillar Two initiatives (the U.S. April 8 Proposal).

The foregoing (and follow-up bilateral and multilateral discussions) established the groundwork for the G-7 Finance Ministers and Central Board Governors (at their meeting in London on June 5, 2021) and the G-7 Leaders' Summit (at their meeting in Cornwall, England, on June 11-13, 2021) to express their support for an integrated two-pillar solution. These events then set the stage for the IF to consider these proposals at their meeting at the end of June.

One hundred thirty-one of the 139 countries of the OECD/G-20 Inclusive Framework (representing more than 90 percent of the world's gross domestic product or GDP), approved a framework to move the project forward – Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy (Statement).

Significantly, the countries supporting the global tax revision plan included nearly all developed countries (inclusive of the G-7 member countries2 and G-20 member countries3 (other than Estonia, Ireland and Hungary), leading developing countries such as Brazil, China, India and jurisdictions commonly used for international tax planning, such as Bermuda, the Cayman Islands, Singapore and Switzerland. Ireland, while supporting the agreement, did not sign the Statement because of its reservation with respect to a global minimum tax of "at least 15 percent." The eight countries that did not sign the Statement are Estonia, Hungary, Kenya, Nigeria, Saint Vincent and the Grenadines, and Sri Lanka.

The G-20 Finance Ministers are scheduled to consider the Statement at their upcoming meeting this week (on July 9-10, 2021), in Venice, Italy, with final endorsement of Pillar One and Pillar Two at the G-20 meetings in Italy in October 2021.

The Statement

What It Contains. The Statement contains agreed upon key conceptual components of each Pillar. Remaining issues and a detailed implementation plan to be finalized by October 2021.

Pillar One


In-Scope Companies

  • Multinational enterprises (MNEs) with global turnover above 20 billion euros (approximately $23.5 billion) and profitability (profit before tax/revenue) above 10 percent.
  • Turnover threshold may be reduced to 10 million euros (approximately $11.8 billion), contingent on successful implementation of Amount A,4 with relevant review process beginning seven years after agreement comes into force, with review process lasting no more than one year.

Out-of-Scope Companies

Extractive and regulated financial services companies.


Segments disclosed in the financial accounts that meet in-scope rules – only applied in exceptional circumstances.

Nexus and Sourcing

  • New Special Purpose Nexus Rule
    • Applies solely to determine whether a jurisdiction qualifies for Amount A allocation.
    • Permits allocation of Amount A to a market jurisdiction when in-scope MNE:
      • General Rule. Derives at least 1 million euros (approximately $1.2 million) from that jurisdiction
      • For smaller jurisdictions with GDP lower than 40 billion euros (approximately $47.5 billion). Derives at least 250,000 euros (approximately $297,000).
    • Sourcing of Revenue. Revenue sourced to end-market jurisdiction where goods/services are used/consumed.
      • Detailed source rules for specific categories of transactions to be developed.
      • MNE must use a reliable method based on its facts and circumstances.
    • Compliance costs. Limited to a minimum.

Rules Relating to How to Determine Amount of Taxation, Elimination of Double Taxation and Safe Harbor

  • Amount Taxable. For in-scope MNEs, between 20 percent and 30 percent of residual profit (i.e., profit in excess of 10 percent of revenue) to be allocated to market jurisdictions with nexus using a revenue-based allocation key.
  • Determination of Amount. Profit and loss of in-scope MNEs to be determined by reference to financial accounting income, with a small number of adjustments and losses will be carried forward.
  • Elimination of Double Taxation. Double taxation of profit allocated to market jurisdictions to be relieved by exempting or credit method.
  • Safe Harbor. Where residual profits of an in-scope MNE are already taxed in a market jurisdiction, a safe harbor will cap the residual profits allocated to the market jurisdiction through Amount A. Further work on the design of the safe harbor will be undertaken.

Tax Compliance

  • To be streamlined and MNEs will be permitted to manage process through a single entity.

Tax Certainty

  • Dispute prevention and resolution mechanisms will apply to in-scope MNEs.
    • These measures to be applied in a mandatory and binding manner.
  • For certain developing economies, consideration being given to an elective binding dispute resolution mechanism for Amount A issues.

Amount B

  • Simplify and streamline the determination of the fixed remuneration (which is based on the arm's length principle for defined baseline distributing and marketing functions that occurs in the market jurisdiction).
    • There will be a particular focus on the needs of low-capacity countries.
  • This work to be completed by the end of 2022.

Unilateral Measures

  • There will be "appropriate coordination" between the application of the new international tax rules and the removal of all Digital Services Taxes and other relevant similar measures on all companies.


  • The multilateral instrument through which Amount A is implemented will be developed and opened for signature in 2022, with Amount A coming into effect in 2023.

Pillar Two

Overall Design

  • Although not specifically stated in the Statement, Pillar Two is designed to cause in-scope MNEs to pay a minimum level of tax irrespective of where they are headquartered or the jurisdictions in which they operate.
  • Pillar Two Rules
    • Two interlocking domestic rules referred to as the Global anti-Base Erosion Rules (GloBE rules).
      • Income Inclusion Rule (IIR). This rule imposes a "top-up" tax on a parent entity in respect of the low-taxed income of a constituent entity.
      • Undertaxed Payment Rule (UTPR). This rule denies deduction or requires an equivalent adjustment to the extent the low-taxed income of a constituent entity is not subject to tax under an IIR.
    • The Subject to Tax Rule (STTR), a treaty-based rule that allows source jurisdictions to impose limited source basis taxation on certain related party payments subject to tax below a 7.5 percent to 9 percent minimum rate.
      • The taxing right would be limited to the difference between the minimum rate and the tax rate on the payment
      • The STTR would be creditable as a covered tax under the GloBE rules.
  • Order of Application of Pillar Two Rules

The STTR would be applied prior to the GloBE rules to deny treaty benefits.

  • The STTR is intended to assist source countries to protect their tax base, particularly those countries with less-developed administrative capabilities.
  • Importance of STTR
    • IF members recognize that the STTR is an integral part of achieving consensus on Pillar Two for developing countries (i.e., countries defined as those with a gross national income or GNI per capita, calculate using the World Bank Atlas method of $12,535 or less in 2019.
    • IF members that apply nominal corporate income tax rates below the STTR minimum rate to interest, royalties and a defined set of other payments would implement the STTR into their bilateral treaties with developing IF members when requested to do so.

Status of the GloBE Rules

  • The GloBE rules will have the status of a "common approach."
  • IF members are not required to adapt the GloBE rules.
  • If an IF member chooses to do adopt the GloBE rules, the IF member will implement and administer the rules in a manner consistent with the outcomes provided for under Pillar Two, including following the operating rules and guidance agreed to by the IF.
  • Further, there will be acceptance of the GloBE rules applied by other IF members, to include the order of the rules and the application of any agreed safe harbors.

Scope of GloBE Rules

  • In-Scope Companies
    • MNEs that meet the 750,000 euros (approximately $884 million) threshold, as determined under the BEPS Action 13 (country-by-country reporting).
    • Countries are free to apply the IIR to MNE headquartered in their country even if they do not meet the threshold.
  • Out-of-Scope Companies
    • Government entities
    • International organizations
    • Nonprofit organizations
    • Pension funds or investment funds that are Ultimate Parent Entities of an MNE Group or any holding vehicles used by such entities, organizations or funds.
    • Possibly MNEs in the initial phase of their international activity – to be explored

Operating Rules

  • Minimum Tax for Purposes of IIR and UTPR: 15 percent
  • Effective Tax Rate Calculation (ETR)
    • The GloBE rules will operate to impose a "top-up" tax using an ETR calculated:
      • on a jurisdictional basis
      • using a common definition of covered taxes
      • a tax base determined by reference to financial accounting income (with tax policy objectives of Pillar Two and mechanisms to address timing differences).
    • With respect to existing distribution tax systems, there will be no "top-up" tax liability if earnings are distribute within three to four years and taxed at or above the minimum level.
  • Rule Design for IIR and UTPR
    • IIR allocates "top-up" tax based on a top-down approach subject to a split-ownership rule for shareholdings below 80 percent.
    • UTPR allocates "top-up" tax from low-tax constituent entities, including those located in Ultimate Parent Entity jurisdictions under a methodology to be agreed.
  • Carve-Outs
    • GloBE rules will provide for a formulaic substance carve-out that will exclude an amount of income that is at least 5 percent (7.5 percent in the five-year transition period) of the carrying value of tangible assets and payroll.
    • GloBE rules will provide for a de minimis exclusion.
  • Other Exclusion

International shipping income (as defined in OECD Model Tax Convention).

  • Simplifications

To ensure that the administration of the GloBE rules are as targeted as possible and to avoid compliance and administrative costs disproportionate to the policy objectives, the implementation framework will include safe harbors and other mechanisms.

Coexistence with GILTI

  • Pillar Two will apply a minimum tax rate on a jurisdictional basis (as mentioned).
  • Based on a jurisdictional approach, consideration will be given to the conditions under which the global intangible low-taxed income (GILTI) regime will coexist with the GloBE rules, to ensure a level-playing field.


  • IF members adopt an implementation plan, it will include:
    • GloBE Model rules to facilitate the coordination of GloBE rules, to include possible development of a multilateral instrument for that purpose
    • An STTR model provision, together with a multilateral instrument to facilitate its adoption, and
    • Transitional rules, including the possibility of a deferred implementation of the UTPR
  • Pillar Two should be brought into law in 2022, to be effective 2023

Next Steps

The agreement reached in the Statement reflects the ambition of the IF members for a robust global minimum tax with a limited impact on MNEs carrying out real economic activities with substance.

  • There is a direct link between the global minimum ETR and the carve-outs, and there will be continuing discussion to take a final decision of these design elements within the agreed framework by October.

Conclusion and Takeaways

  • The 131-country agreement of the conceptual parameters of Pillar One and Pillar Two is a significant step forward in seeking to revamp the international tax system to deal with a digitized virtual global economy and the necessity to set "multilateral agreed limitations to tax competition"5 to promote tax equity and tax efficiency.
  • It should not be overlooked that the Pillar One Amount, as revised by the U.S. proposal, limits application of Amount A to the largest and most profitable 100 or so MNEs, using quantitative rather than qualitative factors. This means that the residual profits of MNEs not within scope and deriving substantial amount of income will not be allocated to market jurisdiction. Query, will digital service taxes and other unilateral measures continue to apply to these MNEs? Which unilateral measures will be withdrawn, and will it include measures such as the United Kingdom's diverted profits tax?
  • Between now and October, much technical work must be completed to deal with the numerous technical details and unanswered questions of the conceptual framework description. Some of these items are 1) under Pillar One: from which countries will reallocated revenue come from?;6 how will double taxation of reallocated income be prevented?; how will dispute resolution to promote tax certainty be devised, particularly in view of the opposition of developing countries to binding dispute resolution?; apart from digital service taxes, which other unilateral taxes will be removed?; 2) under Pillar Two: how will special tax incentives (such as patent boxes) be treated?; how will GILTI be coordinated; how will ETR computations be simplified?
  • Further, in terms of the IF reaching a consensus on the overall package, important political questions remain, such as 1) what will Ireland do?;7 2) how can the EU reach unanimity (assuming Pillar Two requires implementation through an EU Directive), when three of its members (Estonia, Hungary and Island) did not sign the Statement and Cyprus, another member of the EU, is not even a member of the IF and has expressed concern over the Pillar Two global minimum tax proposal?
  • The Statement contains an ambitious time frame for implementation and it is not clear how the IF member countries will be able to implement and pass internal legislation and enter into multilateral treaties within the currently proposed time frame.
  • With respect to the United States, while the Biden Administration is committed to the adoption of Pillar One and Pillar Two as a result of the linkage of these multilateral proposals with its domestic tax agenda, at this time the path forward for legislative enactment is not clear, particularly in view of the slim margins in the House and Senate and the views of more moderate House and Senate members. The Statement confirms that treaty changes are required to implement the IF. Is it realistic to assume that the Senate (with its two-thirds advice and consent approval requirement) will timely approve a multilateral agreement in view of its recent track record on approving tax treaties?

In summary, although much has been accomplished in the past few months to revamp to have a coordinated revision of the international tax system, much remains to be done in the technical and political areas to complete and implement the project. After the issuance of the Statement on July 1, 2021, it has been reported that OECD chief Pascal Saint-Amans made the following comment about the project: "It's unstoppable …Whatever happens in Congress, whatever happens in Europe, I think we've turned the page."8 Time will tell. So, buckle up for what will be an interesting and wild ride.


1 The Inclusive Framework on BEPS allows interested countries to work with the 38 OECD and G-20 member countries on developing standards on BEPS-related issues.

2 The G-7 is composed of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.

3 The G-20 is composed of the European Union (EU) (27 countries) and 19 individual countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, and the United States. Note, Cyprus, although part of the EU is not part of the IF.

4 Amount A is a new taxing right that allocates high-value residual profits, based on a formula, which is not necessarily determined on the arm's length principle.

5 The quoted portion is attributed to Mathias Cormann, Secretary General of the OECD. See Editorial Board Opinion in The Washington Post entitled "Doing the Minimum" (July 5, 2021).

6 It has been reported that the Pillar One reallocation of profits would impact mostly U.S. companies. See Bloomberg Tax, "U.S. Companies to Bear Brunt of Reallocation Under OECD Tax Deal," (July 6, 2021). Query the impact of this statement in the U.S., particularly in Congress?

7 It has been reported that Paschal Donohoe, Ireland's finance minister and president of the euro zone's grouping of finance ministers said Ireland supported Pillar One and remains committed to the process and aims to find an outcome that Ireland can yet support.

8 "U.S. Reconciliation Bill May Have Global Minimum Tax Provisions," Stephanie Soong Johnston, Tax Notes (July 7, 2021).



DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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