OECD public consultation on Pillar One and Pillar Two in the taxation of digital business models

The purpose of Pillar One is to establish new determination and allocation rules (Nexus approach) for profits of companies that are predominantly active in the digital-intensive or consumption-oriented sector (Automated Digital Services and Consumer Facing Businesses). With Pillar One, "activity states" (states in which the company is predominantly active even without a physical presence) are to receive a corresponding share of the residual profit, calculated at group level, allocated for taxation (Amount A). Marketing and sales or routine activities should be compensated with a fixed amount (Amount B).

Pillar Two deals with the introduction of a global minimum tax for internationally active companies. To this end, the following four main mechanisms are to be developed:

• Income Inclusion Rule (similar to CFC rules);
• Undertaxed Payments Rule (limitation of deductions for certain payments to related parties abroad);
• Switch-over rule (addition of certain permanent establishment income);
• Subject to tax rule (denial of certain treaty benefits in the source state).

There is still to be clarified with regard to Pillar One by name:

• Which business activities fall within the scope (digital business models in the narrow sense or a broader range of activities);
• Formula for allocating part of the residual profit to the market States in respect of companies exceeding a certain profitability threshold
• Choice between mandatory and Safe Harbor implementation;
• Procedural issues to promote legal certainty.

With regard to Pillar Two, various technical details are still open, which are further elaborated in the Blueprint Report, as well as the question of whether the GILTI rule is compatible with Pillar Two in US tax law: The OECD expects that, in the event of a full agreement on Pillar One, around USD 100 billion will be allocated annually to the host countries. Pillar Two is expected to generate additional tax revenues of approximately USD 60-100 billion.

The blueprints and other documents are available here.