Searching for Shangri-La: Reflections on the OECD’s Digital Tax Project
Analysis begins and ends with discussion of twin pillars

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The goal of rewriting international tax rules to adapt more fully to the digitizing economy has eluded policymakers over the past decade. Efforts to find an acceptable solution at the global level so far have failed to muster consensus as different constituencies have raised perceived shortcomings that have halted progress, even as unilateral actions by governments have grown from a few outliers to a threatening wave. This year is likely to be a monumental one that could be defined by anything from a breakthrough that pushes forward an international solution to a failure that could sweep countries toward politically focused domestic tax policies with a likelihood of trade retaliation to some still-to-be-revealed middle ground between these two extremes.

Against this backdrop, four significant policy issues within the ongoing political discussion have emerged: 1) the “fairness” argument, 2) the “principled” approach, 3) the implementation and capacity aspect, and 4) tax certainty.


The Organisation for Economic Co-operation and Development/G20 Inclusive Framework on Base Erosion and Profit Shifting (the OECD/G20 Inclusive Framework on BEPS, hereafter the Inclusive Framework) has actively sought a global consensus on how to address the tax challenges arising from the digitization of the economy ever since the final 2015 BEPS reports failed to achieve an outcome on BEPS Action 1. Over several years—with an intermediate report on the tax challenges and several proposals centered on user participation, marketing intangibles, and significant economic presence—a more delineated framework has emerged, resulting in two “pillars” proposed in the Inclusive Framework.

Pillar One focuses on allocating a greater share of (residual) profits to market/user jurisdictions by moving away from the traditional arm’s-length principle approach in certain respects and creating a standalone nexus rule without reference to physical presence. The three main components of Pillar One are Amount A, which provides for a new taxing right for market jurisdictions with a share of a multinational enterprise’s (an MNE’s) residual profit being reallocated; Amount B, which provides for a fixed return for certain baseline marketing and distribution activities taking place physically in a market jurisdiction (with outcomes consistent with the arm’s-length principle); and enhanced tax certainty elements that provide effective dispute prevention and resolution.

Pillar Two focuses on introducing rules for a global foreign minimum tax regime and provides for a right to “tax back” where a jurisdiction in which an MNE derives income has not exercised a primary taxing right, or where MNE intragroup payments otherwise are subject to low levels of effective taxation. Pillar Two does not connect directly to the concerns about the digitizing economy that underlie Pillar One but is conceived as a further extension of the BEPS program intended to limit perceived harmful tax competition among jurisdictions by providing that large companies pay a minimum level of tax on income regardless of where it arises.

Pillar One

Scope of Amount A

In the Pillar One Blueprint issued in October 2020, the Inclusive Framework indicates that the scope of Amount A would focus on two types of businesses: automated digital services (generally online advertising and searches, cloud computing, social media and intermediation platforms, and streaming services) and consumer-facing businesses (where revenues are generated from the ultimate sale of goods and services to individual consumers). The definition of “consumer facing” has been modified from previous iterations to exclude the provision of intermediate products and components that are incorporated into a finished product sold to consumers (often business-to-business); the definition will apply to franchise rights and third-party resellers. A non-inclusive list of affected businesses includes personal computing products, clothes, branded foods, automobiles, and franchise licensing arrangements (such as hotels and restaurants). There will be specific carve-outs for most extractive industries and commodities, financial service activities that are not retail in nature, and airline/shipping activities.

The applicable threshold for in-scope businesses will consider an overall group gross revenue threshold, with additional limits based on aggregate in-scope revenues, and a de minimis threshold. Amount A nexus would not be based on physical presence but rather on significant and sustained engagement in a market jurisdiction; a revenue threshold could be the sole determiner for automated digital services, whereas other consumer-facing businesses will need to meet various criteria. The nexus revisions will require a design to limit filing and tax-related obligations in market jurisdictions and may involve a one-stop shopping concept for registration and reporting.

Since Amount A will feature a formula-based allocation mechanism—looking at a portion of deemed residual profits—there would be numerous technical issues to resolve, including the use of business line/regional segmentation, the notion of digital differentiation, and specific revenue-sourcing rules for different business models. The Blueprint identifies profit before tax as the most favorable profit-level indicator and stresses the need for loss carryforward rules to apply.

Amount B Issues, Dispute Resolution

Regarding Amount B, the Blueprint notes that the fixed return for baseline marketing and distribution activities is “based on” the arm’s-length principle, but will need to account for regional, industry, and functionality differences. A definition of baseline activities will need to be developed but likely will include no or low risk, lack of intangibles, and routine levels of functionality. Further technical work is envisioned on profit-level indicator, fixed percentage at an agreed profit, benchmarking studies, and regional/industry differentiation. The stated goal is for Amount B to operate within the existing treaty network.

The Blueprint also recognizes a clear need for increased tax certainty, particularly before tax assessments are made and to make them binding. In addition to enhancing traditional dispute prevention and resolution tools, a review panel is being considered to help make determinations regarding Amount A aspects (such as scope). Subject to consensus, mandatory binding dispute resolution tools will be developed.

Implementation Method

The exact implementation method for Pillar One is still being explored, although domestic legislation and tax treaty changes clearly would be necessary, along with transition rules. A multilateral convention potentially could solve a number of difficult technical implementation issues but would require the highest levels of political support.

Pillar Two


The Pillar Two Blueprint discusses several mechanisms envisioned to establish a global framework of minimum taxation. The income inclusion rule (IIR) operates as a top-up tax when income of controlled foreign entities is taxed below an effective minimum tax rate. The switch-over rule (SoR) complements the IIR by removing treaty obstacles in situations where a jurisdiction uses an exemption method that could frustrate the application of a top-up tax to branch structures. The undertaxed payments rule (UTPR) serves as a backstop to the IIR through application to certain identified payments made to constituent entities; the top-up tax computation is the same as under the IIR. And finally, the subject-to-tax rule (STTR) would help source countries protect their tax base by denying treaty benefits for deductible intragroup payments made to jurisdictions with low or no taxation.

As currently outlined in the Blueprint, the IIR and UTPR (collectively, GloBE) rules would apply to companies with more than €750 million in annual gross revenues. The financial accounts of the parent entity are used to calculate the tax base and an effective tax rate (ETR) after accounting for covered taxes. The GloBE provisions contemplate allowing recognized losses when computing the tax rate and providing for a formulaic substance carve-out to exclude certain fixed returns.


The Pillar Two Blueprint raises a number of potential design choices, including reliance on country-by-country reporting thresholds and definitions, a list of excluded entities (such as investment entities, pension funds, and nonprofit organizations), timing difference simplifications, and rule ordering. A number of issues remain open for political decision, including the need for some mechanism to allow for coexistence of the GloBE rules with the United States’ global intangible low-taxed income (GILTI) regime; the amount of the minimum rate; and whether calculation of ETR should occur on an aggregate or jurisdictional level.


Perceived “Fairness”

The political debate around tax policy in the current environment frequently focuses on whether companies (and individuals) are paying their so-called “fair share.” Although claims of this nature may make for popular sound bites, fairness is difficult to measure qualitatively and quantitatively. Although corporate income tax (CIT) statutory rates and CIT as a percentage of total revenues have decreased in recent years according to OECD statistics,1 a numeric perspective does not strongly indicate that current corporate tax behavior is far afield from historical norms.2

Rather than focusing only on CIT, the total tax contribution (TTC) framework that has been developed over the past decade or so provides a more useful picture of the economic contributions that MNEs provide in each local jurisdiction in which they operate. Beyond just CIT, companies bear significant amounts of other taxes (property taxes, non-creditable VAT, payroll taxes, etc.) as well as payments they collect on behalf of others that are contributed to tax authorities (VAT, employee-related taxes, etc.).

The current discussion over how most appropriately to tax companies in the global digitizing economy is certainly fitting but is sometimes weighed down by charged rhetoric. A less heated and more holistic analysis would be welcome to inform needed policy debates.

Value of Fundamental Principles

A frequent comment by external stakeholders throughout this process has been that the short timeline for reaching political agreement may have resulted in initial decisions not clearly grounded in fundamental tax policy principles. For example, Business at OECD (BIAC) has developed a set of principles for assessing how various proposals of the Inclusive Framework’s digital project align with business goals3 and has provided a “stoplight” on how the Blueprint proposals line up with the principles.4

Embedding clear principles within the Pillar One framework could give ongoing political negotiations a stronger underlying purpose that could lead to greater international understanding and commitment over the long term. Indeed, without clear economic concepts to unify the entire endeavor, any announced “agreement” might not be sufficient to result in enduring adherence by governments or to guide interpretation and implementation once agreement is reached. By comparison, adoption of the arm’s-length principle as a bedrock principle for determining profit allocation has helped governments maintain decades of stability in the international tax framework.

Although it is up to the Inclusive Framework to now determine if the arm’s-length principle should be replaced (as considered in Amount A), it is clear that an animating principle must be defined that commands widespread respect in order to provide reasonable certainty and administrative grounding. What seems missing from Pillar One is a rooted economic principle that tax authorities and taxpayers can follow, with tolerance for dynamic changes in business models and the evolution of economies and trade in the future. In contrast, a merely political agreement may not withstand societal pressures, leading to a cascade of subsequent revisions that might undercut the entire Inclusive Framework exercise.

While taking time to embed clear principles within the Pillar One framework may slow both the political negotiations and technical work, doing so could give Inclusive Framework discussions a stronger purpose that may well lead to greater long-term international understanding and commitment.

One Step at a Time

The Blueprint proposals represent some fairly significant departures from the current profit allocation rules and cross-border taxation of MNEs and introduce new complexity and likely pain points. Not to prejudge the outcome of any political agreement that may be reached, the process of implementing new rules will be a challenge for all stakeholders involved. To rewrite in just a few years the international tax principles that have existed in their current form for many decades understandably raises questions of how taxpayers and tax authorities can adapt to such a monumental shift. This burden will be felt by all tax authorities, but the capacity constraints and technical expertise of developing countries would be especially challenged.

Because of the significant disruption at stake—to data collection, business systems, supply chains, tax authority engagement, cross-border controversy, and more—a limited transition phase seems justified to help ensure that Pillars One and Two are fit for their purposes as well as to give tax authorities needed time to prepare and upskill. An elective early testing phase might be accepted as appropriate, in that it could give taxpayers an opportunity to opt in immediately for any number of reasons—commitment to the new regime, brand reputation, perceived outcome favorability, or decreased litigation—and could provide test cases for the new rules in practice.

With a limited phase for viability testing, tax authorities could benefit from being able to adjust administrative practices while dealing with more favorably minded taxpayers at the start. Politicians and public citizens would be able to see initial results to determine the extent to which the changes move in the direction of a more equitable tax system. Then the viability phase would fall away, and the lessons learned from this transition period would be effectively used to handle the new tax norms in effect for everyone. This staged approach aligns with what the OECD has done with its International Compliance Assurance Programme (ICAP), starting with a select taxpayer pool to test the fundamentals and then gradually expanding participation as experience is gained. This is particularly important before large-scale changes to treaties and domestic legislation are required.

Keeping It (Relatively) Simple

As the Inclusive Framework has acknowledged, there is a strong need for simplification, in both Pillar One and Pillar Two, to reduce complexity and provide enhanced certainty for all stakeholders. There is strong business support for mandatory binding dispute prevention and resolution for Amount A as well as for mechanisms beyond Amount A. Some of the main challenges relate to timing and resource burdens as well as thresholds and simplification. And, of course, both Pillars must ensure that processes allow for the elimination of double taxation.

Tax certainty is key to achieving the project’s goals, but there is not yet a clear view on how to achieve binding resolution. Although much good can be accomplished by introducing new dispute prevention tools prior to reaching the stage where arbitration is needed, binding dispute resolution (like arbitration) is likely to form a very important part of any solution. Not only does mandatory arbitration provide an impartial forum for resolving intractable disputes when negotiations break down, the mere knowledge of its existence is very likely to induce both sides to engage in discussions in good faith with a view to resolving differences without needing to resort to arbitration. Process improvements alone are just not likely to be sufficient.

Measure Twice, Cut Once

The OECD Secretariat’s estimates of the possible effects of the Pillar One and Pillar Two proposals on countries’ tax revenues and economic investment are detailed and commendable for the analysis. The report relies on a combination of firm-level and aggregate data sources, including country-by-country reporting data, with the reforms characterized as leading to a much more favorable environment than scenarios that assume the proliferation of unilateral DSTs and increased trade tensions that could occur if there were no Inclusive Framework consensus. At the same time, Pillar One is not expected to raise much if any net global tax revenue, with the result being approximately $100 billion per year of existing profits reallocated to market jurisdictions. Taking into account the combined effect of the Pillars One and Two proposals and the US GILTI regime, the total effect could represent between $56 billion and $102 billion per year in new revenues (or up to around four percent of global CIT revenues)—although the exact revenue gains, of course, would depend on the final design and parameters of Pillars One and Two, the method of implementation, and the behavioral response by MNEs and governments.

The relatively minor amount of new global revenues the Inclusive Framework project will raise should be weighed against the significant costs that companies and tax administrations will incur in implementing it. Although many factors enter into a policy debate of this magnitude, a clear cost-benefit analysis has not featured as a focus to date—but should not be ignored.

Importantly, if significant design simplifications could reduce the administrative burden by roughly fifty percent at a cost of, say, around twenty percent in terms of precision (or additional revenue collected), such simplifications should be seriously considered and, in the absence of a compelling argument, they could be adopted. If the Inclusive Framework decides up front to simplify, such decisions can always be revisited if countries determine the simplifications were too significant. But a failure to take seriously the need for simplification now might make it tougher to tackle later and could even jeopardize the successful launch of the initiative.


In tackling the ambitious goal of reaching a political agreement on the Pillar One and Pillar Two frameworks by mid-2021, there are many obstacles to overcome in a few short months. We hope that the policymakers involved in these negotiations remain receptive to recommendations from the business community as it seeks to engage constructively so that any final result represents an informed view of the practical realities governments and companies will face. As outlined above, we strongly believe that making any new rules principle-based will lead to a more stable and equitable system than the current proposals. We also view the fairness debate as one without a verifiable measuring stick and one that limits valuable discussions about the comprehensive contributions that companies make in their communities. Given the radical nature of Pillar One in departing from decades of profit-allocation pedagogy and practice, a staged approach would provide a safe space in which to explore and experiment with an easier implementation to see potential effects.

Jeremiah Coder is a director in PwC’s global tax policy practice based in Washington, D.C., and was a former tax policy advisor at the OECD. Pat Brown is co-leader of PwC’s Washington National Tax Service.

Editor’s note: The views expressed herein are solely those of the authors and do not necessarily reflect those of PwC. All errors and views are those of the authors and should not be ascribed to PwC or any other person.


  1. For example, the worldwide average corporate income tax rate fell from forty-five percent in 1980 to 25.85 percent in 2020, according to the OECD. See Elke Asen, “Corporate Tax Rates Around the World, 2020,” Tax Foundation, December 9, 2020,
  2. OECD research indicates that corporate taxes as a share of total revenues increased from 7.7 percent to 9.6 percent between 1990 and 2019. See Christina Enache, “Sources of Government Revenue in the OECD,” Tax Foundation, February 11, 2021,
  3. See “Business Principles for Addressing the Tax Challenges of the Digital Economy,” Business at OECD, January 2019,
  4. See “Business at OECD (BIAC) Written Response to the OECD Public Consultation on the OECD/G20 Inclusive Framework on BEPS Reports on the Pillar One and Pillar Two Blueprints,” Business at OECD, December 14, 2020,

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