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How does Pillar One Tie into Pillar Two?

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Although Pillar One and Pillar Two are largely separate, there are some overlaps between them.

For instance, Pillar One applies before Pillar Two when considering the application of Pillar Two.

This means that for Pillar Two purposes, any tax on income allocated to a jurisdiction under Pillar One will be treated as a covered tax when calculating the GloBE ETR. This is because the tax on the income is based on the income or profits of the entity. See our analysis of covered tax at Pillar Two Covered Tax.

But how about the opposite scenario? How does Pillar Two impact on Pillar One?

The draft Pillar One rules issued by the OECD on July 11, 2022 include some interesting overlaps with Pillar Two. 

Domestic Minimum Tax

Firstly, a number of the definitions are very similar to the Pillar Two Rules. For instance a qualified domestic minimum top-up tax is defined as:

  1. a minimum tax that is included in the domestic law of a jurisdiction and that determines the Excess Profits of the Entities located in the jurisdiction  in a manner that is equivalent to the GloBE Rules;
  2. operates to increase domestic tax liability with respect to domestic Excess Profits to the Minimum Rate for the jurisdiction and Entities for a Period; and
  3. is implemented and administered in a way that is consistent with the outcomes provided for under the GloBE Rules and the Commentary, provided that the jurisdiction does not provide any benefits that are related to the rules.

This is very similar to the Pillar Two definition – see more on the Pillar Two definition at qualified domestic minimum top-up tax


Secondly, the calculation of the Pillar One elimination profit includes many adjustments that mirror the Pillar Two GloBE rules.

The elimination profit is a key part of the Pillar One rules as it determines the amount deducted from any profits allocated to a jurisdiction due the marketing and distribution safe harbour. See our simple Pillar One profit allocation calculator to see the potential impact of the marketing and distribution safe harbour. 

Adjustments to the financial accounting profit or loss to calculate the elimination profit include:

  • Tax Expense (or Tax Income);
  • Excluded Non-Portfolio Dividends;
  • Excluded Non-Portfolio Equity Gain or Loss;
  • Included Revaluation Method Gains or Losses;
  • Policy Disallowed Expenses;
  • Prior Period Errors and Changes in Accounting Principles;
  • Accrued Pension Expense;
  • Stock-Based Compensation Expense;
  • Hybrid Profit (or Loss);
  • Asset Gain (or Loss) Spreading Adjustments.

If you’re familiar with the Pillar Two Rules, you will recognize a lot of these as they are similar to the adjustments used to calculate GloBE income (see more on these adjustments for Pillar Two purposes at Pillar Two GloBE Adjustments). 

They don’t tie in completely though. For instance, under Pillar One there is no adjustment for foreign currency gains or losses arising from differences in the tax and accounting currency, whereas Pillar Two requires an adjustment. 


As with Pillar Two, the purposes of the adjustments is to identify a standardized measure of taxable income that reflects the general principles of the members of the Inclusive Framework.

However, in the case of Pillar One there are very few elections (only one in fact which relates to fair value adjustments). Some of adjustments that overlap with Pillar Two are actually elections under Pillar Two, but are mandatory under Pillar One. 

For instance, take the case of stock-based compensation expenses.

Given both Pillars rely on the financial accounts as the starting point of their respective calculations, the expense for stock-based compensation would be based on the accounting treatment. As we explain in our analysis of Pillar Two GloBE Income Elections companies generally account for stock-based compensation based on the present value of the stock option at the time of issue, and amortize that amount over the vesting period. 

However, for tax purposes, companies generally deduct the value of stock-based compensation based on the ultimate market value of the stock. 

For Pillar Two purposes, an MNE group can elect to apply the treatment for tax purposes. For Pillar One there is no election – it is mandatory to replace the accounting treatment with the tax treatment. 

Other Overlaps

There are a number of other cases where the Pillar One Rules ‘piggy-back’ on the Pillar Two Rules including:  

– The rules for intra-group financing arrangements. We cover these rules (including a worked example) at intra-group financing arrangements, however, Pillar One includes similar rules that apply to intra-group financing arrangements that can be reasonably anticipated, over the expected duration of the arrangement to:

  • increase the amount of expenses taken into account in calculating the elimination profit of an entity that is classified as a Low-Tax Entity for purposes of the GloBE Rules;
  • without resulting in a commensurate increase in the taxable income of an entity that is classified as a High-Tax Counterparty for purposes of the GloBE Rules.

 – The rules to allocate income arising to a flow-through entity. This includes tax transparent and reverse hybrid entities.

See our Pillar Two analysis at Allocation of Income, however, the Pillar One rules are remarkably similar and allocate the income to the entity owners unless its a tax transparent entity that is a UPE or a reverse hybrid (in which case the income remains with the entity itself – just as under Pillar Two). 

– Pillar One includes taxable presence rules. These are also similar to the rules for Pillar Two. Pillar One deems a taxable presence where there is:

  • a place of business in a jurisdiction which is treated as a permanent establishment in accordance with a Tax Treaty;
  • if there is no applicable Tax Treaty, a place of business in respect of which a jurisdiction taxes under its domestic law the income attributable to the place of business on a net basis similar to the manner in which it taxes its own tax residents;
  • if a jurisdiction has no corporate income tax system, a place of business situated in that jurisdiction that would be treated as a permanent establishment in accordance with the OECD Model Tax Convention; or
  • a place of business that is not already described above through which operations are conducted outside the jurisdiction where the entity is located provided that the jurisdiction exempts the income attributable to the operations.

The overlap between the two Pillars is to be welcomed for MNEs and their advisers, given it reduces the complexity of what is already a very complex area.