Pillar One: Summary

Table of Contents

Pillar One evolved as part of the OECDs Base Erosion and Profit Shifting (BEPS) initiative.

Background to Pillar One

The first real detail we had was in the October 2020 Pillar One Blueprint. This is a lengthy read (at 225 pages) but gives useful background to the Pillar One Rules and the intention behind some of the key provisions. Nevertheless this was just a consultation, and some aspects have since changed.
After the Blueprints, there was political agreement in the July 2021 and October 2021 OECD Statements. They were relatively brief but did outline the broad operation of both Pillar One and Pillar Two, as agreed by members of the Inclusive Framework.
Various draft rules have been issued on specific aspects of the Pillar One Rules including:
On July 11, 2022 a Progress Report on Pillar One was issued which included draft rules for the implementation of Amount A of Pillar One.
On October 6, 2022, the OECD issued the Progress Report on the Administration and Tax Certainty Aspects of Amount A of Pillar One (the ‘Progress Report’), which includes draft Model Rules on the administration of Amount A. For more information see Highlights of the OECD Progress Report on the Administration of Amount A.
On December 8, 2022, a Consultation Document on Amount B was issued. 
Pillar One was initially planned to generally apply from January 1, 2023, however, this has now been pushed back given the difficulties in reaching agreement. 
A Multilateral Convention (MLC) for the implementation of Amount A of Pillar One has been developed. It will be published for signature in the second half of 2023, with a signing ceremony organised by year-end. The MLC should enter into force during 2025, allowing for the domestic consultation, legislative, and administrative processes applicable in each jurisdiction.
It should be noted that during an OECD Tax Talks meeting on July 19, 2023, it was confirmed that Pillar One would only enter into force when a critical mass of countries has ratified the MLC. A critical mass of countries is defined as ratification by 30 jurisdictions that account for at least 60% of in-scope MNEs. 
Pillar One consists of two main elements, Amount A and Amount B.

What is Amount A?

Amount A aims to reallocate a portion of the profits of the largest 100 or so multinationals to the jurisdictions they operate in. 
It has changed significantly since the first OECD Blueprint.
Originally it was planned to only apply to multinationals providing automated digital services or where they were consumer facing businesses. This no longer applies and it could apply to any multinational that was within its scope. 
The reason for Amount A is that the basic principles of the international tax system no longer match the operating models of many international businesses today.  
In order for a jurisdiction to tax the income of a foreign company there needs to be some kind of source or connection with that jurisdiction. If not, then there is no right to tax.
Simply having revenue derived from a jurisdiction may well constitute having a source in that jurisdiction, but for corporate income tax purposes this is frequently not enough.
There needs to be some form of physical presence in the jurisdiction.
This is partly to do with tax compliance, as enforcing a taxing right against a foreign company with no actual presence in a jurisdiction is difficult.  
As such, most jurisdictions require some form of permanent establishment before there is a right to tax the income of the foreign entity. 
International double tax treaties (which take precedence over domestic law) also require a permanent establishment in order to establish taxing rights. 
Given the growth of online trading, multinational businesses can therefore derive revenue from jurisdictions without establishing a taxable presence. 
A number of jurisdictions have enacted digital services taxes to take the problem. These are a gross-based tax on income from specified digital activities (ie there are generally no or very few tax deductions available). They suffer from a number of drawbacks, not least the fact that they are not income taxes and therefore don’t benefit from double tax relief provisions under domestic law or tax treaties.  Part of the Pillar One rules requires the removal of these existing digital service taxes.
The OECD has created the Amount A framework under Pillar One to allow companies to tax the income of foreign multinationals even where there is no taxable presence in that jurisdiction. 

Key Principles of Amount A under Pillar One

The first key point to note is that Amount A will effect very few companies. In general, only companies/groups that have revenue of more than 20 billion euros and a profit margin of more than 10 percent in a period are subject to Pillar One. 
Where a company is within the scope of Pillar One, there will be significant compliance and administrative obligations, at least initially, to gather the information required for the Amount A calculation. 
Multinational groups that are within the scope of Amount A will have to:
1. Source Their Revenue.
Article 4 and Schedule E of the Progress Report on Amount A of Pillar One provides for detailed revenue sourcing rules.
In general, revenues are sourced according to the type of revenue.
The draft rules include details of various different types of revenue and where they are deemed to be sourced from. There are also a number of reliable indicators that can be used to to determine, for example, the place of use, in order that the revenue can then be sourced.  In certain situations an allocation key can be used as a proxy for the actual sourcing requirements. 
Once the revenue is sourced, if it is less than 1 million euros in a jurisdiction (or 250,000 euros for smaller jurisdictions), there is no reallocation requirement for that jurisdiction. 
For more information, see:
2. Calculate Adjusted Profits 
Once it is established that revenue sourced to a jurisdiction is more than 1 million euros (or 250,000 euros in a small jurisdiction), the multinational would then need to calculate its adjusted profits

Amount A allocates a proportion of the adjusted profit before tax of the MNE group or segment to market jurisdictions.

The adjusted profit before tax is based on the financial accounting profit or loss of the UPE as reported in its consolidated financial accounts, which is then subject to a number of adjustments under Article 5 of the Progress Report on Amount A of Pillar One.

For more information, see Amount A: Adjusted Profits.

3. Profit Reallocation Calculation

Once adjusted profits have been determined, the MNE group has to carry out the profit reallocation calculation. 

The profit allocation rules are at the heart of Pillar One as they determine the amount of profit that is allocated to the market jurisdictions.

The approach taken in Article 6 of the Progress Report on Amount A of Pillar One is in line with the suggested approach in the OECDs statement in October 2021.

Profits reallocated to a jurisdiction are 25% of the profits above a 10% profitability threshold. They are then allocated to jurisdictions based on the proportion of local revenue sourced to that jurisdiction to total group revenue.

Profits that are reallocated to a jurisdiction are then taxed based on the corporate income tax regime of that jurisdiction. 
For more information, see Amount A: Profit Reallocation.
4. Marketing and Distribution Profits Safe Harbour Calculation
One of the key reliefs for MNE groups is the marketing and distribution profits safe harbour. Where it applies, it reduces the profits allocated to the market jurisdiction. The calculation of this is complex. 
One of the purposes of the safe harbour is to prevent double taxation, where a multinational group has already established a taxing right in a jurisdiction due to physical presence.
Use our Marketing and Distribution Safe Harbour Calculator to simplify the calculation.

What is Amount B?

Amount B is separate from Amount A and relates to the application of the arm’s length basis to in-country baseline marketing and distribution activities.

In particular, it will provide a fixed return for baseline marketing and distribution activities that is intended to deliver a similar outcome to the arms length basis.

The purpose is to simplify transfer pricing rules for both tax authorities and multinational groups. 

Although detail on the application of Amount B was provided in the October 2020 Blueprint, the July 2021 Statement issued by the OECD stated that Amount B is being revisited and redrafted.

On December 8, 2022, the OECD published a consultation document on Amount B of Pillar One. 

It describes the broad operation of Amount B and seeks public input on a large number of aspects of the proposed rules. The consultation ran until January 25, 2023, and the OECD issued further Amount B rules on July 17, 2023.


Both Amount A and Amount B are likely to require amendments to both domestic law and treaties.

A new multilateral convention for implementing Amount A is planned for mid 2023.

Whether this will be approved and implemented by members of the Inclusive Framework is another issue. 

On February 20, 2023,  the French economic minister said that Amount A is being blocked by countries including the US, Saudi Arabia and India, and that it is time for a “European solution” for greater alignment of corporate tax policies between member states (ie a European Digital Levy).

Note that on April 29, 2021, the EU Parliament did adopt a resolution on OECD negotiations, the tax residency of digital companies and a possible European digital tax. This has however, now been put on hold pending implementation of the OECD Two Pillar Solution.

July 11, 2023 Update

On July 11, 2023, the OECD issued an Outcome Statement on Pillars 1 & 2 that gives an update on the status and timeline for implementation of Amount A and B of Pillar One.

Amount A

A Multilateral Convention (MLC) for the implementation of Amount A of Pillar One has been developed. It will be published for signature in the second half of 2023, with a signing ceremony organised by year-end. The MLC should enter into force during 2025, allowing for the domestic consultation, legislative, and administrative processes applicable in each jurisdiction.

Amount B

Further documentation on Amount B of Pillar One was launched on July 17, 2023 with a public consultation until September 1, 2023. This is aimed to be completed for year-end. The Inclusive Framework plans to approve a final report on Amount B and incorporate key content into the OECD Transfer Pricing Guidelines by January 2024.

Digital Service Taxes

138 countries and jurisdictions have also agreed in the Outcome Statement to not impose any new DSTs (or relevant similar measures) on any company before December 31, 2024, or the entry into force of the MLC if earlier, provided the signature of the MLC has made sufficient progress by the end of the year.