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.

On October 11, 2023, the OECD published the  Multilateral Convention to Implement Amount A of Pillar One (MLC).

Although the MLC is not yet open for signature (as there is still no consensus between IF members on certain aspects), the OECD also released an Explanatory Statement and the Understanding on the Application of Certainty of Amount A.

It requires ratification by 30 States accounting for at least 60% of the ultimate parent entities of MNEs initially expected to be in-scope for Amount A. Once these minimum conditions are met, the States that have ratified can decide when the MLC will enter into force.
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. Scope

1.1 Identify if they are In-Scope

Under Article 3 of the MLC, multinational groups subject to the Amount A reallocation are defined as ‘Covered Groups’. 

A group is a covered group where in a fiscal year:

– the revenue of the group for the period is more than 20 billion euros (this is adjusted if the accounting period is not 12 months); and 

– the pre-tax profit margin of the group is more than 10 percent. 

1.2 Determine if Segmentation would apply

Under Annex C, Section 4 of the MLC segmentation can apply where an MNE group has revenues that exceed the 20 billion euros threshold, but where it doesn’t meet the profit margin test (ie its pre-tax profit margin is less than 10%).

In this case a segment of the group disclosed in the consolidated financial accounts of the UPE can be a ‘covered segment’. A covered segment is subject to the Amount A rules (with some adjustments) irrespective of the fact that the MNE group may not be subject to Amount A. 

1.3 Determine Excluded or Exempt Entities

Just as for Pillar Two, excluded entities are excluded from the scope of Amount A. The definition is the same as for the Pillar Two GloBE Rules with one exception.

For the purposes of the Pillar Two GloBE Rules, an entity owned by an excluded entity can also be treated as an excluded entity for Pillar Two where at least 85% of the value of an entity is owned (directly or indirectly) by one or more excluded entities (excluding pension services entities), and where substantially all of the entity’s income is dividends or equity gains or losses excluded from the Pillar Two GloBE income or loss calculation. This does not apply for the definition of an excluded entity under the Pillar One Amount A Rules.

There are also specific exclusions for certain industries. Eg Annex C included exclusions for extractives, regulated financial services, and defence), and purely domestic-oriented businesses.

2. Source Their Revenue.

Articles 6/7 and Annex D of the MLC provides for detailed revenue sourcing rules.

In general, revenues are sourced according to the type of revenue.

The 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 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:

Amount A Revenue Sourcing Rules.

Amount A: Reliable Indicators.

Amount A: Allocation Keys.

3. 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 Annex B Section 2 of the MLC.

For more information, see Amount A: Adjusted Profits.

4. 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 5 of MLC 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.

5. 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.

For more information, see Amount A: Marketing and Distribution Profits Safe Harbour.

Use our Marketing and Distribution Safe Harbour Calculator to simplify the calculation.

6. Eliminate Double Taxation

The Amount A elimination of double taxation provisions in Article 11 of the MLC apply to prevent a multinational group being taxed twice on profits allocated to a market jurisdiction where there is already some form or physical establishment that is subject to tax. 

It does this by using the return on depreciation and payroll as a proxy for physical activities. 

The rules are complex and operate in a defined order with jurisdictions being classified as Tier 1, Tier 2, Tier 3A or Tier 3B. The obligation to eliminate double taxation is allocated to Tier 1 jurisdictions first, then Tier 2, Tier 3A and finally Tier 3B.

The amount allocated is generally restricted to the Amount A profits available for double taxation relief or a given threshold which varies depending on the Tier.

The elimination of double taxation provisions rely heavily on the definitions used to calculate the marketing and distribution profits safe harbour, which is itself intended to reduce double taxation by reducing any profit reallocation where there are physical activities within a jurisdiction that would be taxed under domestic law. 

See: Amount A Double Tax Relief

There are then filing and payment responsibilities, with a single tax return filed with

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.
On February 19, 2024, the OECD published its final report on Pillar One Amount B, aimed at simplifying and streamlining the application of the arm’s length principle to baseline marketing and distribution activities. It includes guidance on “Special considerations for baseline distribution activities” which is incorporated into the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022 as an Annex to Chapter IV.
The report/updated guidance provides that jurisdictions can choose to apply a ‘simplified and streamlined approach’ (formerly referred to as Amount B) to in scope distributors resident in their jurisdiction. See:
Both Amount A and Amount B are likely to require amendments to both domestic law and treaties.
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.
October 11, 2023 Update
On October 11, 2023, the OECD published the  Multilateral Convention to Implement Amount A of Pillar One (MLC).
It requires ratification by 30 States accounting for at least 60% of the ultimate parent entities of MNEs initially expected to be in-scope for Amount A. Once these minimum conditions are met, the States that have ratified can decide when the MLC will enter into force.

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

On February 19, 2024, the OECD published its final report on Pillar One Amount B. Jurisdictions can choose to apply the simplified and streamlined approach (‘the simplified approach’) for in scope transactions in their jurisdictions for fiscal years commencing from January 1, 2025.

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.