OECD Two Pillar Approach: Impact on Business

Gautam Khurana


ILO Consulting Services Pvt Ltd


In October 2021 the Organization of Economic Co-Operation and Development (OECD) announced that 136 countries have reached an agreement on a two-pillar International Taxation approach which was introduced in 2020 – Pillar One addressing taxing rights and distribution of residual profits and Pillar Two imposing a global minimum tax.   This will create a significant impact on businesses as there will be a complete reordering of the current norms governing global tax and transfer pricing strategies.


What led to the introduction of the Two Pillar approach?

Challenges posed by accelerating digitalization and globalization of the world economy resulted in years of intensive negotiations to update and fundamentally reform international tax rules.

Existing international tax rules, framed almost 100 years ago, rely on physical presence and a profit allocation rule based on the arm’s length principle. But the business landscape has changed with digitalization and globalization as business models have come up that operate without physical presence - they have scale without mass and rely heavily on intangible assets, devoid of observable location.

The outcome has been a blueprint released by OECD in 2020 with proposed solutions to address tax challenges. Pillar One and Pillar Two frameworks are the key components of this blueprint.


What does Pillar One address?

Pillar One addresses companies that aren’t paying enough tax in jurisdictions where they have a market presence without a physical presence. It primarily focuses on digital companies and consumer-oriented businesses in which a company that does not have a physical presence in the jurisdiction sells products directly to consumers. The framework covers the following components:

  • Determining the jurisdiction qualifies for an allocation of revenue through new special business nexus rules.
  • Allocation of 25% of a residual profit (Amount A) to market jurisdiction that meets the necessary nexus test.
  • Fixed remuneration (Amount B) for ‘baseline’ routine marketing and distribution activity in line with Arm’s Length Price.
  • Mechanism to avoid double taxation.
  • Multilateral convention to remove the Digital Service Tax.

This pillar aims at simplicity, avoiding double taxation and a lowering of the compliance burden, along with an emphasis on attaining a robust mechanism for dispute prevention and resolution. It will come into effect from 2023.


What does Pillar Two address?

This pillar attempts simplification through consolidated financial accounts, effective tax rates based on Country by Country (CbC) reports, the concept of low-risk jurisdictions, a situation wherein the effective tax rate for one year will be accepted for subsequent multiple years without fresh calculation, a de-minimis profit threshold, etc. It seeks to establish a minimum level of taxation on multinational companies with businesses around the world.

Under Pillar Two, thresholds for effective tax rates would be established, therefore, it would be applied after Pillar One. That is, companies would first allocate the tax due to jurisdictions under Pillar One OECD guidelines; post which, if they are below the minimum effective tax rate, Pillar Two guidelines would apply. This Pillar envisages a 15% global minimum tax rate for large multinationals, as illustrated below.




Effective Tax Rate

Top Up Rate

Top up Tax

















This is an important step toward eliminating tax havens and addressing the transfer pricing issue of tax competition.


India’s position vis-à-vis Pillar 1 and Pillar 2 frameworks of OECD

India became a part of this global tax deal in July 2021 by being part of the 136 countries that adopted the high-level statement containing the outline of a consensus solution to address tax challenges. In fact, the principles underlying the solution justify India’s stance for a greater share of profits for the markets, consideration of the factors that create demand with respect to profit allocation, the need to address the issue of cross border profit shifting, and the need for Subject to Tax Rule to stop Treaty Shopping.

Bilateral tax treaties exist to reciprocate the benefits between the residents of two countries. But when a person from a third country invests in any of those two countries just for the sake of avoiding tax and deriving the benefits of low taxation, it is a case of Treaty Shopping.


Impact on the business community

The agreement to implement a global minimum tax has been hailed as a fundamental breakthrough in the reform of international tax. However, multinational companies are likely to face a challenging operating environment in the future. Under the current tax rules, different countries can impose different corporate tax rates on multinational companies (MNCs). Therefore, MNCs resort to tax strategies like ‘profit sharing’ – leading to increased tax revenues in countries with lower tax rates and decreased revenues in countries with higher rates.

While Pillar One aims to reallocate taxing rights of countries, Pillar Two aims to set a global minimum tax rate of 15%. This has been heralded as a commendable step to fight global tax gaps and large-scale tax evasion. However, in all consultations on Pillar One and Pillar Two, the biggest concern Indian MNCs doing business overseas have laid on the table is that - their income should be taxed only once.

A broader agreement on a minimum standard of 15% would be of relief to Indian MNCs in terms of compliance hurdles since they would not have to talk to multiple tax authorities in different countries.  But companies doing business with India are at risk of the equalization levy introduced by the Indian Government and will have to relook their structure regarding how they will comply with Pillar One. Most forms of equalization levy and unilateral measures will become obsolete once Pillar One is implemented.


Going ahead, business houses should consider the following potential issues:

  • Determining the applicability of Pillar One and Pillar Two to transactions and business houses.
  • Analysis of new rules on additional tax cost, allocation of profits, cash flow, and changes in the financial statement.
  • Evaluation of existing ownership structure and alternative options to restructure the business operation.
  • Analysis of Withholding Tax.
  • Compliances and documentation on the Pillar One and Pillar Two approach.
  • Training of in-house team for implementation of Pillar One and Pillar Two approach.



The application of the Pillar One and Pillar Two income tax approaches is expected to bring significant changes to the existing Income Tax rules. The additional tax on the market jurisdiction and existing double taxation treaties would have a significant impact on the companies having offices in a different jurisdiction. In addition, the companies are required to consider new taxation rules with the existing domestic rules, double taxation treaties, transfer pricing regulations, and compliances.

Going ahead, looking at the concerns being raised by different companies with respect to Pillar One and Pillar Two approaches, business houses need to be mindful of the fact that taxation must be aligned to the context of their operations; and that it is crucial for them to have appropriate transfer pricing policies and their documentation in place as they communicate with tax authorities.

XLNC ARCHIVE | 19 May 2022


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