How will the G20/OECD’s pillar one and pillar two project affect disputes?
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How will the G20/OECD’s pillar one and pillar two project affect disputes?

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Alison Lobb and Howard Osawa of Deloitte explore potential areas of controversy arising from the G20/OECD’s pillar one and pillar two project and considerations to manage disputes and potential double taxation.

The global tax reform project to address the tax challenges of the digitalisation of the economy has gained significant momentum in the past few months, with a high level political agreement of the G7, G20 and, at latest count, 132 countries of the OECD Inclusive Framework on BEPS.

The political agreement is, of necessity, high level, and many questions of detail (mainly technical, a few political) remain to be answered. The G20 and OECD Inclusive Framework have committed to October 2021 for addressing the remaining issues and preparing a detailed implementation plan.

In the meantime, the greatest level of detail, and the focus on tax dispute and prevention mechanisms, remains that published in the OECD ‘blueprints’, recognising that the proposals remain subject to change.

The OECD release of the pillar one and pillar two blueprints in October 2020 reflects a determination to:

  • Develop a framework to address the taxation of the digitalised economy with a reallocation of profits to market countries; and

  • Continue efforts to combat BEPS via the introduction of a global minimum tax regime.

The blueprints provide additional refinements to proposals to address aspects of these reform of the international tax system that may give rise to tax disputes and may represent the greatest administrative challenge for governments and tax authorities of the OECD Inclusive Framework members.

While the blueprints provide additional detail on the approach the OECD Inclusive Framework is taking to develop a universally acceptable framework for international taxation, there are still many areas that require further development and consideration prior to the issuance of the final recommendations.

Indeed, there has been already, at the timing of this article (July 2021), indication that there will be movements away from the recommendations of the blueprints with recent agreement by the G7, G20 and 132 members of the Inclusive Framework to simplify the applicable scope of the pillar one framework.

The ongoing work and the need to further develop and clarify the particular details of the pillar one and pillar two regimes adds another layer of complexity for businesses in their efforts to prepare for their adoption. The G20 as well as the 132 OECD Inclusive Framework countries committed to the challenging and ambitious timeline of implementation in 2023.

Acknowledging that the pillar one and pillar two frameworks will continue to change and evolve as technical work continues and the outcomes of political agreements become known, this article aims to highlight potential areas of dispute and dispute resolution mechanisms within the frameworks as they are presented in the blueprints.

The pillar one blueprint addresses and provides significant detail regarding the various elements needed to establish a global framework for taxation and allocation of profits to market countries, notably, details relating to scope, nexus, revenue sourcing, base determination, and profit allocation.

Given the broad scope of the proposals, and the significant changes that they represent, there remain areas that require further guidance to avoid controversy. Indeed, the pillar one blueprint acknowledges the complexity underlying the efforts to determine an equitable reallocation of income and taxing rights, and, as a result, provides guidance and proposals on how to potentially manage controversy to provide greater certainty to businesses.

While the proposals described in the pillar two blueprint can largely be considered prescriptive, there are still areas that may create challenges for many businesses. Such challenges may, for example, include the determination of jurisdictional effective tax rates, the coordination of the switch-over rule with treaty requirements, and for US multinationals, coordination with the various base-erosion measures enacted through the Tax Cuts and Jobs Act of 2017.

However, unlike the pillar one blueprint, the pillar two blueprint, while providing detailed discussion to describe how controversy related to these points may be avoided, does not propose a formal mechanism or process to prevent or resolve controversy, and unless this is addressed, its implementation may create additional challenges for businesses and tax authorities to resolve controversy through traditional means.

Pillar one

The proposals of the pillar one blueprint aim to accommodate changes in business models arising from the digitalisation of the economy through the introduction of new profit allocation mechanisms and nexus rules to expand the taxing authority of market jurisdictions.

The proposals are to be applied to the ‘largest and most profitable’ businesses, defined as those with global annual revenues of €20 billion (approximately $23.6 billion) and a profit margin of 10% or more. Extractives and regulated financial services businesses are excluded from scope. The quantum of the income to be re-allocated and taxed, the so-called ‘Amount A’ is, in the pillar one blueprint, to be defined through a variety of considerations involving a new nexus rule, revenue sourcing rules, and the determination of the base of income subject to the re-allocation.

The pillar one blueprint also includes reference to the possible application of a safe harbour return for baseline marketing and distribution activities (Amount B) to help provide a simpler and more easily administered approach to transfer pricing (TP) enforcement for transactions involving these routine activities.

Needless to say, both approaches to determine Amount A and Amount B present challenges and potential controversy: The underlying complexity of the analysis needed to identify the residual profit (in ‘paying entities’) subject to re-allocation for Amount A may create differing views for both businesses and the tax administrations of affected jurisdictions; and the assessment of ‘positive’ or ‘negative’ lists of activities to determine the applicability of the safe harbour returns under Amount B may create controversy if the local business activities cannot be clearly seen to fall into either category.

Recognising the potential difficulties arising from the proposed frameworks, the blueprints provide proposals on how some of the potential areas of controversy, most notably relating to Amount A, may be managed.

Pillar one blueprint proposals to avoid double taxation with respect to Amount A

The pillar one blueprint identifies possible areas of controversy arising from the determination and allocation of residual profits from Amount A. The blueprint in this regard recognises the complexity of business organisation and the possibility of operating models where residual income is not recognised in a single entity.

Rather, such residual income may be spread across several entities throughout a multinational enterprise (MNE), and in such cases, the resulting allocation of Amount A may result in double counting and double taxation. For example, this could arise in instances where there is a regional principal, and residual returns resulting from local efforts to develop markets or exploit the intangibles granted to them accrue to the regional principal.

By allocating a portion of the consolidated residual income used to determine Amount A, it may be the case that there is a double counting that results in double taxation. With this in mind, the blueprint address this possibility and proposes solutions to eliminate double taxation in such cases.

To avoid double taxation, the pillar one blueprint introduces a mechanism comprising of two components to help limit this risk. The first component is intended to first identify the entities earning residual income that would comprise the ‘payers’ of the Amount A tax liability. It is proposed that this is determined through a four-step process consisting of:

  • An activity test to qualitatively confirm non-routine contributions made by an entity to the creation of residual income;

  • An assessment of income to evaluate the capacity of an entity to pay the Amount A liability;

  • A market connectivity test to ensure that the residual profits earned by the entity align with the markets that it serves; and

  • A pro-rata allocation of Amount A tax liability among other paying entities if the entity that has jurisdiction over the market from which it derives residual income cannot financially bear the cost of the additional tax liability.

The second component proposed in the blueprint involves the use of an exemption or credit method to eliminate the possibility of double taxation for income reported in a payer’s jurisdiction. The blueprint acknowledges that additional work is needed to refine these proposed approaches including clarity in respect of the application of the four-step process as well as coordination with pillar two.

Pillar one blueprint proposals to obtain tax certainty and dispute resolution

Given the complexity and challenges to determine Amount A, the pillar one blueprint proposes a framework to help businesses with dispute prevention and dispute resolution. To aid in dispute prevention, the blueprint proposes the development of a standardised Amount A return and documentation package, and centralised filing, validation and exchange of this information with jurisdictions subject to the Amount A allocation.

As a measure of dispute prevention and to provide tax certainty, the blueprint proposes a process where the business may request early certainty with the lead tax administration, which is expected to be located in the jurisdiction where the return and documentation are filed, and which is most likely the jurisdiction of the ultimate parent entity.

The lead tax administration may determine whether the return and documentation would require further review by a panel, and if so, a review panel comprising six to eight tax administrations affected by the Amount A re-allocation will be formed to review the Amount A return and documentation.

While the details of the mechanism to recognise and implement the outcome of the panel review remain unclear, the intention of the framework would be to ensure all affected jurisdictions abide the result of the panel review.

If the review panel and its constituent tax administrations cannot agree on the outcome of the review, a second ‘determination’ panel will be formed which is obligated to reach a decision. The blueprint envisages further work on the make-up of the determination panel. If after the determination panel review the business and the determination panel agree on the conclusions, which may include revisions to the determination of Amount A originally proposed by the MNE, the outcome is similarly considered binding for all affected jurisdictions

If the panel and the MNE do not agree on the outcome of the panel review, the MNE may then withdraw its request for early certainty and rely on domestic procedures in each affected jurisdiction or seek relief through mutual agreement procedures (MAP), if available. This may create significant challenges for the MNE if, as is likely, the determination of Amount A in the affected jurisdictions is subject to controversy.

The statement from the OECD Inclusive Framework on political agreement emphasised that in-scope MNEs will benefit from dispute prevention and resolution mechanisms, which will not only avoid double taxation for Amount A, but will also include all issues ‘related to Amount A’ (e.g. TP and business profits disputes), in a mandatory and binding manner. This indicates that the largest and most profitable companies in scope of Amount A will be able to obtain greater certainty over existing international tax matters that affect where business profits are taxed.

Pillar two

The pillar two blueprint proposals are intended to address concerns that countries are competing for inbound investment through low, or no, corporation tax rates. It aims to establish a framework from which tax administrations may establish taxing rights to ensure that large MNEs (MNEs with global revenues exceeding €750 million) pay a minimal level of tax regardless of where they may be headquartered or where they operate.

The pillar two blueprint proposes the introduction of a global minimum tax rate, agreed politically to be ‘at least’ 15%, and other mechanisms to promote global anti-base erosion measures. These include an income inclusion rule, undertaxed payment rule, a switch-over rule, and a subject to tax rule. The application of the rules and how they apply to the agreed global minimum tax rate are intended to have clear definitions and are generally mechanical in practice.

While the proposals in the pillar two blueprint are generally prescriptive in nature, and less prone to subjectivity and disagreement, certain elements of the proposals may potentially lead to controversy, for example, if jurisdictional financial data used in consolidated financial statements is to be used to determine the tax base. This method of calculating the effective tax rate of entities in a jurisdiction may lead to possible inconsistencies with local accounts and filed tax returns and may be questioned by tax administrations.

In addition, as the income inclusion rule and secondary undertaxed payment rule require adoption by various tax administrations, the OECD Inclusive Framework has recognised the need to harmonise the approach such that existing tax laws and regulations do not create inconsistencies so as to avoid potential controversy and double taxation.

While no proposed framework for dispute resolution is currently provided in the blueprint, the OECD Inclusive Framework Statement makes clear that countries must implement and administer the rules in a way that is consistent with the outcomes provided for under pillar two. This includes taking into account model rules and guidance agreed to by the Inclusive Framework, and importantly countries must accept the application of the income inclusion and undertaxed payment rules applied by other Inclusive Framework countries including agreement on rule order and the application of any agreed safe harbors.


The pillar one and pillar two proposals represent significant changes to the global international tax framework that are considered necessary to address the challenges relating to the taxation of digital and digitalising businesses, and to further address difficulties involving BEPS.

The two blueprints, and subsequent political agreements, propose an overview of frameworks that may be adopted to address these complex issues. In addition, an important mandate of the OECD and the Inclusive Framework is to also make available protocols to help businesses achieve certainty and provide mechanisms that will help to resolve disputes after implementation.

The G7, G20 and OECD Inclusive Framework acknowledge that the proposals require further consideration and refinement and have noted that work will continue with a view to further updates for the OECD Inclusive Framework and G20 Finance Ministers meetings in October 2021.

Click here to read Deloitte's TP Controversy Guide 2021

Alison Lobb



Deloitte UK

T: +44 20 7007 0497


Alison Lobb is a partner of Deloitte in London. She specialises in TP, tax policy and international tax.

Alison’s work includes leading on Deloitte input to the OECD and UK government consultations on international tax matters, including the BEPS project and digitalised economy work.

Alison has multinational clients quoted on the stock exchanges of London and New York across all business sectors. As well as TP analysis, documentation, audits and APAs, she covers all areas of international taxation and business models, such as questions of residence, permanent establishment, withholding tax, diverted profits tax, EU directives and BEPS initiatives.

Howard Osawa



Deloitte Japan

T: +81 70 1473 8951


Howard Osawa is a partner in the TP practice of Deloitte Tohmatsu Tax Co., and is based in Tokyo, Japan. He has more than 25 years’ experience in TP and has worked in both Japan and in the US.

Prior to joining Deloitte, Howard also performed a dual role as the Japan country leader for the customs and trade practice at a large professional services firm in Tokyo while also helping companies with TP matters.

Howard has supported companies in a variety of industries in the areas of documentation, audit defense, APAs, MAP proceedings, supply/value chain planning, and customs and trade planning and audit defense.

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