Agreements on BEPS 2.0 provides needed breakthrough on the future of international tax
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Agreements on BEPS 2.0 provides needed breakthrough on the future of international tax

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As the BEPS 2.0 project gains momentum toward finalisation, Barbara Angus and Luis Coronado of EY summarise how we got here, provide an update on the latest developments and share their views on what to expect next.

It has been a little more than two years since the OECD initiated the bold project that seeks to address the tax challenges of the digitalisation of the economy (commonly known as the BEPS 2.0 project) in a coordinated manner across the globe. The BEPS 2.0 project is intended to provide a systematic approach to the reallocation of taxing rights to market jurisdictions (under pillar one) and to introduce a new system of global minimum tax rules (under pillar two). This against a backdrop of numerous countries considering or already implementing unilateral measures that are deviations from the long-standing international tax architecture and as such are likely to result in double taxation.

During the June 2021 meeting of the G7 finance ministers in London, an agreement was reached among the G7 countries on several key parameters with respect to the global tax changes being developed under pillar one and pillar two. This agreement was endorsed by the G7 leaders at their summit the following week. On July 1 2021, at the conclusion of two days of virtual meetings of the OECD/G20 Inclusive Framework on BEPS, the OECD released the ‘Statement on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy (the Statement), which now reflects agreement of 132 of the member jurisdictions of the Inclusive Framework in connection with the BEPS 2.0 project. The seven members of the Inclusive Framework that have not joined the Statement are Barbados, Estonia, Hungary, Ireland, Kenya, Nigeria and Sri Lanka.

The Statement describes agreed components with respect to both pillars of the BEPS 2.0 project. The Statement further indicates that remaining issues and a detailed implementation plan will be finalised by October 2021. On July 10 2021, at the conclusion of their meeting in Venice, the G20 finance ministers endorsed the July 1 statement, called for finalisation by their next meeting on October 15-16 2021, and encouraged those jurisdictions that have not yet joined the agreement to do so.

Recent political-level developments

Following the release of the pillar one and pillar two blueprints in October 2020 and the subsequent public consultation, focus shifted from the technical details of the proposed rules to the effort to achieve a high-level political consensus in the Inclusive Framework on both pillars by mid-2021. Strong support from the Biden administration in the US served to re-energise the global discussions in recent months.

The Biden administration has been most vocal about pillar two, calling for an agreement on robust global minimum tax rules in order to end what it refers to as the global race to the bottom on corporate tax rates. In discussions in the Inclusive Framework, representatives of the US Department of the Treasury stated the position that the minimum tax rate should be at least 15%, while also communicating the view that this should be the floor and that discussions should continue regarding a higher rate.

The Biden administration has made a direct link between the global pillar two effort and its domestic legislative proposals for significant changes in the US corporate tax system, including proposals to raise the US corporate tax rate from 21% to 28%, to increase the tax under the existing global intangible low-taxed income (GILTI) regime (which is the US analogue to the income inclusion rule contemplated under pillar two), and to introduce a new stopping harmful inversions and ending low-tax developments (SHIELD) regime (which is based in part on the undertaxed payments rule contemplated under pillar two).

The Biden administration also has expressed support for pillar one, advocating that the global businesses that would be in scope of the new nexus and profit allocation rules be determined based on quantitative thresholds designed to capture large, highly profitable companies rather than more subjective qualitative criteria.

The proposals under pillar one and pillar two, including these US policy positions, were the subject of discussion among the finance ministers of the G7 countries at their June 4-5 2021 meeting in London under the UK Presidency of the G7. The communiqué released at the conclusion of the meeting expressed strong support for the ongoing work on the BEPS 2.0 project. It also included specific commitments on key parameters of the new rules being developed. Specifically, the G7 finance ministers committed to “a minimum global tax of at least 15% on a country-by-country basis” (under pillar two) and to “reaching an equitable solution on the allocation of taxing rights, with market countries awarded taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises” (under pillar one).

The G7 leaders added their endorsement at their summit on June 11-13 2021, describing the G7 commitment as “a significant step towards creating a fairer tax system fit for the 21st century, and reversing a 40-year race to the bottom.” The G7 leaders communiqué further stated that “our collaboration will create a stronger level playing field, and it will help raise more tax revenue to support investment and it will crack down on tax avoidance.”

The statement

With this encouragement from the G7 countries, the Inclusive Framework jurisdictions met on June 30 – July 1 2021 with the aim of reaching a conceptual agreement. The July 1 2021 statement released at the conclusion of the meeting describes the key components of each pillar that were agreed.

Pillar one

The scope of the pillar one rules is to be applicable to multinational entities (MNEs) with global turnover above €20 billion and profitability (i.e., profit before tax/revenue) above 10%. Exclusions are provided for the extractive and regulated financial services industries. The Statement notes that the turnover threshold may be reduced to EUR 10 billion (approximately $23.5 billion), contingent on successful implementation of the new rules including tax certainty. For this purpose, a review process is to begin seven years after the agreement comes into force and would be completed in not more than a year.

For in-scope MNEs, between 20% and 30% of residual profit, which is defined as profit in excess of 10% of revenue, would be allocated to market jurisdictions where there is nexus. For purposes of this allocation, profit or loss is determined by reference to financial accounting income (with a small number of adjustments), and losses are carried forward.

Under a special purpose nexus rule, the new rules for allocation to a market jurisdiction would be applicable if the in-scope MNE derives at least €1 million in revenue from that jurisdiction. A lower threshold of €250,000 would apply in the case of smaller jurisdictions that have a gross domestic product lower than €40 billion. For this purpose, revenue would be sourced to the end market jurisdiction where the goods or services are used or consumed, with detailed sourcing rules to be specified.

Where the residual profits of an in-scope MNE are already taxed in a market jurisdiction, a marketing-and-distribution-profits safe harbour would apply to cap the residual profits that are allocated to the market jurisdiction under the new rules. The Statement indicates that work on a simplified approach for the application of the arm’s-length principle to in-country baseline marketing and distribution activities is to be completed by the end of 2022 and will focus in particular on the needs of low-capacity countries. Double tax relief is to be provided under the exemption or credit method for profit allocated to market jurisdictions under the new rules.

The Statement indicates that mandatory and binding dispute prevention and resolution mechanisms are to be provided for issues related to the new allocations to market jurisdictions, but notes that consideration will be given to an elective dispute resolution mechanism for certain developing countries. MNEs would be allowed to manage the tax compliance process with respect to the new rules through a single entity.

With respect to unilateral measures, the Statement references appropriate coordination between the application of the new international tax rules and the removal of all digital services taxes (and other relevant similar measures) on all companies.

Finally, the Statement states that the multilateral instrument through which the new rules for allocations to market jurisdictions are to be implemented will be developed and opened for signature in 2022, with the new rules coming into effect in 2023.

Pillar two

The Statement describes pillar two as having two elements. The global anti-base erosion (GloBE) rules are a set of interlocking rules: an income inclusion rule (IIR) that allows parent entities to impose a top-up tax on low-taxed income of affiliated entities, and the undertaxed payments rule (UTPR) that denies deductions or requires an equivalent adjustment for payments to low-tax affiliated entities that have not been subject to tax under an IIR. The subject-to-tax rule (STTR) allows jurisdictions to impose a withholding tax on certain related-party payments that are taxed at a low adjusted nominal rate. Although the STTR is described second, it would apply before the GloBE rules and thus take priority over those rules.

The Statement describes the GloBE rules as having the status of a common approach, specifying that Inclusive Framework jurisdictions would not be required to adopt these rules, but, if they choose to do so, they are to implement and administer the rules in a way that is consistent with the agreed design and accept the application of such rules by other Inclusive Framework members.

The GloBE rules would apply to MNEs with total consolidated group revenue of at least €750 million in the immediately preceding fiscal year. However, the Statement notes that countries would be free to apply the IIR to MNEs that are tax resident within their jurisdiction even if this threshold is not met. An exclusion from the GloBE rules is to be provided for investment funds, pension funds, governmental entities, non-profit organisations, and international organisations that are at the top of an MNE group. The Statement also indicates that further consideration will be given to a possible exclusion for MNEs that are in the initial phase of their international activity.

The Statement indicates that the rights to impose a top-up tax are allocated to jurisdictions under a top-down approach under the IIR (with special rules for split-ownership situations) and under a methodology to be agreed under the UTPR.

The GloBE top-up tax is determined using an effective tax rate (ETR) test calculated at the jurisdictional level, with a common definition of covered taxes and a tax base measured by reference to financial accounting income (with adjustments to be agreed and mechanisms to address timing differences). The Statement notes that in the case of existing distribution tax systems, no top-up tax would apply if earnings are distributed within three to four years and taxed at or above the minimum level.

According to the Statement, the minimum tax rate for purposes of the IIR and the UTPR will be at least 15%.

The GloBE rules provide for a formulaic substance carve-out that would exclude income in the amount of at least 5% of the carrying value of tangible assets and payroll. The Statement notes that for a transition period of five years, this amount would be increased to 7.5%. In addition, a de minimis exclusion is to be provided. Furthermore, international shipping income is excluded.

According to the Statement, because the pillar two rules are to apply on a jurisdictional basis, consideration will be given to the conditions under which the US GILTI regime will co-exist with the GloBE rules, in order to ensure a level playing field.

With respect to the STTR, the minimum rate will be from 7.5% to 9% and the taxing right allocated to the source country under the STTR is limited to the difference between the minimum rate and the tax rate on the received payment. The Statement indicates that the Inclusive Framework members recognise that the STTR is an integral part of achieving a consensus on pillar two for developing countries. In this regard, it further states that Inclusive Framework members with nominal corporate income tax rates below the STTR minimum rate for interest, royalties and certain other payments are to agree to implement the STTR into their bilateral treaties with developing members when they are requested to do so.

According to the Statement, the Inclusive Framework members will agree and release an implementation plan, that will include model GloBE rules together with the possible development of a multilateral instrument for coordination of such rules, an STTR model provision together with a multilateral instrument to facilitate adoption, and transitional rules including the possibility of deferred implementation of the UTPR. The Statement notes that pillar two should be brought into law in 2022, to be effective in 2023.

Observations, implications and the path forward

The agreement of 132 jurisdictions reflected in the Statement, and endorsed by the G20 finance ministers, is an important step in advancing the work on the BEPS 2.0 project and its objective of making fundamental changes to the global tax architecture. While the Statement reflects a conceptual agreement, there remains significant work to be done to flesh out substantive and technical details and address the remaining open questions. In addition, there are seven Inclusive Framework jurisdictions that have not yet joined the Statement. Therefore, the work ahead includes making an effort to bring these jurisdictions on board.

As compared to the October 2020 blueprints, the Statement addresses some key parameters that had been held open because of political-level differences among countries. These include the thresholds for determining the MNEs in scope of pillar one, the quantum of profits subject to reallocation under pillar one, and the minimum tax rates under pillar two. However, the Statement reflects ranges for several critical elements, including the portion of profits subject to reallocation to market jurisdictions and the global minimum tax rates, with further negotiation required in an effort to narrow these ranges down to specific numbers.

In terms of timeline, the Statement indicates that both sets of new rules be effective in 2023. In the case of pillar one, the operation of the rules require full consensus of Inclusive Framework jurisdictions and implementation through changes to domestic tax laws and treaty agreements. In the case of pillar two, the GloBE rules are merely a common approach, with implementation optional for Inclusive Framework jurisdictions. Therefore, the path forward for the two pillars is quite different and implementation could well play out differently for each. That said, the timeline laid out in the Statement seems aspirational for each pillar and implementation by a critical mass of countries could require several years or longer.

As can be seen, the new rules being developed in the BEPS 2.0 project would significantly alter the overall international tax architecture under which multinational businesses operate. The rules contemplated under pillar one would be a clear departure from the current international tax framework of nexus based on permanent establishment and profit allocation based on the arm’s-length principle through an evaluation of where value is created and substantial activities are undertaken. The formula-based approach for re-allocating taxing rights to market jurisdictions under pillar one would require an unprecedented level of global coordination and cooperation to ensure that the formula is applied consistently across the world. Any inconsistency would give rise to complex disputes and create the risk of double taxation.

Getting to tax certainty for businesses and tax administrations would require a significant investment in the resources required to administer these new rules and to implement effective multilateral dispute prevention and resolution mechanisms. The global minimum tax rules contemplated under pillar two would be a clear departure from long-standing concepts of tax sovereignty. These rules also would need to be carefully coordinated in order to eliminate the risk of multiple countries applying overlapping top-up taxes.

While important developments are expected this year, the work required to implement any agreement that is reached will continue well beyond 2021. The activity ahead can be expected to be at least as complex as the activity that brought us to this point. Moreover, consensus reached among such a large group of jurisdictions with such diverse perspectives and interests would require constant attention and maintenance to ensure that the operation of the new rules around the world fully reflects the agreed design.

All eyes will be on the Inclusive Framework jurisdictions as they work toward the objective of final agreement by October 2021. Looking ahead, attention will turn to the activity in countries around the world related to the implementation of that agreement through changes in their domestic tax laws and new multilateral agreements.


Click here to read EY's Asia-Pacific Guide 2021


Barbara Angus



Washington DC, US

T: +1 202 327 5824


Barbara Angus is a partner and global tax policy leader based in Washington DC. Her focus is on engaging with clients and governments on tax policy development and implementation across the globe.

From 2016 through 2018, she served as Chief Tax Counsel for the Committee on Ways and Means of the United States House of Representatives, playing a key role in the development and enactment of the US tax reform. Her prior public-sector roles included being the international tax lead for the Office of Tax Policy, US Department of the Treasury, serving as the federal government’s principal legal advisor on international tax policy, and representing the US in the OECD as a vice chair of the committee on fiscal affairs. She also has more than 20 years of private sector experience in international tax matters, including that of forming a consulting firm that developed legislative and regulatory solutions for multinational clients.

Barbara holds a bachelor’s degree from Dartmouth College, a JD from Harvard Law School and a MBA in finance and accounting from the University of Chicago Graduate School of Business.

Luis Coronado




T: +65 6309 8826


Luis Coronado is a partner and global tax controversy leader and Asia-Pacific transfer pricing leader based in Singapore. He has more than 25 years of advisory experience in international tax, TP, tax policy and controversy issues.

Before relocating to Asia, Luis spent several years serving domestic and multinational companies in Latin America. He advises companies on the negotiation of bilateral advance pricing agreements and competent authority resolutions with a range of countries. In the past, he has advised the Inter-American Development Bank, the UN’s Economic Commission for Latin America and the Caribbean, and the World Bank on tax policy issues especially on transfer pricing policy and legislation.

Luis holds a bachelor’s degree from the Universidad Iberoamericana and a MBA from the University of Southern California.

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