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The OECD’s Pillar One and Pillar Two Blueprint Released

13 October 2020

Dear Clients, Colleagues and Friends,

The OECD published yesterday two reports on the blueprint for Pillar One (Pillar 1 Blueprint) and the blueprint for Pillar Two (together, the Blueprints). These extensive reports continue the OECD’s efforts to resolve tax challenges arising from digitalization, and to develop technical solutions in accordance with the approach introduced by the organization earlier this year.

The changes contemplated by the Blueprints would reallocate international taxing rights with respect to the income of multinationals that are active in the digital economy field. While the OECD recognizes the need for further technical work and political decisions in order to finalize the design features of the proposed allocation of taxing rights and nexus rules, the Blueprints represent a significant step in this direction and provide significant insight to the final solutions that are expected to be adopted.

This client update discusses the key takeaways from the Pillar 1 Blueprint. The current expectation of the OECD is to complete the process of finalizing all aspects of Pillar One by July 2021. The full Pillar 1 Blueprint report can be found here. An additional update with respect to the blueprint for Pillar Two will be published in the upcoming days.

Components of the Pillar 1 Blueprint

The key elements of the Pillar 1 Blueprint can be grouped into three components:

  • Amount A – the first part of the Pillar 1 Blueprint discusses the technical aspects of a new taxing right to market jurisdictions over the share of the residual profit at the multinational enterprise (MNE) group (or segment) level;
  • Amount B – the second part of the Pillar 1 Blueprint discusses a fixed return for certain baseline marketing and distribution activities taking place physically in a market jurisdiction in line with the arm’s length principle; and
  • Tax Certainty – the third part of the Pillar 1 Blueprint discusses processes to improve tax certainty through effective dispute prevention and resolution mechanism, both with respect to Amount A taxes and in general.

Amount A

The key design features with respect to Amount A are as follows:

  • Scope: The Pillar 1 Blueprint applies an “activities test”, pursuant to which automated digital services (ADS) and consumer facing businesses (CFB) would be subject to tax on Amount A. In this respect, ADS generally includes businesses such as online advertising, search engines, social media platforms, online gaming, etc. CFB generally includes businesses that generate revenue from the sale of goods or services of a type commonly sold to consumers (i.e., individuals that are purchasing items for personal use). Certain carve-outs are included in the Pillar 1 Blueprint.
  • Revenue Threshold: The Amount A tax is expected to apply to MNE groups that meet a global revenue threshold (based on annual consolidated group revenue), coupled with a de-minimis foreign in-scope revenue carve-out. No decision has been made yet with respect to the amount of the global threshold. However, the Pillar 1 Blueprint emphasizes the advantages of adopting the EUR 750 million global revenue threshold used for the purposes of the Country-by-Country Reporting.
  • New Nexus Test: Businesses that are in-scope may be subject to a new nexus rule. A different nexus rule is suggested with respect to ADS and CFB. For ADS, a nexus is achieved if revenues exceed a certain threshold. For CFB, a nexus is achieved if revenues exceed a certain threshold and there is a “plus factor” to indicate a significant and sustained engagement with the market (one such plus factor may be a subsidiary or a permanent establishment that provides distribution or sale support services, but additional plus factors are also contemplated).
  • Sourcing Rules: In order to determine the revenue to be treated as derived from a particular market jurisdiction, a new sourcing rule is introduced. The Pillar 1 Blueprint sets out a hierarchy of indicators that must be applied with respect to the revenue of each type of business. An MNE will apply the indicator that appears first in the hierarchy of indicators, unless the required information is considered to be “unavailable” or “unreliable”, in which case, the MNE should seek to apply the next indicator in the hierarchy. The sourcing rules also include certain documentation requirements.
  • Tax Base: MNEs that are subject to tax on Amount A profits in a particular market jurisdiction are required to reallocate residual profit to such jurisdiction. The market jurisdiction will receive a fixed percentage portion of the residual profit (income exceeding an agreed level of profitability), using a formula.
  • Loss Carry-forward: Losses generated over a given tax period under Amount A will not be allocated to market jurisdictions. Instead, they will be pooled in a single account and carried forward to subsequent years, with the result that no profit under Amount A would arise until historic losses are absorbed.
  • Marketing and Distribution Safe Harbor: Different options are still being considered in order to avoid “double-counting” of Amount A and marketing and distribution income allocated to the market jurisdiction under the arm’s length principle. The potential marketing and distribution safe harbor would consider income taxes payable in the market jurisdiction under the existing arm’s length principle and Amount A together, limiting taxable Amount A where the residual profit of the MNE is already allocated to the market jurisdiction under transfer pricing rules.
  • Double Taxation: In order to avoid double taxation, the Pillar 1 Blueprint sets out rules for determining the “paying entity”, which will bear the Amount A tax liability. Generally, Amount A tax would be allocated first to entities that contribute to the group’s ability to generate residual profits or have strong connections to the market jurisdiction, to the extent of the relevant entity’s capacity to bear the tax. Thereafter, Amount A tax is allocated pro-rata. The Pillar 1 Blueprint accepts either the exemption method or the credit method as appropriate methods to eliminating double taxation (as opposed to the reallocation method used under current transfer pricing principles).

Amount B

The purpose of Amount B is to both simplify the administration of transfer pricing rules and to enhance tax certainty and reduce controversy between taxpayers and tax administrations.

The Pillar 1 Blueprint will apply the Amount B tax to related party distributors that perform baseline marketing and distribution activities, set by reference to a defined “positive list” and “negative list” of activities. Amount B is intended to approximate results determined in accordance with the arm’s length principle. In this context, the Pillar 1 Blueprint suggests that the so-called TNMM (Transactional Net Margin Method) would be the most appropriate transfer pricing method associated with the adequate remuneration for the baseline marketing and distribution activities. The appropriate profit level indicator contemplated in the Pillar 1 Blueprint is the return on sales. The Amount B quantum may also vary by industry and region.

Improved Tax Certainty Processes

The Pillar 1 Blueprint acknowledges that it would be unpractical to allow all affected tax administrations to assess and audit MNEs’ calculations and allocation of Amount A to various jurisdictions. Accordingly, the Pillar 1 Blueprint proposes to address potential disputes through a determining panel mechanism whose outcomes, if accepted by the MNE, will be binding on the MNE and tax administrations in all relevant jurisdictions. Even if a dispute arises with respect to Amount A, the intent is to develop mandatory binding dispute resolution mechanisms.

Additional mandatory binding resolution mechanisms for disputes unrelated to the application of Amount A would be explored; however, agreement on the scope of such mechanisms is still pending.

The road ahead is still long and full implementation will require interested jurisdictions to revise their domestic laws in line with the Amount A key features and taxing rights, and adopt applicable rules and procedures for administering the proposed new regime, including to secure relief from double taxation. In addition, a new multilateral instrument, which would supersede and prevail over existing bilateral tax treaties for the taxation of in-scope MNEs, would need to be introduced. Nevertheless, it may be prudent to begin the brainstorming regarding the potential implications of the Pillar One and Pillar Two regimes.

We would be happy to analyze the potential impact of the new Pillar One and Pillar Two regimes reflected in the Blueprints on our clients’ positions and consider potential restructurings and shift to other transfer pricing models in order to minimize taxes and maximize utilization of foreign tax credits under the proposed new regimes.


The Tax Department
Herzog Fox & Neeman
Meir Linzen | Managing Partner
Head of Tax Department
Yuval Navot | Partner
 Tax Department
Eyal Bar-Zvi | Partner
Transfer Pricing
Ehab Farah | Partner
Tax Department
Ofer Granot | Partner
 Tax Department
Amir Cooper | Associate
Tax Department
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