OECD commits to digital tax Two-Pillar Approach


Tax Hot Topics newsletterThe Organization for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting released a statement on Jan. 31 re-affirming its commitment to the OECD Secretariat’s “Unified Approach” to address tax challenges arising from digitalization and achieving agreement by the end of 2020.

The statement clarifies aspects of the “Two-Pillar Approach,” updates the “Plan of Work,” provides an outline of the architecture or the Unified Approach and revises the timeline for a consensus-based solution. It indicated that the U.S. Treasury suggestion of safe-harbor treatment of the Pillar One component would need to be resolved to reach consensus. It also states that “unilateral measures” (excise taxes on digital services) by countries would need to be withdrawn.

In January 2019, the OECD Secretariat attempted to synthesize a compromise position from the approaches submitted by members of the Inclusive Framework in order to discourage unilaterally imposed interim measures. The OECD suggested a two-part approach, Pillar One of which proposed to expand taxing jurisdiction for “market” countries and impose a formulary allocation of deemed residual profits to include an allocation to those market countries. Pillar Two would allow countries to tax profits in other jurisdictions that have a low effective tax rate.

The OECD issued a public discussion draft in February 2019, followed by stakeholder comments in March, and a detailed Plan of Work in May 2019. The OECD issued a “unified approach” in October 2019, which attempted to develop a consensus approach to Pillar One. On Dec. 2019, Treasury Secretary Steven Mnuchin sent a letter to the OECD expressing misgivings about the unified approach’s departures from established tax principles and suggested that Pillar One should operate as an elective safe harbor rather than a mandatory approach.

The statement attempts to clarify the Two-Pillar Approach and re-set the Plan of Work as well as the timeline for the achievement of a consensus resolution. It narrows the scope of affected companies to two categories, automated digital services and consumer-facing businesses, with specific carve-outs for extractive industries, most of the financial services sector, and the operation of ships and aircraft.

The Pillar One approach retains its three-tier profit allocation approach with some modifications and suggested approaches to dispute resolution. The statement comments on progress being made on Pillar One and indicates a number of open issues but does not provide details as to completion.

The timeline has now moved to preparing a report on the Unified Approach to a meeting of the G20 finance ministers and central bank governors on Feb. 22 and 23. A July meeting has been scheduled to reach agreement on the key policy features of the Unified Approach which would form the basis of a political agreement. Consensus resolution is still expected by the end of 2020, but significant work remains, and many issues are still open and would need to be addressed to achieve consensus.

Practice Tip: The statement continues to refine how pillar one would be implemented. Numerous issues will need to be addressed before consensus is reached and is subject to continued negotiations including scope and application. As the process continues to move forward, potentially impacted business should consider further modeling out the potential impact of these provisions.


David Sites
Washington National Tax Office
T +1 202 861 4104

David Zaiken
Managing Director
Washington National Tax Office
T +1 202 521 1543

Steven Wrappe
Managing Director
Washington National Tax Office
T +1 202 521 1542

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