July 7, 2021 (Updated August 18, 2021)

Agreement on Global Tax Reform: What Happened and What's Next

Holland & Knight Alert
Alan Winston Granwell | Joshua David Odintz


  • The Organization for Economic Cooperation and Development (OECD)/G-20 Inclusive Framework on Base Erosion and Profit Shifting (IF) on July 1, 2021, issued a Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy (Statement) that 130 of its 139 members had agreed on a way forward to address the tax challenges arising from the digitalization of the economy. (Subsequently, Peru, Saint Vincent and the Grenadines, and Barbados supported the Statement.) The Statement contains the agreed upon components of the Pillar One (nexus and profit allocation rules) and the Pillar Two (global minimum tax rules) framework, which will be followed by a resolution of remaining issues and a detailed implementation plan by October 2021.
  • Significantly, the countries supporting the global tax revision plan included nearly all developed countries (inclusive of the G-7 member countries and G-20 member countries other than Estonia, Ireland and Hungary), leading developing countries such as Brazil, China, India (all within the G-20) and jurisdictions commonly used for international tax planning, such as Bermuda, the Cayman Islands, Singapore and Switzerland. Ireland, while supporting the agreement, did not sign the Statement because of its reservation with respect to a global minimum tax of "at least 15 percent." The remaining countries that have not signed the Statement are Estonia, Hungary, Kenya, Nigeria (the largest economy in Africa) and Sri Lanka.
  • The G-20 Finance Ministers endorsed the Statement at their July 9-10 meeting in Venice, Italy. While endorsement by 133 of the 139 countries of the conceptual framework of the Pillar One and Pillar Two initiatives is an important and significant achievement, particularly in view of the stalled progress at the end of 2020, much remains to be done between now and October. The IF will have to grapple with technical, design and implementation issues. Moreover apart from these issues, political issues remain to be resolved, particularly in the European Union and in the United States. So, while the 133-country agreement is a major step forward, time will tell whether the IF countries ultimately will approve and adopt these bold initiatives to revamp the international tax system.

Addressing the tax challenges arising from the digitalization of the economy has been a top priority of the Base Erosion Profit Shifting (BEPS) project of the Organization for Economic Cooperation and Development (OECD)/G-20 Inclusive Framework (IF)1 since 2015. Attempts to reach consensus on the architecture of the Pillar One and Pillar Two blueprints issued by the IF on Oct. 12 2020, had stalled because of the uncertain scope and application of the proposals. Further complicating the situation was the position of the United States prior to the election in November 2020 and how a new Administration would view the initiative.

All of that changed after the election, and series of events turbocharged conceptual agreement of a revamp of the international tax system.

The first event: A combination of U.S. initiated actions had the effect of refocusing and reinvigorating the IF to move the project forward. These included the supportive statements by senior Biden Administration officials to reengage with the IF (and drop the Pillar One safe harbor proposal), the Made in American Tax Plan domestic tax initiatives to increase the rate of corporate income tax to 28 percent (or perhaps 25 percent), to increase the global minimum tax to 21 percent (or perhaps a slightly lesser number), to repeal of the BEAT and, in lieu thereof, to adopt the SHIELD, and to link the foregoing domestic proposals with the multilateral outreach proposal of the Made in America Tax Plan for other nations to adopt a robust minimum tax, the purpose of which is to forestall the corporate "race to the bottom" and thereby seek to ensure U.S. competitiveness notwithstanding potential U.S. tax rate increases, and the April 8, 2020, U.S. Department of the Treasury proposal to the Steering Group of the Inclusive Framework Meeting to revise and simplify the Pillar One and Pillar Two initiatives (the U.S. April 8 Proposal). In crafting the April 8 proposal, Treasury Department drafters were well aware that certain countries within the IF would be much more interested in Pillar One than Pillar Two, while others would be interested in Pillar Two and that the overall success of moving the OECD/G-20 project forward therefore required an integrated two-pillar solution.

The second event: The proactive involvement of the United States established the groundwork for the G-7 Finance Ministers and Central Board Governors (at their meeting in London on June 5, 2021) and the G-7 Leaders' Summit (at their meeting in Cornwall, England, on June 11-13, 2021) to express their support for an integrated two-pillar solution based on the U.S. April 8 Proposal. These events then set the stage for the IF to consider these proposals at their meeting at the end of June.

The third event: At the June IF meeting, 130 of the 139 countries of the OECD/G-20 Inclusive Framework (representing more than 90 percent of the world's gross domestic product or GDP), approved a framework to move the project forward – Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy (Statement).

Significantly, the countries supporting the global tax revision plan included nearly all developed countries (inclusive of the G-7 member countries2 and G-20 member countries3 (other than Estonia, Ireland and Hungary), leading G-20 developing countries, such as Brazil, China, India and jurisdictions commonly used for international tax planning, such as Bermuda, the Cayman Islands, Singapore and Switzerland. Ireland, while supporting the agreement, did not sign the Statement because of its reservation with respect to a global minimum tax of "at least 15 percent." The remaining countries that did not sign the Statement are Estonia, Hungary, Kenya, Nigeria and Sri Lanka.

The fourth event: Shortly after the June IF meeting, the G-20 Finance Ministers at their meeting on July 9-10 in Venice, Italy, endorsed the Statement, invited all members of the IF that had not yet joined the international agreement to do so, and called on the IF to resolve the open technical issues, finalize the design elements, and adopt a detailed plan for the implementation of the two pillars by the next meeting in October 2021.

The Statement

What It Contains. The Statement contains agreed upon key conceptual components of each Pillar. Remaining issues and a detailed implementation plan to be finalized by October 2021.

Pillar One


In-Scope Companies

  • Multinational enterprises (MNEs) with global turnover above 20 billion euros (approximately $23.5 billion) and profitability (profit before tax/revenue) above 10 percent.
  • Turnover threshold may be reduced to 10 billion euros (approximately $11.8 billion), contingent on successful implementation of Amount A,4 with relevant review process beginning seven years after agreement comes into force, and review process lasting no more than one year.

Out-of-Scope Companies

Extractive and regulated financial services companies.


Segments disclosed in the financial accounts that meet in-scope rules – only applied in exceptional circumstances.

Nexus and Sourcing

  • New Special Purpose Nexus Rule
    • Applies solely to determine whether a jurisdiction qualifies for Amount A allocation.
    • Permits allocation of Amount A to a market jurisdiction when in-scope MNE:
      • General Rule. Derives at least 1 million euros (approximately $1.2 million) from that jurisdiction
      • For smaller jurisdictions with GDP lower than 40 billion euros (approximately $47.5 billion). Derives at least 250,000 euros (approximately $297,000).
    • Sourcing of Revenue. Revenue sourced to end-market jurisdiction where goods/services are used/consumed.
      • Detailed source rules for specific categories of transactions to be developed.
      • MNE must use a reliable method based on its facts and circumstances.
    • Compliance costs. Limited to a minimum.

Rules Relating to How to Determine Amount of Taxation, Elimination of Double Taxation and Safe Harbor

  • Amount Taxable. For in-scope MNEs, between 20 percent and 30 percent of residual profit (i.e., profit in excess of 10 percent of revenue) to be allocated to market jurisdictions with nexus using a revenue-based allocation key. This is an increase from 20 percent. 
  • Determination of Amount. Profit and loss of in-scope MNEs to be determined by reference to financial accounting income, with a small number of adjustments and losses would be carried forward.
  • Elimination of Double Taxation. Double taxation of profit allocated to market jurisdictions to be relieved by exempting or credit method.
  • Safe Harbor. Where residual profits of an in-scope MNE are already taxed in a market jurisdiction, a safe harbor would cap the residual profits allocated to the market jurisdiction through Amount A. Further work on the design of the safe harbor will be undertaken.

Tax Compliance

  • To be streamlined and MNEs would be permitted to manage process through a single entity.

Tax Certainty

  • Dispute prevention and resolution mechanisms would apply to in-scope MNEs.
    • These measures to be applied in a mandatory and binding manner.
  • For certain developing economies, consideration being given to an elective binding dispute resolution mechanism for Amount A issues.

Amount B

  • Simplify and streamline the determination of the fixed remuneration (which is based on the arm's length principle for defined baseline distributing and marketing functions that occurs in the market jurisdiction).
    • There would be a particular focus on the needs of low-capacity countries.
  • This work to be completed by the end of 2022.

Unilateral Measures

  • There would be "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.


  • The multilateral instrument through which Amount A is implemented would be developed and opened for signature in 2022, with Amount A coming into effect in 2023.

Pillar Two

Overall Design

  • Although not specifically stated in the Statement, Pillar Two is designed to cause in-scope MNEs to pay a minimum level of tax irrespective of where they are headquartered or the jurisdictions in which they operate.
  • Pillar Two Rules
    • Two interlocking domestic rules referred to as the Global anti-Base Erosion Rules (GloBE rules).
      • Income Inclusion Rule (IIR). This rule would impose a "top-up" tax on a parent entity in respect of the low-taxed income of a constituent entity.
      • Undertaxed Payment Rule (UTPR). This rule would deny a deduction or require an equivalent adjustment to the extent that the low-taxed income of a constituent entity is not subject to tax under an IIR.
    • The Subject to Tax Rule (STTR), a treaty-based rule that would allow source jurisdictions to impose limited source basis taxation on certain related party payments subject to tax below a 7.5 percent to 9 percent minimum rate.
      • The taxing right would be limited to the difference between the minimum rate and the tax rate on the payment
      • The STTR would be creditable as a covered tax under the GloBE rules.
  • Order of Application of Pillar Two Rules

The STTR would be applied prior to the GloBE rules to deny treaty benefits.

    • The STTR is intended to assist source countries to protect their tax base, particularly those countries with less-developed administrative capabilities.

  • Importance of STTR
    • IF members recognize that the STTR is an integral part of achieving consensus on Pillar Two for developing countries (i.e.,countries defined as those with a gross national income or GNI per capita, calculated using the World Bank Atlas method of $12,535 or less in 2019.
    • IF members that apply nominal corporate income tax rates below the STTR minimum rate to interest, royalties and a defined set of other payments would implement the STTR into their bilateral treaties with developing IF members when requested to do so.

Status of the GloBE Rules

  • The GloBE rules would have the status of a "common approach."
  • IF members would not be required to adapt the GloBE rules.
  • If an IF member were to choose to do adopt the GloBE rules, the IF member would implement and administer the rules in a manner consistent with the outcomes provided for under Pillar Two, including following the operating rules and guidance agreed to by the IF.
  • Further, this approach would require acceptance of the GloBE rules applied by other IF members, to include the order of the rules and the application of any agreed safe harbors.

Scope of GloBE Rules

  • In-Scope Companies
    • MNEs that meet the 750,000 euros (approximately $884 million) threshold, as determined under the BEPS Action 13 (country-by-country reporting).
    • Countries would be free to apply the IIR to MNE headquartered in their country even if they do not meet the threshold.
  • Out-of-Scope Companies
    • Government entities
    • International organizations
    • Nonprofit organizations
    • Pension funds or investment funds that are Ultimate Parent Entities of an MNE Group or any holding vehicles used by such entities, organizations or funds.
    • Possibly MNEs in the initial phase of their international activity – to be explored

Operating Rules

  • Minimum Tax for Purposes of IIR and UTPR: "at least" 15 percent
  • Effective Tax Rate Calculation (ETR)
    • The GloBE rules would operate to impose a "top-up" tax using an ETR calculated:
      • on a jurisdictional basis
      • using a common definition of covered taxes
      • a tax base determined by reference to financial accounting income (with tax policy objectives of Pillar Two and mechanisms to address timing differences).
    • With respect to existing distribution tax systems, there would be no "top-up" tax liability if earnings are distribute within three to four years and taxed at or above the minimum level.
  • Rule Design for IIR and UTPR
    • IIR allocates "top-up" tax based on a top-down approach subject to a split-ownership rule for shareholdings below 80 percent.
    • UTPR allocates "top-up" tax from low-tax constituent entities, including those located in Ultimate Parent Entity jurisdictions under a methodology to be agreed.
  • Carve-Outs
    • GloBE rules would provide for a formulaic substance carve-out that would exclude an amount of income that is at least 5 percent (7.5 percent in the five-year transition period) of the carrying value of tangible assets and payroll.
    • GloBE rules would provide for a de minimis exclusion.
  • Other Exclusion

International shipping income (as defined in OECD Model Tax Convention).

  • Simplifications

To ensure that the administration of the GloBE rules are as targeted as possible and to avoid compliance and administrative costs disproportionate to the policy objectives, the implementation framework will include safe harbors and other mechanisms.

Coexistence with GILTI

  • Pillar Two would apply a minimum tax rate on a jurisdictional basis (as mentioned).
  • Based on a jurisdictional approach, consideration would be given to the conditions under which the global intangible low-taxed income (GILTI) regime would coexist with the GloBE rules, to ensure a level-playing field.


  • IF members adopt an implementation plan, it would include:
    • GloBE Model rules to facilitate the coordination of GloBE rules, to include possible development of a multilateral instrument for that purpose
    • An STTR model provision, together with a multilateral instrument to facilitate its adoption, and
    • Transitional rules, including the possibility of a deferred implementation of the UTPR
  • Pillar Two should be brought into law in 2022, to be effective 2023

Next Steps

The agreement reached in the Statement reflects the ambition of the IF members for a robust global minimum tax with a limited impact on MNEs carrying out real economic activities with substance.

  • There would be a direct link between the global minimum ETR and the carve-outs, and there would be continuing discussion to take a final decision of these design elements within the agreed framework by October 2021.

Conclusion and Takeaways

  • The 133-country agreement of the conceptual parameters of Pillar One and Pillar Two is a major step forward in seeking to update the international tax system to deal with the digitized virtual global economy and the necessity to establish "multilateral agreed limitations to tax competition"5 so as to promote tax equity and tax efficiency.
  • The amount of income under Amount A to be ceded to market jurisdictions increased as part of the agreement. Additionally, the IF will consider expanding the reach of Amount A in seven years. If Amount A were not to generate the "right amount" of tax revenue for market jurisdictions, there would be significant pressure to expand the pool of businesses subject to Amount A. 
  • The Pillar One Amount A, as revised by the U.S. proposal, initially limits application of Amount A to the largest and most profitable 100 or so MNEs, using quantitative rather than qualitative factors. This means that the residual profits of MNEs that are not within scope and derive substantial amount of income would not be allocated to market jurisdiction. The Statement also indicates that digital service taxes and other unilateral measures should not apply to all MNEs, both those in-scope and those out of scope.
  • Between now and October, much technical work will need to be completed to deal with the myriad technical details and remaining design issues. Some of these items are 1) under Pillar One: from which countries will reallocated revenue come from?;6 how would double taxation of reallocated income be prevented?; how would dispute resolution to promote tax certainty be devised, particularly in view of the opposition of developing countries to binding dispute resolution?; apart from digital service taxes, which other unilateral taxes would be removed?; 2) under Pillar Two: how would special tax incentives (such as patent boxes or other investment incentive legislation) be treated?; how would GILTI be coordinated; how would ETR computations be simplified?
  • In terms of the IF reaching a consensus on the overall package, important political questions remain, such as 1) what will Ireland do?;7 2) how can the EU reach unanimity (assuming Pillar Two were to be implemented through an EU Directive), when three of its members (Estonia, Hungary and Island) did not sign the Statement and Cyprus, another member of the EU, is not even a member of the IF and has expressed concerns over the Pillar Two global minimum tax proposal?
  • The Statement contains an extremely ambitious time frame for implementation. It is not clear how IF member countries will implement and pass internal legislation and enter into multilateral treaties within the currently proposed time frame.
  • With respect to the United States, the Biden Administration is committed to the adoption of Pillar One and Pillar Two initiatives. The Pillar Two initiative is directly tied to the success of the U.S. domestic legislative initiative to increase the corporate income tax and to increase the global minimum tax. Some IF countries want the U.S. to enact Pillar Two compliant legislation in 2021 to demonstrate that the U.S. will hold up its side of the agreement. The Biden Administration will use this point to encourage Congress to pass significant changes to GILTI, repeal the BEAT and enact the SHIELD. The Pillar One initiative is intended to update the international tax system and to end unilateral digital service and other taxes that could cause double taxation for U.S. multinationals (the timing of which is discussed below).
  • At this time, however, the path forward for legislative or treaty consideration and enactment is not clear. There are a number of reasons for this.
    • The extremely slim margins the Democrats have in the House and Senate.
    • Republican opposition in the Senate to the global tax deal.
    • Treasury Secretary Janet Yellen has put forth a rough timeline on when the Biden Administration hopes that Congress can take up the initiative. Her hope is that Congress would approve a global minimum tax through budget reconciliation later this year and then, with respect to Pillar One, work with Congress, perhaps in the Spring 2022, and try to determine what is necessary for implementation.
    • The linkage between the bipartisan "hard" infrastructure bill, which the Senate passed and will be considered by the House, and the Democrat "human" infrastructure bill (which is intended to be passed through the budget reconciliation process). How this moves forward in Congress will be determined in the next few months.
    • Further, if treaty changes are required to implement the global tax proposals, query how this will occur in view of Republican opposition in the Senate (with its two-thirds advice-and-consent approval requirement for treaties)?8 Also, the U.S. has never signed on to a multilateral double income tax treaty,9 which would reflect a significant change in treaty policy.
    • Finally, Congress will be concerned about the revenue impact of the two pillars. According to a recent article by Michael Devereux and Martin Simmler of the Oxford University Centre for Business Taxation, 64 percent of Amount A will be paid by U.S.-headquartered MNEs.10 Secretary Yellen may have a hard time convincing two thirds of the Senate to support a multilateral instrument that is a revenue loser for the U.S. 

In summary, although much has been accomplished in the past few months to revamp the international tax system, much remains to be done both in the technical/design and political areas to complete, enact and implement the project. After the issuance of the Statement on July 1, 2021, OECD chief Pascal Saint-Amans made the following comment about the project: "It's unstoppable …Whatever happens in Congress, whatever happens in Europe, I think we've turned the page."11 Time will tell. So, buckle up for what will be an interesting and wild ride.


1 The Inclusive Framework on BEPS allows interested countries to work with the 38 OECD and G-20 member countries on developing standards on BEPS-related issues.

2 The G-7 is composed of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.

3 The G-20 is composed of the European Union (EU) (27 countries) and 19 individual countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, and the United States. Note, Cyprus, although part of the EU is not part of the IF.

4 Amount A is a new taxing right that allocates high-value residual profits, based on a formula, which is not necessarily determined on the arm's length principle.

5 The quoted portion is attributed to Mathias Cormann, Secretary General of the OECD. SeeEditorial Board Opinion in The Washington Post entitled "Doing the Minimum" (July 5, 2021).

6 It has been reported that the Pillar One reallocation of profits would impact mostly U.S. companies. See Bloomberg Tax, "U.S. Companies to Bear Brunt of Reallocation Under OECD Tax Deal," (July 6, 2021). Query the impact of this statement in the U.S., particularly in Congress?

7 Paschal Donohoe, Ireland's finance minister and president of the euro zone's grouping of finance ministers has said Ireland supports Pillar One and remains committed to the process and aims to find an outcome that Ireland can yet support. Ireland on July 20, 2021, announced a public consultation on the Pillar One and Pillar Two proposals.

8 Additional complications arise if the Biden Administration pus forth its 21 percent global minimum tax but the Pillar Two minimum tax is at least 5 percent. Some U.S. legislators may be loath to vote for a 21 percent rate. Further, query what happens to the initiatives if Congress were not enact tax legislation imposing an increased global minimum tax? With respect to withdrawing digital service taxes, a number of countries have indicated that they would not do so until the United States approves and enacts legislation (or a treaty) with respect to Pillar One.

9 The U.S. is a party to the Convention on Mutual Administrative Assistance in Tax Matters, (the Convention), which was developed jointly by the OECD and the Council of Europe in 1988 and amended by Protocol in 2010, which is the most comprehensive multilateral instrument available for all forms of tax cooperation to tackle tax evasion and avoidance. The Protocol is still awaiting "advice and consent" in the Senate.

10 "Who Will Pay Amount A?," EconPol Policy Brief, Michael Devereux and Martin Simmler, July 2021

11 "U.S. Reconciliation Bill May Have Global Minimum Tax Provisions," Stephanie Soong Johnston, Tax Notes (July 7, 2021).

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.

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