Fri, Aug 12, 2022

Transfer Pricing Policy Update: The Inclusive Framework’s Pillars One and Two

The OECD and the United States Council for International Business (USCIB) held their annual International Tax Conference in Washington, D.C., from June 27 to 28, 2022. The conference provided officials from the OECD Secretariat and governments the opportunity to update the international tax community on progresses made concerning Pillar One and Pillar Two.

Pillar One

The OECD is resetting the Pillar One timeline after facing serious political and technical headwinds. Specifically, the Multilateral Convention on Pillar One would not have been ready for signature in July, as initially envisioned. Instead, a new “consolidated consultation document” was to be released in July for consideration by stakeholders, with ample time provided for review and comments.

U.S. Statements

Officials from the U.S. Treasury asserted that (1) Pillar One is essential to the stability of the global international tax system but needs to fairly allocate income and not result in double taxation, (2) Pillar One cannot be implemented alongside any unilateral measures that further tax residual profits, and (3) Withholding taxes need to be in-scope in determining profit allocations (This has been opposed by many countries.) as they reflect the exercise of taxing rights by a market–this is a contentious issue, but there seems to be a recognition, at least by developed countries, that not including withholding taxes would provide jurisdictions (e.g., developing countries that have less developed income tax systems) with an incentive to increase them.

Process to Finalize Pillar One

The July consultation document was expected to include guidance about: (1) the marketing and distribution profit safe harbor to avoid double counting under Amount A, (2) rules for elimination of double taxation, (3) withholding taxes, (4) revenue sourcing (based on input from stakeholders), (5) tax base and (6) exclusion for extractive and regulated financial services.

Important Technical and Political Issues

  • The 25% re-allocation of deemed residual profit in-scope Amount A was used as an illustration of the willingness of countries to compromise. This metric controls the scope of the residual profit of a multinational over which taxing rights are re-allocated to market jurisdictions. The U.S., including business representatives, appear to have advocated for a lower number, while a group of countries appear to have advocated for a substantially higher number.
  • Inclusion of withholding taxes appeared to be favored by developed countries and opposed by developing countries.
  • Mechanism to select jurisdictions funding Amount A. The OECD appears to be studying a mechanism by which jurisdictions with the highest return to a measure of substantive economic activity (e.g., assets or payroll) would provide tax relief first, and then down the chain. No Article 9 (transfer pricing) concepts will be reflected in such mechanism that needs to be formulaic to increase the predictability of its application.


Pillar Two

A key issue is whether the U.S. global intangible low-taxed income (GILTI) tax needs to be changed to comply with the Income Inclusion Rule (IIR) of Pillar Two.

U.S. Statements

The view of the U.S. Treasury is that the modifications to GILTI in the Biden’s administrations Build Back Better legislation (passed by the House but not by the Senate) would make GILTI compliant. The U.S. Treasury also discussed the current GILTI as a controlled foreign corporation (CFC) regime for purposes of Pillar Two, where GILTI-paid taxes can be allocated on a jurisdictional basis as required by the IIR. In addition, multiple non-U.S. officials reiterated that a modified U.S. GILTI would be deemed IIR compliant–perhaps sending a signal to the U.S.

Process to Finalize Pillar Two

The OECD and Inclusive Framework are currently working on five workstreams that concern the practical adoption and implementation of the Global Anti-Base Erosion (GloBE) rules. Guidance is expected to be released on a piecemeal basis as it becomes available. The five workstreams include: (1) the coordination of the GloBE rules and their order of application, and the development of the peer review process, (2) additional interpretation of the Model GloBE rules, (3) GloBE information return and rules related to the return, (4) safe harbors and (5) “tax capacity building” allowing for a system to provide a tax administration with guidance and technical assistance to implement the rules.

Important Technical and Political Issues

  • New guidance is expected concerning the use of deferred tax accounting to replace or complement the “carryforward” mechanism discussed in the October 2020 blueprint. Valuation allowances and uncertain tax positions will not be included in “covered taxes” because of management’s discretion is allowed causing a concern that deferred taxes may never been paid.
  • The EU reiterated its confidence that Pillar Two will be implemented in all or most of the EU, despite Hungary’s current opposition preventing the unanimous agreement required under the EU’s Pillar Two directive. Many countries have expressed concern about the status of the U.S. GILTI regime and adoption of Pillar Two by the U.S.
  • A technical issue of importance concerns the allocation of CFC taxes. It is an issue for the U.S. GILTI tax but is also relevant in countries like Japan, the UK and many other that do have CFC regimes. A consensus has not been reached yet but is necessary for a successful implementation of Pillar Two.
  • The treatment of R&D tax credits under the GloBE rules was sharply criticized by the business community. R&D tax credits can result in a jurisdiction’s effective tax rate dropping below the 15% threshold and causing a top-up tax levied in another jurisdiction. The extent to which Pillar Two could reduce the effectiveness of R&D tax credits and stifle innovation was subject to debates between business representatives and policy makers.



While there seems to still be a consensus and willingness by the Inclusive Framework to bring the Pillar work to its conclusion and implementation, the last several months have been plagued with political and technical difficulties. A clear takeaway from the OECD/USCIB conference is that the timing for the release of new guidance concerning the Pillars remains extremely fluid and key technical issues have not yet been resolved. Taxpayers should take advantage of these delays to start quantifying the potential impact of the Pillars on their tax position.

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