Outline and Considerations for the Pillar One Blueprint Proposals for Amount A

Outline and Considerations for the Pillar One Blueprint Proposals for Amount A

By Simon Webber (Managing Director, Duff & Phelps LLC, New York) & Ryan Lange (Director, Duff & Phelps LLC, New York)

On October 12, 2020 the OECD/G20 Inclusive Framework (IF) released the Report on Pillar One Blueprint. This is a working document that presents the IF’s current thinking on the scope and application of changes to the international tax system to address the Tax Challenges Arising from Digitalization.  Specifically, the OECD is seeking broader consensus and approval for its proposals before moving forward further into a more detailed design.

At this point a little bit of history is useful to understand the stakes around these proposals and the environment the OECD finds itself. The tax challenges for the digitalizing economy were identified as the first of fifteen action items in the OECD’s BEPs Action Plan announced in 2014.  While the issues were quickly acknowledged, work on a solution was initially deferred in favor of other more tactical areas of the BEPs initiative. This pause continued until several IF countries started to propose and implement unilateral measures (e.g., Digital Sales Taxes (DSTs)) against companies that they considered to be exploiting their markets without adequate local taxation.

DSTs, as a form of sales tax, are an aggressive solution which have not been received favorably by the United States and other headquarter locations of multinational enterprises (MNEs). In response, the U.S. imposed retaliatory tariffs on imports from countries that unilaterally implemented DSTs and similar DST proposals by other U.S. trading partners are now on hold until 2021, pending the agreement of the alternative taxation scheme represented by the proposals within the Pillar One Blueprint. The financial pressures arising from the COVID-19 pandemic make further delays untenable to many jurisdictions. Therefore, the OECD issues these proposals in a very difficult environment, probably not the best environment for considered consensus tax policy decisions.

In this respect the OECD team should be commended for providing a considered outline for what is a completely new system of international taxation in a relatively short amount of time. The key aspects of the Pillar One system are clear from the 11 building blocks they identify, and the main threshold issues in each are identified and discussed. Unfortunately, few specific details are agreed by the IF members which means this document is still really a “sketch of a blueprint” / conceptual framework. As such comments are high level concerning the direction of the proposals and the issues and challenges any detailed design would need to address in reaching a consensus within the IF. Nevertheless, all stakeholders have a good idea of what’s likely on the horizon, if not nearer, from the document.


At present the Pillar One Blueprint targets large, profitable MNEs that provide Automated Digital Services (ADS) or that are characterized as Customer Facing Businesses (CFBs).The ADS companies include the expected list of on-line, digital content, social network, gaming and market-place companies but also on-line standardized teaching and cloud computing companies. A key defining factor for a service to be considered “automated” is the ability to scale up services with little or no human involvement (i.e., if the marginal cost to add new users is very small or zero).

A CFB is defined by the type(s) of product(s) it sells (i.e., products commonly used by consumers) as opposed to whether it sells directly to consumers themselves – this definition is less specific and may well capture a broader, more diverse group including large consumer product and brand companies. Some CFB categories are still under debate including pharmaceuticals – all drugs or just over-the-counter drugs; franchises and licensing; dual use products/services, while other categories/industries are exempt from Pillar One entirely including natural resources – non-renewable extractives, renewable resources and energy, agriculture; financial services – banking, insurance, asset management; Infrastructure and construction; international air and shipping). The inclusion of CFBs offers an opportunity to address historical controversy areas around market contributions more generally, and also means that more countries have a material financial interest in the Pillar One outcome, which should lead to a better overall solution.

In its attempt to focus on the targeted group of large, multi-national companies, the Pillar One Blueprint suggests provisions for excluding ADS or CFB companies below a certain size (as measured by consolidated revenues), and those that have de minimis foreign in-scope revenues; however, even with these thresholds, the proposals may apply to several thousand companies or, at a minimum, require them to show they are not in scope. Furthermore, the OECD planning team realizes that the proposals presented in the Pillar One Blueprint may well generate controversy, and suggests approaches for dispute prevention and resolution to increase tax certainty for taxpayers, including a panel system for companies to address potential common areas of dispute (e.g., confirm whether they are in or out of scope of the income associated the new Pillar One taxing right, Amount A). It is anticipated that the dispute rules would be embedded within the same instrument that introduces the rules for Amount A, so one would not be implemented without the other.


The nexus rules proposed in the Pillar One Blueprint are based on indicators of significant and/or sustained engagement with market jurisdictions. The new tax nexus leads to an entitlement by a market jurisdiction to tax an allocation of a separately derived portion of an MNE’s profits (“Amount A”) deemed to be associated with market engagement.  Companies will have nexus for Pillar One taxation in a market jurisdiction where they surpass a market revenue threshold (still to be determined). The revenue associated with a market jurisdiction would be determined using sourcing rules (discussed in more detail in the next section).  

Consideration is also being given to additional indicia that help define the scope of this new nexus concept, including temporal requirements to target only those companies with sustained engagement in the market; scaled revenue thresholds that are commensurate with the size of the market; and lower nexus standards for small, developing economies; and different thresholds and indicators for determining nexus for CFB companies. These additional considerations are primarily aimed at balancing the compliance burden with the interests of smaller jurisdictions, in the efforts to help build consensus within the IF.

The new nexus rules for the Pillar One taxing rights are clearly different from the nexus concept within the existing international tax framework, which generally taxes the profits of MNEs based on physical presence and the type of transactions and activities performed within a jurisdiction. The new tax right is essentially based on the deemed presence of a market contribution or asset that is not necessarily part of the local nexus of the MNE but which is associated with the MNE’s profits earned from the market jurisdiction.

Revenue Sourcing

Revenue sourcing rules will underlie the nexus thresholds and also the determination of the Amount A, MNE income taxable. These rules try to balance different types of market engagement and engagement across international borders. For example, ADS companies will have to source based on the location of the user at the time of revenue generation, which sounds onerous but is a common factor in their service model architecture. Others such as social media, or marketplaces will look at both the provider and recipient locations. Various forms of revenues including content, services, data sale/alienation, and advertising are included. Duplicative revenue sourcing is avoided through a hierarchy of indicators where several factors come into play in revenue sourcing.

Interestingly the OECD recognizes the role and constraints where VPNs are involved in limiting some forms of consumer data and thankfully do not recommend piercing this important privacy veil for consumers. Taxpayers will have to support the indicators they use (over others higher in the hierarchy), maintain a control framework around sourcing, and retain documentation around the application and results.  Tax authorities will have a right to review, with resolution of disputes through a multi-party review panel system to improve certainty.

Tax Base Determination

The determination of taxable income under the current OECD transfer pricing guidelines which follow the arm’s-length principle relies on an assessment of related functions, assets and risks, including associated development, enhancement, maintenance, protection and exploitation (DEMPE) functions for intangibles, as well as  entrepreneurial and risk management activities. In contrast, the Pillar One Blueprint uses a more formulary method to determine an allocation of consolidated enterprise profits to market jurisdictions.

Accounting Profit before tax

Pillar One taxable income determinations are going to be based on a simple application of sourced revenues for the year (discussed above) multiplied by an adjusted global market contribution profit rate. The starting point for determining the adjusted global market contribution profit rate will be either the adjusted global profitability of the taxpayer or its segment profitability. The profitability measure is be accounting profit before tax (PBT) based on “eligible GAAPs”, which are thought not to produce materially inconsistent outcomes. These include IFRS, and the GAAPs of Australia, Canada, Hong Kong (China), Japan, New Zealand, PRC, India, South Korea, Singapore and the U.S. Adjustments to remove from PBT such items as dividend income, gains and losses in connection with shares, and certain non-deductible expenses for corporate income tax are proposed.

The inclusion or removal of income from joint ventures accounted for under the equity method is also under debate to protect against possible manipulation of PBT through the coordinated structuring of businesses as a collection of minority interests. If included, corresponding adjustments to revenues used to determine the PBT rate would be needed as well. Other adjustments are also contemplated for interest charges from related parties, and gains and losses from exceptional and non-recurring items on the basis of relevance to tax base profitability for Pillar One.

The Pillar One definition of PBT is to be aligned with the definition of PBT for Pillar Two, however, the discussions of PBT differ in the Pillar One and Pillar Two Blueprints. One area of potential concern is around stock based compensation (SBCs). SBCs aren’t mentioned in Pillar One, however, Pillar Two proposes removing GAAP SBC expense (usually based on fair value over the period from issuance to vesting) and replacing with SBC tax deductions in the year (usually based on the spread gain inclusion for individual income tax at the time of exercise). There are often different GAAP accounting and tax treatments under eligible GAAPs and country tax rules, which may have a material impact on the Pillar One tax base and also the effective tax rate measure under Pillar Two. In this regard definitive guidance on the tax and GAAP treatment of SBCs across countries is long overdue.

Another area of discussion is around book-to-book adjustments for material areas such as goodwill impairment. Under some GAAP rules, impairment charges for acquired goodwill are permanent, whereas under IFRS the value of acquired goodwill may, under certain circumstances, be written back. While interesting, this discussion seems to miss a broader point around acquisition-related reorganizations (or reorganizations in general), which may contribute to the issue of double counting, and also double taxation, that is clearly important to address.  Specifically, many acquisitions are also accompanied by internal reorganizations of the acquired assets with the existing business. Local country tax rules (e.g., the German “transfer package” rules) and the intangible and restructuring guidance in Chapters VI and IX of the OECD Transfer Pricing Guidelines may well require consideration for such post-acquisition integration transfers that includes (and therefore subjects to tax) related customer relationship and goodwill value.

Both of these items represent, in part, the present value of related future profits to market contributions that may also be taxed under Pillar One. Adjusting for this in the context of an acquisition may be as simple as adjusting PBT with an amortization charge for goodwill (for example 1/10th through 1/20th of the average book value in the year). Like losses, this will be relatively easy to separately track as it is already disclosed in most financial statements. It may also encourage some coordination of international tax rules on these assets. For reorganizations outside of an acquisition integration context, there will not be any recognition of asset or profits/losses on sale in the consolidated financial statement, but the underlying taxation of customer relationship and goodwill value may be present and potentially of even greater value.

A simplified mechanism for addressing material events like this will be needed for both past and future reorganizations. Such mechanism could potentially be part of the process to relieve double taxation, and/or a mechanism for allocating the taxation of Pillar One market contribution profits from such transfers jurisdictions in a similar manner to Pillar One where material.  


The Blueprint asks for comments about segmentation of financial results by business. The OECD realizes that while segmentation may more accurately identify profits (or losses) from the specific businesses with market nexus, it also introduces potentially significant administrative burdens on taxpayers, as well as uncertainties and related opportunities for manipulation where allocations are used to determine related PBT. While current financial statement reporting requirements do provide for segmentation by business or geography, they are usually at a much higher level than PBT. Many expenses and transactional results captured at the PBT level may be difficult to attribute without creating a lot more granularity in financial reporting accounting systems–in particular, gains and losses on sales, foreign exchange gains and losses and interest.

Segmentation also introduces transfer pricing back into the mix if inter-segment transactions exist.  A requirement to segment is being considered for business where their ADS or CFB businesses exceed certain threshold differences to the rest of the consolidated group. If this is the case, it seems only equitable that taxpayers should also be able to elect to segment if they so choose.  What is clear is that any form of segmentation will need to follow a standardized set of allocation and attribution rules that probably need to be more rigorous than current financial reporting segmentation and will require some form of attestation by an independent party. To segment or not to segment, will therefore need to be weighed carefully by tax administrations and taxpayers.


The Pillar One Blueprint recognizes the important point that there are sometimes significant temporal differences between an MNE’s investments to develop a market and when it enjoys the fruits from that investment, especially as for those markets and business models that are new or developing. In these cases, there are clear timing inequities to be addressed in order to fairly tax MNEs and also to reflect historical deductions by different tax jurisdictions that may be relevant and important to gain IF consensus. It attempts to level the playing field in a simplified manner by keeping a separate book on Pillar One “losses” (both pre-regime and post-regime) that can be used to offset future Pillar One taxable income. Pillar One losses for this purpose might mean actual red ink, or profits below a minimum “routine return” threshold.  

For many businesses, however, their foreign markets lag behind the domestic business in terms of development and profitability, or there may be unexpected markets with unusually high profits. Loss utilization on its own will not prevent the inherent subsidization of some markets by others that using a global profit or profit rate will entail. While not perfect, this mechanism for compensatory adjustment is at least an acknowledgement to the issue and perhaps a reasonable compromise between accuracy and equity. Decisions on sourcing thresholds may also play a part in addressing this subsidization issue.  Losses in the context of acquisitions and reorganizations are also discussed as potential points of manipulation and certain restrictions (similar to loss carryforward limitations in many jurisdictions) may be considered.

Computing Amount A

The Pillar One Amount A tax base will be determined by a formulaic three-step process:

  1. Determine a residual profit to intangible (including market) contributions (at the group or segment level) by applying a routine return profitability threshold to limit potential interactions with existing activities and remuneration under conventional transfer pricing rules.
  2. Determine the proportion of residual profits (at the group or segment level) that relates to the market contributions taxable under Pillar One based on the application of a fixed percentage to ensure that other contributory factors such as trade intangibles, capital and risks continue to be adequately remunerated with residual profit.
  3. Determine the specific amount of Pillar One taxable profit attributable to market contributions that should be allocated to each applicable market jurisdiction (i.e., those jurisdictions determined to have nexus under Pillar One).

The quantum and basis for the reductions for routine returns in Step 1 are not specifically discussed. They will probably be some form or combination of return on sales, return on assets or, like Pillar Two, a return on employees and assets. There is some fear that this may just be the equivalent of Amount B, which is only intended to set a remuneration for certain baseline marketing and distribution activities. There may well be many more substantive operational and supply chain contributions in the in-scope businesses, especially within CFBs.

Clearly, the lower the threshold the more overlap there will be with base remuneration of functions in the existing tax system,  the more friction the system will generate, and have to alleviate in order to be equitable to tax jurisdictions and taxpayers. The higher the threshold, the fewer “target” ADS and CFB companies will be subject to Pillar One taxation. If the proposals for Amount B become industry or regional specific, it is also possible that the routine return threshold may also follow that path. Again, the IF will need to weigh equity with administrative simplicity and efficiency. It would certainly be a lot of wasted effort on the part of companies and tax administrations if companies have to jump through all the in-scope, sourcing and other hoops only to find that they fall below the minimum routine profit threshold, so this should also be part of the scope gating threshold for the Pillar One tax system.

The discussion around Step 2 includes an illustrative range of residual profits attributable to market contributions between 10% to 30%. However, the higher the proportion the higher the overlap and potential for inter tax jurisdictional differences of opinion. This market contribution proportion may also be considered on an industry by industry basis.

The allocation of the Pillar One taxable profits, either as direct derived taxable income amount or its equivalent as the multiplication of source revenues with a percentage rate of profit to revenues, is clearly tied into the revenue sourcing analysis. This should include all revenues associated with the residual profits, even those relating to jurisdictions below the nexus or sourcing thresholds. The proposals may also need to reflect a proportionate attribution of revenues associated with joint ventures if the associated equity-based profits are also included in the PBT tax base calculation.

Double Tax Relief

The Pillar One proposals represent a reallocation of taxable profits from one taxing jurisdiction to another; profits that likely have already been taxed by another jurisdiction. In its OECD/G20 IF consultation document issued in November 2019 stated that:

“the new rules, taken together with existing transfer pricing rules, will need to deliver the agreed quantum of profit to market jurisdictions and do so in a way that is simple, avoids double taxation, and significantly improves tax certainty relative to the current position. It is also important that the new rules are reconciled with existing rules. That is, the new rules should not create distortions and should be effectively applicable to both profits and losses.” (OECD, Public consultation document “Secretariat Proposal of a “Unified Approach” under Pillar One”, para 29).

Consistent with this statement, the Pillar One Blueprint is at pains to point out its proposals are meant to be an overlay to the existing international tax rules that create a nexus and a profit taxation right for market jurisdictions and avoid double taxation. True to these statements, the Pillar One Blueprint includes several important elements to resolve areas of potential double taxation. The issues for MNEs to consider are how timely, effective and administrable these proposals around double tax relief will be in practice when they are fleshed out.

Paying Entity

The process for double tax relief within the Blueprint will start with the identification of “Paying Entities” as the parties that most likely originally paid tax on the profits are now also subject to tax under Pillar One. These paying entities will either (i) be allowed to have a corresponding reduction of taxable income in their jurisdiction tax return(s) – an income exemption mechanism; or (ii) be provided with a tax credit against their corporate income taxes for corresponding Pillar One taxation by each market jurisdiction – tax credit system. In order to avoid controversy, this is one part of the Pillar One Blueprint where accuracy should probably rule over simplicity and efficiency. As such, this process needs to include all layers of tax, from income taxes, withholding taxes, gains taxes, and importantly digital sales taxes in the determination.

An analysis of tax burden by jurisdiction is also an integral part of the Pillar Two, so it is likely that the relevant information will be available. The analysis may also need to consider the past in terms of prior taxation of significant transactions involving Pillar One relevant market contribution profits if these are not adjusted for in other ways.  It is clear that with the introduction of Pillar One, MNEs will need to carefully consider both where they incur taxes under the existing international tax system, and how easy and quickly they are likely to be able to relieve associated double taxation on Pillar One taxable profits in their tax rate and cash tax planning. 

Double Counting

The Pillar One Blueprint rightly identifies that there may be instances where an MNE already earns sufficient profits in a market jurisdiction that its Pillar One additional tax liability may be fulfilled. It provides for a “safe harbor” mechanism for taxpayers to identify where this may the case and only to be subject to Pillar One tax on any shortfall to a defined minimum market taxable profit: The minimum liability as a return for local sales activities (perhaps Amount B) Plus the Pillar One tax liability. Other areas of double counting may well occur if the routine return thresholds in Step 1 of the Pillar One taxable profit calculation are too low, or the market contribution percentage in Step 2 of the same calculation is too high. If this new Pillar One tax system is to be successfully adopted, it will be important to minimize areas of obvious friction such as double counting.

Income Exemption vs Tax Credit

The Pillar One Blueprint considers an exemption to income or a tax credit system as a means for countries to alleviate double taxation of taxpayers (another of the OECD’s long-standing policy goals).

Each system has its advantages and disadvantages. An exemption system should provide immediate relief from double taxation if the exemption is claimable in the same year as the Pillar One income tax base is derived. Jurisdictions have widely varying tax return due dates, some much earlier in the year than the proposed filing of Pillar One and Pillar Two tax returns. As such immediate exemption of income may be difficult in some countries. Further, the exemption system may not address all points of prior taxation of market contribution profits. For example, withholding taxes, or digital sales taxes that continue to be imposed by jurisdiction.

Tax credits provide relief for taxes paid and therefore are inherently a retroactive double tax relief mechanism. They are also generally to avoid double taxation of profits in dividends or other income streams that are newly taxed. The main issue with a tax credit approach is that tax credit systems around the world follow widely different mechanisms and will need to potentially handle tax at source in hundreds of countries. Double tax relief using existing tax credit systems is therefore unlikely to be quick or certain, but it is a system already in place to help alleviate double taxation.

At least the Pillar Two blueprint proposals include Pillar One taxes in the determination of jurisdictional effective tax rates for the purpose of identifying low tax income.

Dispute Resolution

The system of dispute resolution under the Pillar One Blueprint revolves around a series of review panels to resolve issues as part of the tax determination process and dispute panels with escalation. While eventually equitable, without clear timelines for resolution of issues or binding agreement, these mechanisms are likely to be expensive and time consuming and may well fail to alleviate taxation issues for tax administrations and double tax issues for taxpayers. Its unclear if developed countries, let alone developing country tax administrations will have the resources to make such a process work effectively or efficiently.

The Future

While there are many issues to resolve in the detailed development of the Pillar One proposals prior to implementation, there is little doubt that failure to relieve double tax in a timely and efficient manner will be key to the success and longevity of the Pillar One system. Unfortunately, the politicized, pressure-keg environment in which the OECD and Inclusive Framework’s efforts are being made is not likely to result in consensus (and probably shouldn’t) prior to the deadlines set out by individual countries and blocks to impose unilateral solutions (aka digital sales taxes) in 2021.

We look forward to seeing the comments on the current proposals and how Pillar One will evolve. If DSTs are inevitable as a stop gap measure, a question might be how they may be made more equitable so that companies don’t just pass them on to their customers. Making them scaled or proportional to profit, and tax deductible in some way, would be a start. Perhaps this is where the United Nations efforts in this regard can also contribute to the process to get to the OECD’s more permanent Pillar One solution.

The content and views expressed herein are those of the authors and not necessarily of Duff & Phelps or its clients.

Outline and Considerations for the Pillar One Blueprint Proposals for Amount A


Simon Webber is Managing Director at Duff & Phelps LLC, New York.



Ryan Lange is Director at Duff & Phelps LLC, New York.