North America: Residual Profits and Market Jurisdictions

In brief

The OECD/G20 Inclusive Framework on BEPS (“Inclusive Framework”), composed of 139-member countries, has been working on a consensus-based, long-term solution to the tax challenges arising from globalization and the digitalization of the economy. During its 29 and 30 January 2020 meeting, the Inclusive Framework decided to move ahead with a two-pillar approach, including: under the first pillar, solutions for determining the allocation of taxing rights, and under the second pillar, the design of a system to ensure that multinational enterprises (MNEs) pay a minimum level of tax on profits. These two pillars were fleshed out in greater detail in October 2020. Pillar One reallocates taxing rights over the residual profits of the largest and most profitable MNEs away from the locations where they actually operate to market jurisdictions. Pillar Two attempts to introduce a global minimum corporate tax that countries can use to protect their tax bases.


In depth

While both pillars have generated a tremendous amount of interest in the international tax community, Pillar One holds the greatest fascination. It is a new concept in international tax albeit with limited applicability. In contrast, Pillar Two borrows heavily from the US tax reform enacted in December 2017. The Income Inclusion Rule (IIR) in Pillar Two is closely related to the Global Intangible LowTaxed Income (GILTI) regime, and the Undertaxed Payments Rule (UTPR) is related to the Base Erosion and Anti-abuse Tax (BEAT).

In April 2021, the US Treasury made a presentation to the Inclusive Framework as to Pillars One and Two. The OECD had earlier proposed that only certain automated digital services and consumer-facing businesses would be potentially impacted by Pillar One. In its presentation, the Treasury stated that no more than 100 MNEs should be in scope (i.e., be subject to Pillar One). Instead of the original scope definition based on sector, Treasury proposed that quantitative criteria should be utilized in determining which MNEs are in scope, and that criteria should be a “total revenue threshold” and a “profit margin threshold.” Treasury noted that a total revenue threshold is easily applied and eliminates many MNE groups. A profit margin threshold, according to Treasury, identifies the most intangible driven and the most profitable MNEs with the highest profitshifting potential.

In response to a 24 May 2021 letter from Senator Michael Crapo (R-ID), Ranking Member of the Senate Finance Committee, Treasury Secretary Janet Yellen wrote in her letter dated 4 June 2021, that “Meanwhile, our Pillar 1 comprehensive scope proposal will be largely revenue neutral for the United States since we will be on both the receiving and giving end of the proposed profit reallocations. Indeed, one interesting feature of Pillar 1 estimates is that they demonstrate the extent to which both US- and foreign-headquartered corporations have managed to shift profits derived from sales to US customers outside the United States for years, including under the 2017 tax act.”

The G-7 Finance Ministers met in London on 4 and 5 June 2021. They agreed to award taxing rights on at least 20% of the residual profits, that is above a 10% margin, for the largest and most profitable multinational entities to market jurisdictions. And they agreed to a global minimum tax of at least 15 % that each country would adopt.

The 139 member-countries of the Inclusive Framework met virtually on 30 June 30 to 1 July 2021. At the conclusion of their meeting, they released a statement supported by 130 (currently, 132) of its members that, if enacted and implemented by the member-countries, would dramatically change international tax around the world. The Inclusive Framework statement provided as to Pillar One:


In-scope companies are the multinational enterprises (MNEs) with global turnover above EUR 20 billion and profitability above 10% (i.e., profit before tax/revenue) with the turnover threshold to be reduced to EUR 10 billion, contingent on successful implementation including of tax certainty on Amount A, with the relevant review beginning seven years after the agreement comes into force, and the review being completed in no more than one year. Extractives and Regulated Financial Services are excluded.


There will be a new special purpose nexus rule permitting allocation of Amount A to a market jurisdiction when the in-scope MNE derives at least EUR 1 million in revenue from that jurisdiction. For smaller jurisdictions with GDP lower than EUR 40 billion, the nexus will be set at EUR 250.000. The special purpose nexus rule applies solely to determine whether a jurisdiction qualifies for the Amount A allocation. Compliance costs (including on tracing small amounts of sales) will be limited to a minimum.


For in-scope MNEs, between 20% to 30% of residual profit defined as profit in excess of 10% of revenue will be allocated to market jurisdictions with nexus using a revenue-based allocation key.


The G-20 Finance Ministers met in Venice on 9 and 10 July. In its Communique released at the end of their meeting, the G-20 Finance Ministers wrote:

We endorse the key components of the two pillars on the reallocation of profits of multinational enterprises and an effective global minimum tax as set out in the ‘Statement on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy’ released by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) on 1 July We call on the OECD/G20 Inclusive Framework on BEPS to swiftly address the remaining issues and finalise the design elements within the agreed framework together with a detailed plan for the implementation of the two pillars by our next meeting in October.

Since the release of the Inclusive Framework statement on 1 July, a couple of reports have surfaced on the impact of Pillar One. Nikkei, using earnings data from QUICK FactSet, determined that 81 companies meet the revenue and profit margin thresholds set out in the Inclusive Framework statement. Of those 81 companies, 35 are American companies, 11 are mainland Chinese companies, six are Japanese companies, and five are Hong Kong companies. Nikkei Staff Writers, China and US home to nearly 60% of companies likely to pay global tax (3 July 2021).

Michael Devereux and Martin Simmler, both of Oxford, recently published Who Will Pay Amount A? in EconPol Policy Brief (July 2021). Devereux and Simmler found that only 78 of the world’s 500 largest companies will be affected by Amount A in Pillar One. If the lower end — 20%— of the residual profit allocation is adopted, then the total allocation of Amount A for these 78 companies would be USD 87 billion. Of that amount, USD 56 billion would be generated by US-headquartered companies, USD 39 billion by technology companies and USD 28 billion by the five largest US technology companies (Apple, Microsoft, Alphabet, Intel and Facebook). Devereux and Simmler noted that the smallest of the 500 largest companies has revenues of USD 26.3 billion. As a result, Devereux and Simmler speculate that if a revenue threshold of USD 20 billion is utilized, in-scope companies and Amount A might be around 100 companies and USD 100 billion, respectively.

This alert is part of the Tax News and Developments newsletter. See the other articles below:

Part 2 - International: G20 supports latest Pillar One and Pillar Two proposals

Part 3 - United States: Eleventh Circuit agrees that the Federal Circuit effectively has control over all overpayment interest suits

Part 4 - United States: Ninth Circuit reverses Tax Court’s use of substance-over-form doctrine in Mazzei

Part 5 - North America: NOL carryback period waiver applies to certain specified liability losses

Part 6 - North America: Maryland Court of Appeals rules that Travelocity is not liable for Maryland sales and use tax prior to enactment of Maryland’s accommodations intermediary law

Part 7 - North America: IRS temporarily allows CFCs an automatic accounting method change to ADS

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