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Ireland joins OECD inclusive framework agreement Pillar One and Pillar Two

The OECD agreement from an Irish perspective 

On 7 October 2021, the Minister for Finance, Paschal Donohoe issued a statement on the decision for Ireland to enter the OECD International Tax Agreement on Pillars One and Two. 

According to the Minister, the focus over recent weeks has been to secure the necessary changes to provide certainty and stability and to ensure that strategic interests are protected. Prior to the Ministers address the position adopted by the Irish Government was that Ireland was not in a position to sign up to the interim agreement in July 2021, as important issues remained to be addressed, in particular the minimum effective tax rate proposed of “at least 15%”.

Following a period of engagement with the OECD and international partners, the revised agreement removes the words “at least” in the draft text. According to the Minister, the agreement will impact on 56 Irish multinational companies that employ approximately 100,000 workers, and 1,500 foreign owned multinational companies that employ approximately 400,000 workers.

In terms of impact for Irish taxpayers, the agreement will allow for the retention of the 12.5% rate of tax for businesses with annual turnovers less than €750million. Accordingly, there should be no increased corporation tax rate for 160,000 businesses representing 1.8million employees.

The Minister recognised the potential cost of the agreement as being very difficult to predict and noted the estimated cost of up to €2billion annually. However, this should be balanced against the greater risks of continued business uncertainty and the associated negative impact on Ireland’s attractiveness as a location for investment. The Minister also acknowledged that critical technical discussions will continue over the coming months in line with the framework of the political agreement. He further acknowledged that there remain sensitive issues for Ireland including in respect to the method of reallocation under Pillar 1, as well as detailed technical provisions under Pillar 2 but that being in the agreement allows us to shape and influence those discussions. We would concur.

While further details are outlined in full later in this alert, some of the key features of the revised agreement are noted as follows:

  • In scope businesses under Pillar One’s “Amount A” will reallocate 25% of their residual profit above a 10% profit level to market countries;
  • The global minimum effective tax rate for Pillar Two is 15%;
  • The Subject to Tax rule rate is 9%;
  • Implementation for both Pillars One and Two remains at 2023 (with the Undertaxed Payments Rule to be implemented shortly after in 2024);
  • New digital services taxes are to be curtailed, and existing ones will be repealed in due course;
  • Pillar Two model legislation to be available by the end of November 2021;
  • Pillar One treaty changes via a multilateral instrument are to be ready in early 2022.

We would see the above timelines as ambitious. Speaking after the announcement from the Inclusive Framework on 8 October, Minister Donohoe welcomed the agreement noting the benefits that will accrue from this agreement.

'The agreement reached this evening at the Inclusive Framework demonstrates the importance of working together to achieve positive outcomes for the world. This landmark agreement will address global tax challenges of digitalisation and provide the certainty and stability that large business and Government need.'

Discussion of the OECD Inclusive Framework’s revised agreement of 8 October 2021

On 8 October 2021, the G20/OECD Inclusive Framework on BEPS (inclusive framework) published a statement on the components of global tax reform, agreed by 136 of its members. This is an update to the statement published in July 2021.

Since 2017, the 140 member countries of the inclusive framework have been jointly developing a ‘two-pillar’ approach to address the tax challenges arising from the digitalization of the economy. Two detailed “blueprints” were published in October 2020 on potential rules for addressing nexus and profit allocation challenges (Pillar One) and for global minimum tax rules (Pillar Two). Political agreement on key aspects of the proposals was reached by the G7, G20, and many of the OECD inclusive framework countries in June and July 2021.

Nexus and profit allocation rules (Pillar One)

Amount A

Pillar One’s “Amount A” proposal reallocates taxing rights in favor of market countries through the creation of a new taxing right. In-scope businesses will reallocate 25% of their residual profit above a 10% profit level to market countries using a revenue-based allocation key. The 10% profit level will be calculated as the ratio of profit before tax to revenue.

Amount A will apply to multinational businesses with global annual turnover above EUR 20 billion and profitability above a 10% margin, calculated using an averaging mechanism. Businesses in the extractive and regulated financial services sectors are excluded from Amount A. The global annual turnover threshold will be reduced to EUR 10 billion in the future, depending on a successful implementation of Amount A, including in respect of tax certainty. A review to determine the success will be undertaken seven years after the rules enter into force (so expected to be in 2030).

Segmentation rules will apply only in exceptional circumstances where a segment disclosed in financial statements meets the scope of the rules.

A market country will be entitled to an allocation of Amount A if revenues of at least EUR 1 million are generated in that country. For countries with GDP lower than EUR 40 billion, this threshold will be EUR 250,000. Revenues will be sourced to the end market country where goods or services are used or consumed. Detailed sourcing rules will be developed for specific categories of transaction. Requirements to trace small amounts of sales will be kept to a minimum.

A marketing and distribution profits safe harbor will limit the Amount A allocation to market countries where residual profits are already taxed.

To eliminate double taxation, any Amount A liability will be allocated to entities that earn residual profit and relieved via either exemption or credit.

Removal of all digital services taxes (DSTs)

The introduction of Amount A will be coordinated with the removal of all DSTs and other relevant similar measures on all companies. Transitional arrangements are being discussed. Agreement has been reached that, with immediate effect, no new DSTs will be imposed on any company (unless Amount A fails to be implemented by the end of 2023). A detailed definition of what constitutes a relevant similar measure will be included in the multilateral convention to implement Amount A and its explanatory notes.

Amount B

Further work will be undertaken to simplify and streamline the pricing of “baseline marketing and distribution activities” undertaken by related party distributors, starting with work to define the scope.

Tax certainty

Mandatory and binding dispute resolution mechanisms will be available in respect of all issues related to Amount A, including transfer pricing, business profits, and determination of whether an issue falls within the scope of the Amount A dispute resolution mechanism. Some small developing economies that have few or no mutual agreement procedure cases will have access to an elective (rather than mandatory) dispute resolution process.

Global minimum tax (Pillar Two)

Income inclusion rule and undertaxed payment rule

New rules will ensure that large multinational businesses pay a minimum effective rate of tax of 15% on profits in all countries. The income inclusion rule will result in additional “top up” amounts of tax being payable by a parent entity of the group to its tax authority.

The undertaxed payment rule will apply as a secondary (backstop) rule where the income inclusion rule has not been applied. Groups with a maximum of EUR 50 million of tangible assets in overseas countries and which operate in no more than five overseas countries will be exempt from applying the rule for up to five years.

Multinational groups with consolidated revenues of at least EUR 750 million will be in scope, but countries will be free to apply lower thresholds to groups headquartered in their country. The allocation method for top up taxes under the undertaxed payment rule, including in respect of low taxed profits in the country of the ultimate parent, remains to be agreed.

The Pillar Two rules will have the status of a common approach: countries will not be required to adopt them, but if they choose to, implementation must be in a manner consistent with the model rules and inclusive framework guidance. Consideration will be given to the conditions under which the US global intangible low-taxed income (GILTI) regime will co-exist with the Pillar Two global minimum tax, including being applied on a country by country (jurisdictional) basis.

Effective tax rate calculations will use a tax base determined by reference to financial accounts, subject to agreed adjustments and mechanisms to address timing differences.

A formulaic substance carve-out will exclude income that is a 5% return on tangible assets and payroll. A transition period will apply during which 8% of the carrying value of tangible assets and 10% of payroll initially will be excluded, declining gradually over a ten-year period to 5%. There also will be a de minimis exclusion in respect of countries where a group has revenues of less than EUR 10 million and profits of less than EUR 1 million, and an exclusion for international shipping income.

Subject to tax rule

The subject to tax rule will allow limited source taxation on related party interest, royalties, and a defined set of other payments. The rule will be incorporated into bilateral tax treaties by countries that apply nominal rates of tax below a minimum rate to such receipts where requested by developing country members of the inclusive framework.

The taxing right will be limited to the difference between the subject to tax minimum rate of 9% and the tax rate on the payment.

Implementation plan

Nexus and profit allocation rules (Pillar One)

A multilateral convention to implement Amount A will be developed by early 2022, and available for signature in mid-2022. This will provide a framework for consistent implementation of Amount A, irrespective of a country’s tax treaty network. The multilateral convention will contain: rules to calculate Amount A and eliminate double taxation; administration processes; exchange of information processes; and dispute prevention and resolution mechanisms. It will be supplemented by explanatory notes. The Amount A rules will enter into force in 2023 once a critical mass of countries have ratified the multilateral convention.

Model rules for domestic legislation to implement Amount A will also be developed by early 2022. Final deliverables will be released by the end of 2022 for Amount B.

Global minimum tax (Pillar Two)

Model rules to define the scope, mechanics, and administration of the income inclusion rule and undertaxed payment rule, and a model treaty provision to give effect to the subject to tax rule, will be developed by the end of November 2021. The model rules will be supplemented by commentary. A multilateral convention to facilitate the adoption of the subject to tax rule in bilateral treaties will be developed by mid-2022.

A framework for the coordinated implementation of the income inclusion rule and undertaxed payment rule will be developed by the end of 2022, potentially alongside a multilateral convention to facilitate consistency. The income inclusion rule will take effect from 2023, with the undertaxed payment rule deferred by one year to 2024.


The updated inclusive framework statement shows progress in relation to some of the political questions that remained from the agreements reached in July. The most important developments are the negotiations that have allowed Ireland, Hungary, and Estonia to sign up to the agreement, making an EU directive on Pillar Two to implement the OECD proposals more likely. These include determination of the global minimum rate for the income inclusion rule and undertaxed payment rule as 15% (removing “at least” in relation to the rate). The rate for the subject to tax rule, the enhanced withholding tax for developing countries only, is agreed at 9% (removing the range 7.5% to 9%).

Other areas of clarification include the amount of profits to be reallocated to market countries under Amount A of Pillar One – set as 25% of residual income above a deemed routine return of a 10% profit margin on sales.

The negotiations have led to agreement that no new DSTs will be introduced (unless Pillar One’s Amount A fails to be implemented by the end of 2023). This is significant, as a number of countries had announced the intention to look at unilateral measures. The Canadian Finance Ministry, for example, has confirmed that its proposed DST will be legislated but will only apply as from 1 January 2024 if the Amount A rules are not in force (but will in that case be backdated to 1 January 2022). This is designed to maintain the focus of key countries, such as the US, in getting domestic approval for the Amount A changes in 2022.

The updated statement also includes an implementation plan that reflects commitment to the ambitious and challenging objective of implementation in 2023. This includes model legislation and commentary on Pillar Two by the end of November 2021 and treaty clauses (for a new multilateral instrument) and explanatory notes for Amount A by early 2022. Implementation of the undertaxed payment rule will be deferred by one year, to 2024, to allow time for countries to enable the income inclusion rule to take effect in domestic regimes before the backstop is invoked (learning from the implementation of country-by-country reporting and the complexities of local filing).

These political and timing points aside, the statement does not answer the difficult technical questions that the inclusive framework has been grappling with over the summer and which businesses, understandably, see as important. Notably for Amount A this includes how the ”paying entity” that has to exempt or give credit for amounts allocated to market countries will be determined, and for the income inclusion rule and undertaxed payment rule of Pillar Two includes how timing differences will be dealt with (a modified deferred tax approach or excess tax credit carry forward being options under consideration). There are also no further clarifications on definitions, such as how the exclusions for extractives and regulated financial services will be applied. There are no updates on Amount B (the transfer pricing marketing and distribution return baseline reward) apart from to say that the OECD will work first on scope. Businesses are keen to see these points resolved.

For Pillar Two these areas will have to be resolved by the end of November 2021 for the release of model legislation and explanatory notes. For Pillar One Amount A, early 2022 will be the latest possible date for resolution, and for Amount B it will be the end of 2022.

The OECD statement says that there will continue to be consultation with business “within the constraints of the timeline.” There has been only limited business consultation on technical matters for 12 months while government-to-government political negotiations have been continuing, and many businesses will want an opportunity to comment on detailed technical provisions before they are legislated. The challenging timeline suggests that consultations may have to remain limited, which will increase the risk of frictions and kinks in the rules that will need to be resolved post-implementation.

The most important remaining political challenge is the US domestic approval of the rules, in particular those related to Amount A. US Treasury Secretary, Janet Yellen, issued a statement saying that “This deal paves the way for Congress to enact those proposals, and I’m hopeful they’ll do so swiftly though the reconciliation process.” This will be an area that businesses will want to monitor closely in early 2022.

The OECD estimates that under Pillar One, taxing rights on more than USD 125 billion of profit will be reallocated to market countries each year. The global minimum corporate income tax under Pillar Two is estimated to generate around USD 150 billion in additional global tax revenues annually. The inclusive framework countries that have not yet agreed to the proposals are Kenya, Nigeria, Pakistan, and Sri Lanka.

Next steps

The two-pillar solution will be discussed by G20 finance ministers at their meeting on 13 October 2021, and G20 leaders at the G20 Leaders’ Summit on 30-31 October 2021.

Deloitte’s EMEA Dbriefs series will hold a webcast on 25 October 2021 at 13:30 BST/14:30 CEST to discuss the proposals. For more information and to register visit

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