Pillar One and Pillar Two Explained

The OECD’s Pillar One and Pillar Two reforms represent the most significant overhaul of international corporate taxation in decades. In this episode, we explain what each pillar does, who it affects, and why it matters, particularly in a world shaped by digital business models and globalised markets.

Developed under the auspices of the Organisation for Economic Co-operation and Development, the two pillars aim to modernise how multinational enterprises (MNEs) are taxed and to reduce harmful tax competition between jurisdictions.

🔎 What You’ll Learn in This Episode1️⃣ Pillar One: Reallocating Taxing Rights

Pillar One addresses the challenge of taxing highly digitalised and consumer-facing MNEs that can generate significant profits in a country without a physical presence.

• Amount A

This reallocates a portion of residual profits of the largest and most profitable MNEs to market jurisdictions—where customers or users are located—even if the company has no permanent establishment there.

• Amount B

Amount B introduces a simplified and standardised return for baseline marketing and distribution activities.

Its purpose is to reduce transfer-pricing disputes and ease compliance, particularly for jurisdictions with limited administrative capacity.

2️⃣ Pillar Two: The Global Minimum Tax

Pillar Two establishes a global minimum corporate tax rate of 15% for MNEs with annual consolidated revenue of at least EUR 750 million.

Where profits in a jurisdiction are taxed below the minimum rate, a top-up tax applies to bridge the gap.

Key mechanisms include:

• Income Inclusion Rule (IIR) – top-up tax at the parent entity level

• Undertaxed Profits Rule (UTPR) – backstop rule allocating tax where income is undertaxed

• Qualified Domestic Minimum Top-up Tax (QDMTT) – allows countries to collect the top-up tax domestically

The objective is to curb profit shifting and base erosion, ensuring that large MNEs pay a minimum level of tax regardless of where they operate.

3️⃣ How the Two Pillars Work Together

While often discussed together, the pillars address different problems:

• Pillar One reallocates taxing rights

• Pillar Two sets a minimum tax floor

Together, they seek to rebalance the international tax system between residence jurisdictions, market jurisdictions, and low-tax jurisdictions.

4️⃣ Implementation Status

Both pillars are being rolled out through a mix of:

• Multilateral conventions

• Domestic legislation

• EU directives (in the case of Pillar Two)

At the same time, technical details continue to evolve, and implementation timelines and political support vary across jurisdictions.

🎯 Key Takeaway

Pillar One and Pillar Two are reshaping international corporate taxation by:

• Expanding taxing rights beyond physical presence

• Establishing a global minimum effective tax rate

• Reducing opportunities for aggressive tax planning

For MNEs, advisors, and policymakers, understanding both the mechanics and the policy intent is now essential.