22 July 2021 Tax & Exchange Control Alert

Pillars of (digital) society: G20/OECD endorse the new nexus and pave the way for a 15% minimum global tax

On 1 July 2021, 130 member states of the G20/Organisation for Economic Co-operation and Development/G20 (OECD) Inclusive Framework on Base Erosion and Profit Shifting (BEPS) signed the Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy (Statement).

The Statement affirms the signatory states’ commitment to key aspects of the G20/OECD’s BEPS Action 1 policy proposals. These aim to adapt international tax law to cater for the nature of the modern, digitalised economy. The Statement acknowledges that the way the current international tax regime works does not properly allocate revenue to jurisdictions that host economic activity by multinational businesses.

The progress on this aspect of the BEPS project is largely attributable to the US’ efforts to have the G7 and then G20 endorse a 15% minimum global tax. At the date of publication 131 out of 139 Inclusive Framework member states had signed the statement – representing approximately 90% of global GDP.

Our Tax & Exchange Control Alert of 3 December 2020 outlines the nature of the issues presented by the digitalised economy to current tax systems and the history of the OECD’s policy development process up to the end of 2020, when technical blueprints for the two pillars were published.

The Statement does not depart greatly from the substance of technical blueprints, but does provide more detail on the proposed manner of implementation for the two pillars, along with planned timelines.

Pillar One – new nexus

Pillar One proposes a new basis for a jurisdiction to claim a right to tax a multinational enterprise or group (MNE). The taxing right would be based on the existence of a significant economic – not necessarily physical – nexus existing in the country. In essence, where a country hosts market or end consumers, it would get a right to tax a portion of the revenue generated by that consumption.

The Statement indicates that the proposal is to have Pillar One implemented through a multilateral instrument. The Statement indicates that the following limitations in scope would apply to the nexus rules:

  • The nexus rules will only be triggered for a country where an MNE derives €1 million in revenue from such country. For jurisdictions with GDPs that are lower than €40 billion, the trigger will be sourced revenue of €250,000.
  • Only MNEs with a global turnover of above €20 billion and profitability of above 10% would be subject to taxation by various countries under the nexus rules.
  • The nexus rules will not apply to certain sectors, including, at this stage, extractives and regulated financial services.

The proposed quantum to be taxed under the nexus rules is 20–30% of residual profit, being profit in excess of 10% of revenue. This amount will be allocated amongst the jurisdictions which host the markets that are the sources of this revenue.

Where residual profits of an MNE are already taxed in a market jurisdiction, safe harbour provisions would limit the amount to be attributable to that jurisdiction.

The Statement indicates that the nexus rules under the proposed multilateral instrument will be administered by a single entity and that principles and guidance around the amounts to be attributed based on particular industries or types of transactions will be developed. Further, disputes, including around the amounts to be attributed to particular market jurisdictions, will be determined in a mandatory and binding manner.

It has been proposed that the multilateral instrument containing the rules be open for signature in 2022, with the nexus rules coming into effect in 2023.

Pillar Two – GloBE and STTR rules

Pillar Two comprises two sets of proposed rules aimed at ensuring that MNEs carry a basic global tax burden. These are the Global anti-Base Erosion Rules (GloBE rules) and Subject to Tax Rules (STTR). The GloBE rules are to be the mechanism through which a minimum global tax burden is to be imposed on MNEs.

It is proposed that these model rules for both the GloBE rules and STTR be published in an implementation plan for Pillar Two, in order to allow member countries to enact the provisions in 2022, for an effective date in 2023.

GloBE rules

The first set of rules under Pillar Two have been termed the GloBE rules and comprise rules to be enacted by individual countries, aimed at:

  • imposing a top-up tax on parent companies through an income inclusion of low taxed income of a subsidiary entity, and
  • denying deductions or applying other adjustments for undertaxed payments to the extent that these tax benefits have not been eliminated by taxation under the top-up tax on the parent company.

The GloBE rules will apply to MNEs that have an effective global group burden of less than 15%. The effective tax rate will be calculated based on a common definition of covered taxes and – with the necessary adjustments for timing and policy – a tax base determined by reference to financial accounting income of the MNE.

The GloBE rules will provide a carve out for tangible assets and payroll that will exclude an amount of at least 5% of income. At present, certain types of income are excluded, including shipping income as defined in the OECD Model Convention.


The STTR is a proposed amendment to bilateral double taxation treaty provisions aimed at allowing developing countries to tax cross-border interests, royalty and other specific payments where these payments are not taxed at the 15% minimum rate by the destination country.

This taxing right will be limited to the difference between the 15% and actual rate of taxation imposed by the destination country.


The current tax regime was not designed for the business models being implemented today. The physical nexus rules, such as permanent establishment and residence tests, in international tax law are not necessarily capable of capturing the vast amounts of intangible economic activity that occur in our digital world.

The Statement presents an ambitious timeline of 2023 for the implementation of one of the most significant changes in taxation. The implementation of these rules will undoubtedly have a major impact on the business models and practices of multinational enterprises across the globe.

As seen with the impact that flowed from the implementation of other BEPS interventions, it is critically important for businesses to keep abreast of the developments around the Two-Pillar approach to future proof their corporate structures and operational models.There are significant differences between the types of expenses that may be claimed by individuals in terms of South African tax law and in terms of Australian tax law. However, the principles laid down by the tribunal in this case are noteworthy for those South African individuals, and more particularly South African employees, who are considering claiming deductions in respect of the expenses that they have incurred pursuant to their employment.

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