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July 2, 2021

Report on recent US international tax developments 2 July 2021

The Organisation for Economic Co-operation and Development (OECD) on 1 July issued a Statement announcing that 130 of the 139-member Inclusive Framework on Base Erosion and Profit Shifting (BEPS) endorsed a high-level agreement on a two-pillar solution to address the tax challenges arising from the digitalization of the economy. The agreement, two years in the making, describes agreed components with respect to both elements of the BEPS 2.0 project: Pillar One on revisions to nexus and profit allocation rules and Pillar Two on new global minimum tax rules. The Statement further indicates that remaining issues and a detailed implementation plan will be finalized by October 2021.

The G20 Finance Ministers are scheduled to consider the outcome of the Inclusive Framework meeting at their meeting in Venice on 9-10 July 2021.

The scope of the Pillar One rules is to be multinational entities (MNEs) with global turnover above €20 billion and profitability (i.e., profit before tax/revenue) above 10%. Exclusions are provided for the extractive and regulated financial services industries. The Statement notes that the turnover threshold may be reduced to €10 billion, contingent on successful implementation of the new rules including tax certainty. For in-scope MNEs, between 20-30% of residual profit, which is defined as profit in excess of 10% of revenue, would be allocated to market jurisdictions where there is nexus.

Countries that have adopted digital sales taxes are committing to eliminate those levies when the new rules under Pillar One are applicable.

The Statement describes Pillar Two as having two elements. The Global Anti-Base Erosion (GloBE) rules are a set of interlocking rules: an Income Inclusion Rule (IIR) that allows parent entities to impose a top-up tax on low-taxed income of a constituent entity, and the Undertaxed Payments Rule (UTPR) that denies deductions or requires an equivalent adjustment for low-tax income that has not been subject to tax under an IIR. The Subject to Tax Rule (STTR) allows jurisdictions to impose a withholding tax on certain related-party payments that are taxed at a low adjusted nominal rate. Although the STTR is described second, it would apply before the GloBE rules and thus take priority over those rules.

The GloBE rules would apply to MNEs with total consolidated group revenue of at least €750 million in the immediately preceding fiscal year. Countries would be free to apply the IIR to MNEs that are tax resident within their jurisdiction, however, even if this threshold is not met. According to the Statement, the minimum tax rate for purposes of the IIR and the UTPR would be at least 15%.

Because the Pillar Two rules are to apply on a jurisdictional basis, consideration will be given to the conditions under which the United States (US) Global Intangible Low-Taxed Income (GILTI) regime will co-exist with the GloBE rules, in order to ensure a level playing field. The endorsement of Pillar Two is a major win for the Biden Administration, which has been pushing for a global agreement in part to buttress support in Congress for its proposals to dramatically toughen the GILTI rules.

US Treasury Secretary Janet Yellen released a statement saying, in part, “Today’s agreement by 130 countries representing more than 90 percent of global GDP is a clear sign: the race to the bottom is one step closer to coming to an end. In its place, America will enter a competition that we can win; one judged on the skill of our workers and the strength of our infrastructure. We have a chance now to build a global and domestic tax system that lets American workers and businesses compete and win in the world economy.”

Irelandand Hungary were among the nine Inclusive Framework members that did not join in the agreement.

Treasury and the Internal Revenue Service on 30 June issued early draft instructions for amended Schedules K-2 (Partners’ Distributive Share Items – International) and K-3 (Partner’s Share of income, Deductions, Credits – International) for Forms 1065, 1120-S, and 8865 for tax year 2021 (filing season 2022). This week’s drafts of the instructions offer a preview of what is coming before final versions are issued. The new Schedules K-2 and K-3 were released on 3 and 4 June 2021. The schedules are meant to provide greater clarity for partners and shareholders to compute their US income tax liability with regard to items of international tax relevance, including deductions and credits.


For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United States), International Tax and Transaction Services, Washington, DC



  1. See EY Global Tax Alert, Ireland broadly supports OECD agreement with reservation on rate, dated 2 July 2020.

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.


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