How OECD’s Pillar One and Pillar Two Will Transform Global Taxation Introduction The global tax landscape is undergoing a fundamental transformation. In response to the increasing digitalisation and globalisation of the economy, the Organisation for Economic Co-operation and Development (OECD), through its Inclusive Framework on Base Erosion and Profit Shifting (BEPS), has introduced two monumental reforms: Pillar One and Pillar Two. These reforms aim to ensure that large multinational enterprises (MNEs) are taxed more equitably and in alignment with where economic activity and value creation occur. Together, Pillar One and Pillar Two mark a decisive departure from traditional international tax rules, seeking to achieve a more unified, fair, and enforceable global tax framework. This article provides a comprehensive analysis of how these pillars will reshape international tax rules, shift taxing rights, curb harmful tax competition, and compel significant changes in tax compliance, policymaking, and corporate strategy. 1. Pillar One: Reallocating Taxing Rights Overview Pillar One is designed to reallocate a portion of the global profits of the largest and most profitable multinational enterprises to market jurisdictions—countries where the MNEs’ customers or users are located—regardless of physical presence. Key Components Scope: Targets MNEs with global turnover exceeding €20 billion and profit margins above 10%. Amount A: 25% of residual profits (above 10% margin) are reallocated to eligible market jurisdictions. Nexus Rule: Establishes a monetary threshold (typically €1 million, or €250,000 in smaller economies) for taxing rights in a market jurisdiction. Amount B: Introduces standardised returns for baseline marketing and distribution activities to simplify compliance and reduce disputes. Global Impact Modernises the nexus concept by recognising user and market participation as a basis for taxation. Strengthens the taxing rights of developing and consumer-heavy countries, leading to greater revenue redistribution. Introduces binding dispute resolution mechanisms to foster certainty and avoid double taxation. 2. Pillar Two: A Global Minimum Tax Regime Overview Pillar Two introduces the Global Anti-Base Erosion (GloBE) rules, establishing a global minimum effective tax rate of 15% for large multinational groups operating across jurisdictions. Key Components Scope: Applies to MNEs with consolidated revenues of €750 million or more. Main Rules: Income Inclusion Rule (IIR): Requires the parent company to pay top-up tax if subsidiaries are taxed below 15%. Undertaxed Payments Rule (UTPR): Allows jurisdictions to deny deductions or require adjustments if income remains untaxed. Subject to Tax Rule (STTR): Enables source countries to impose a withholding tax of up to 9% on certain low-taxed, cross-border payments (e.g., interest, royalties). Effective Tax Rate Calculation: Based on adjusted accounting profits and covered taxes. Global Impact Curbs harmful tax competition and prevents the "race to the bottom" in corporate tax rates. Reduces incentives for base erosion and profit shifting (BEPS). Pressures jurisdictions to realign tax incentives that result in effective tax rates below the 15% threshold. 3. Strategic Implications for Stakeholders A. Governments and Tax Administrations Revenue Mobilisation: Countries can now tax digital and intangible-driven income that was previously untaxed due to lack of physical nexus. Policy Overhaul: Requires reforms in domestic tax laws and bilateral treaties to align with GloBE standards. Increased Cooperation: Fosters greater reliance on multilateral instruments and information-sharing frameworks. B. Multinational Enterprises (MNEs) Tax Structuring and Planning: MNEs must reassess group structures, financing arrangements, and transfer pricing to manage top-up tax exposures. Increased Compliance Burden: New documentation (e.g., GloBE Information Return), systems, and processes are required to track effective tax rates. Legal Uncertainty: Differences in local adoption and interpretation of Pillar Two rules may lead to temporary inconsistencies and disputes. C. Developing and Low-Income Countries Enhanced Fiscal Sovereignty: Pillar One’s profit reallocation and STTR under Pillar Two provide new tools for securing taxing rights. Technical Capacity Needs: These countries will require support to build administrative capacity and implement dispute resolution procedures effectively. 4. Implementation Challenges and Timeline Challenges Despite broad consensus, several hurdles remain in the path to full implementation: Political and Legislative Coordination: Many jurisdictions must pass enabling legislation, and in some cases, constitutional or treaty amendments may be required. Unilateral Digital Taxes: Some countries continue to impose digital services taxes, which may overlap with or contradict Pillar One principles. Compliance Complexity: The application of new rules in diverse legal environments will increase the operational burden for tax authorities and MNEs alike. Timeline Pillar Two: Implementation began in 2024–2025 in key jurisdictions, including the EU, United Kingdom, Japan, and South Korea. Pillar One: Expected to take effect in 2026, subject to ratification of the Multilateral Convention (MLC) by participating countries. 5. Opportunities and Risks of the OECD Two-Pillar Approach The OECD’s proposals offer several positive outcomes but are not without significant challenges. Opportunities Firstly, these reforms enable a fairer distribution of tax revenues. Market jurisdictions—where users and consumers reside—will now receive a share of profits even when the MNE lacks a physical presence. This is a major win for developing economies that were previously excluded from taxing rights. Secondly, the reforms promote global tax equity and curb long-standing practices such as profit shifting and the use of low-tax jurisdictions for tax arbitrage. The global minimum tax serves as a floor, discouraging harmful tax competition among countries. Additionally, the reforms introduce greater certainty and transparency through standardised rules and simplified dispute resolution frameworks. Businesses and tax authorities alike will benefit from more predictable outcomes. Risks However, the reforms also carry notable risks. There is a real danger that some countries may continue or expand unilateral digital taxes, leading to conflicts and potential double taxation. The compliance burden on businesses will increase substantially. MNEs will need to invest heavily in new tax systems, reporting processes, and legal interpretations across multiple jurisdictions. Another challenge is the uneven implementation across countries, which could fragment the intended unified approach. Countries may interpret or apply rules differently, undermining the coherence of the framework. Finally, MNEs that have relied on low-tax strategies or digital business models may face disruption and restructuring, as the global rules push for substance and transparency. 6. The Future of International Taxation The OECD’s two-pillar approach represents a landmark evolution in the design of international tax systems. By addressing digitalisation and base erosion head-on, the Inclusive Framework has created a pathway toward a more balanced and cooperative international tax environment. Going forward, the momentum generated by these reforms may inspire further innovation—possibly expanding the rules to include smaller firms, integrating carbon and digital economy taxes, or embracing technology-led compliance systems. While implementation will remain complex, the fundamental shift is undeniable: taxation is evolving from a jurisdiction-bound model to one based on economic presence, fairness, and shared sovereignty. Conclusion OECD’s Pillar One and Pillar Two are poised to reshape the foundations of global taxation. They reinforce a fundamental principle for the modern economy: value creation must be taxed where value is consumed or derived. Tax professionals, regulators, and multinational enterprises must now prepare for this shift. The new rules demand strategic rethinking, enhanced cooperation, and a commitment to transparency. This is not merely a reform of tax laws—it is a redefinition of how the global economy is taxed. Olatunji Abdulrazaq CNA, ACTI, ACIArb(UK) Founder/CEO, Taxmobile.Online