The integration of national economies and markets has increased substantially in recent years, putting a strain on the international tax rules, which were designed more than a century ago. Weaknesses in the current rules create opportunities for base erosion and profit shifting (BEPS), requiring bold moves by policy makers to restore confidence in the system and ensure that profits are taxed where economic activities take place and value is created.

This report analyses the economic and tax revenue implications of the Pillar One and Pillar Two proposals currently being discussed by the OECD/G20 Inclusive Framework on BEPS (Inclusive Framework) as part of its work to address the tax challenges arising from the digitalisation of the economy. These proposals are described in the Pillar One and Pillar Two Blueprint reports(OECD, 2020[1]; OECD, 2020[2]).

The international corporate tax system faces growing challenges. While the OECD/G20 Base Erosion and Profit Shifting (BEPS) project represented an unprecedented multilateral effort to tackle profit shifting, many questions over the allocation of taxing rights remain unresolved. Digitalisation and globalisation have highlighted certain vulnerabilities in the existing framework, which allocates taxing rights principally on the basis of physical presence. In addition to this, some BEPS issues remain. In this context, an increasing number of jurisdictions are taking uncoordinated and unilateral actions, contributing to an increase in tax and trade disputes and growing tax uncertainty. The COVID-19 crisis is exacerbating these tensions by accelerating the digitalisation of the economy and increasing pressures on public finances. The fact that many firms have benefitted from direct or indirect government support during the crisis is also likely to intensify public dissatisfaction with tax avoidance by multinational enterprises (MNEs).

This chapter presents the analytical framework and data sources used by the OECD Secretariat to assess the effect on corporate tax revenues of Pillar One. It focuses exclusively on the effect of Amount A described in the Pillar One Blueprint report (OECD, 2020[1]). The impacts of Amount B and of the processes to improve tax certainty are not modelled due to limitations of the available data, as further discussed below.

This chapter presents the analytical framework and data sources used by the OECD Secretariat to assess the effect on corporate tax revenues of Pillar Two. It also contains high-level estimates of the impact of Pillar Two at the global level and at the level of broad groups of jurisdictions. Pillar Two addresses remaining BEPS challenges and is designed to ensure that large internationally operating businesses pay a minimum level of tax regardless of where they are headquartered or the jurisdictions they operate in (OECD, 2020[1]).

The Pillar One and Pillar Two proposals would introduce significant changes to the international tax rules, affecting global investment through their impacts on the incentives faced by MNEs and governments. Amount A of Pillar One involves the creation of a new taxing right and the reallocation to market jurisdictions of a share of residual profit determined at the MNE group level, based on a formulaic approach. Pillar Two addresses remaining BEPS challenges and is designed to ensure that large internationally operating businesses pay a minimum level of tax regardless of where they are headquartered or the jurisdictions they operate in. Without prejudging the final design and parameter choices, which are still the subject of discussions among members of the Inclusive Framework on BEPS, the structural changes embedded in these new rules could have substantial direct and indirect effects on investment and economic output.

Having good data on the location of profit and economic activity of multinational enterprises (MNEs) is key to assessing the implications of international corporate tax reforms, such as the Pillar One and Pillar Two proposals currently being discussed by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). However, while a range of data sources provide valuable insights on the profit and activities of MNEs, no existing data source is sufficiently comprehensive in its geographic coverage and in terms of variables available to be used in isolation for a comprehensive reform impact assessment covering all 137 jurisdictions in the OECD/G20 Inclusive Framework on BEPS (Inclusive Framework).