New Frontiers of Dispute Settlement in a Pillar One World—Part One
We’re witnessing an increased convergence of tax and trade in corporate risk management

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Over the past several decades, the seemingly discrete disciplines of international tax and trade have become increasingly aligned as the globalization of corporate supply chains and the proliferation of online sales have accelerated. With this development, relations between the general counsel’s office and corporate tax departments have expanded. Corporate counsel have become more familiar with transfer pricing and tax operating models, and now tax directors better appreciate customs duties and tariffs, bilateral investment treaties, and the role of the World Trade Organization (WTO).

More recently, the digital transformation of corporate operations and offerings that has taken hold across the private sector has elicited from legislatures new and novel tax measures—many arguably seeking to extract some measure of tax from nonlocal enterprises able to access local markets without triggering tax liabilities under traditional tax laws, often due to the digitization of corporate products and services. These novel tax measures have in turn provoked aggressive countermeasures, threatened large-scale trade wars, and accelerated multilateral efforts at the Organisation for Economic Co-operation and Development (OECD) to discipline the chaos of uncharted waters. In our view, the digital era presents new opportunities for general counsel offices and tax departments to collaborate on managing and resolving international tax disputes as well as strategic opportunities for in-house professionals who can capably traverse the increasingly unified world of global tax and trade.

We focus on the evolution of global tax and trade that is being driven by the digitization of multinational enterprises (MNEs) and offer our thoughts on how US MNEs might consider dispute settlement (DS) matters in this new era. We also offer a primer on recent tax and trade events and challenges as well as a brief overview of potential tools and venues for DS. Our aim is to bridge gaps in cross-disciplinary knowledge and help corporate counsel and tax directors better navigate modern global tax and trade. Digitization has spurred transformations in global tax, finance, trade, and market operations, and change in this space can be frenetic. Our hope is to lay a foundation for more robust and strategic discussions between general counsel and tax departments focusing on corporate risk management and DS in the digital era.

A Brief Perspective on an Evolving World

To better understand the impact of digitization on global tax and trade, and the corresponding implications for multinational risk management and DS, the best place to start is the work being advanced by the OECD/G-20 Inclusive Framework on Base Erosion and Profit Shifting (hereafter the Inclusive Framework).1 For the past five years, the Inclusive Framework has worked to find global solutions to address the tax challenges arising from the digitization of business, and since January 2019 that work has been laser-focused on creating “new nexus and profit allocation rules” in an effort known as “Pillar One.”2 As tax departments are well aware, the Pillar One proposals are nothing short of transformative in terms of the impact on the global allocation of taxing rights or, stated differently, how governments justify their claim to tax a portion of your company’s income.

Like other legal frameworks for international affairs, the laws governing international taxation are not established by one legislative body but are instead determined by a collection of individual countries’ tax laws. Nevertheless, to achieve some level of consistency within this patchwork of laws, fiscal representatives from individual countries routinely gather in working parties assembled under the aegis of intergovernmental organizations like the United Nations or the OECD to agree on policies and best practices for the international taxation of income.3 If these policies and best practices are acceptable to the governing bodies of an individual member country, then that country will adopt the policies and best practices (in part or in full) by embedding them into the country’s tax laws and by treating them as the foundation for negotiating international income tax treaties. However, if a country considers the policies and practices unacceptable, then it will simply construct its own tax laws and policies as it deems appropriate. Either way, each country retains its sovereign right to levy taxes as it sees fit.

Although this pattern of rule-making preserves the sovereignty of individual countries, the mobility of capital, the globalization of trade, and a desire for “foreign direct investment” (that is, the investment of capital in an economy by nonresidents) are strong forces that tend to drive international consensus. Over time the policies and best practices promoted due to OECD and UN work begin to form a global framework for how international tax laws are generally understood to operate. Though the OECD and the UN may promote different policies and best practices (after all, the two have separate constituencies), in many respects there is convergence.4

The Road to Pillar One

The original international tax rules were crafted in an era when global trade was defined by transactions in tangible goods and robust international communication networks were nonexistent. Thus, the right to tax the income of nonlocal businesses typically was based on notions of physical presence. Indeed, the tax laws and treaties of many countries today adhere to notions that 1) taxing rights are allocated on the basis of whether a company has a “permanent establishment” (PE), meaning some physical presence, in a country, and 2) once a taxing right exists, the income associated with the PE (or associated with transactions between affiliates) is determined using transfer pricing principles that rely on the “arm’s-length principle,” which dictates that tax results are to be based on the economics that would be observed if the PE were independent or if related transacting parties were unrelated. For MNEs, the obvious consequence of allocating taxing rights to countries based on the PE standard is that the standard can also operate as a shield to avoid taxes where there is no PE.

Pillar One originated from the work of the Inclusive Framework, which as noted earlier was tasked with finding global solutions to address the tax challenges arising from the digitization of business. But these “challenges” pertain to the current tax framework, which keeps multinational profits out of national treasuries. In other words, Pillar One is about expanding each country’s right to tax the profits of MNEs, and the “tax challenges” that animate this effort are those encountered by tax authorities without a legal right under existing law to collect taxes from nonresidents that transact business in that country via the cloud. The Pillar One effort, in short, aims to break cleanly from the past by lowering legal barriers to taxation and, in essence, granting each country additional income taxing rights mainly because its residents buy, use, consume, or access your company’s products or services—essentially a market-is-the-measure approach.5

Countries have in fact sought to expand their taxing rights over MNEs using a market-is-the-measure approach for most of the twenty-first century.6 Moreover, resentment at how the current system allocates taxing rights became more acute in the wake of the Great Recession as countries looked for new sources of revenue. And full-scale disenchantment with the present system settled in around 2012, with courts (most notably those in Spain) aggressively pushing back on the technical operation of international tax laws and the French government commissioning a report, released in January 2013, to assess how it might acquire better taxing rights over global internet companies.7 Around the same time, G-20 world leaders called on the OECD to study how the international tax system might be reformed with a view to addressing concerns about “base erosion and profit shifting” by MNEs, an effort that became the BEPS Project.8

The BEPS Project was arguably a once-in-a-generation effort aimed at determining how the existing international tax system could be comprehensively reformed and, as corporate tax departments know all too well, it was ambitious. However, to the disappointment of many countries (including several European Union member states), the conclusion reached in the 2015 final report relating to the impact of digitization on tax laws was that “the whole economy was digitalizing and, as a result, it would be difficult, if not impossible, to ring-fence the digital economy” and write special rules for it.9 It did, however, commit a working group to continue to monitor the digitization of the economy with a goal of producing an updated report in 2020.10 That timing proved too long to wait, and in March 2017 the G-20 finance ministers mandated a new report on the topic; that new report was delivered in March 2018 and formed the foundation for Pillar One.11

In addition, beginning in early 2015—despite the ongoing BEPS Project, or perhaps in some cases in anticipation of a potential lack of action regarding digitization—some Western nations began to enact “alternative tax measures” designed to combat the perceived failure of the international tax system to properly allocate taxing rights to market jurisdictions. The United Kingdom’s “diverted profits tax” was the first such significant measure, followed shortly by Australia’s “multinational anti-avoidance law.”12 These measures—discrete and local, perhaps motivated by politics and an impatient public—arguably served only as stopgap solutions.

By early 2018, the EU, the United Kingdom, and other countries embarked on a new course of action designed to target the revenue of digital MNEs: enacting so-called digital services taxes (DSTs) to tax revenue derived from the local market. These new measures essentially follow a market-is-the-measure approach but operate outside the context of income tax laws, and their proliferation is likely driven by a lack of momentum toward achieving a consensus that the allocation of taxing rights under the existing international tax framework must be modified to address digitization.13 However, as recent years have shown, DSTs have also pushed the world ever closer to a global trade war.14

US Trade Actions

During the last administration, the United States grew increasingly concerned about the impact such DSTs would have on US MNEs, including Facebook and Amazon, with extensive international online sales. The Office of the US Trade Representative (USTR) in April 2019 initiated a Section 301 investigation of France’s proposed DST.15 After a lengthy investigation, USTR determined that France’s DST was “unreasonable or discriminatory and burdens or restricts US commerce.”16 In July 2020, USTR announced ad valorem duties of twenty-five percent on around $1.3 billion of products from France; however, the agency also “determined to suspend the additional duties for up to 180 days to allow additional time for bilateral and multilateral discussions that could lead to a satisfactory resolution of this matter.”17

USTR opened additional Section 301 investigations of DSTs proposed or adopted by Austria, Brazil, the Czech Republic, the EU, India, Indonesia, Italy, Spain, Turkey, and the United Kingdom.18 In actions that bridged the Trump and Biden administrations, USTR in January 2021 found that DSTs in six countries (Austria, India, Italy, Spain, Turkey, and the United Kingdom) discriminate against US digital MNEs.19 Two months later, USTR terminated investigations in the case of four other jurisdictions (Brazil, the Czech Republic, the EU, and Indonesia), because they either repealed or did not adopt their DSTs.20

Last November, USTR suspended retaliation amounting to twenty-five percent tariffs on around $2.1 billion from the six countries found to discriminate against US MNEs.21 As in the case of France, USTR recognized the potential for a multilateral solution. Once Pillar One was announced, USTR terminated the Section 301 investigations of France and the other six countries to recognize the “political agreement” at the OECD.22 The agency still monitors those countries to ensure adherence to the cease-fire on DSTs and the eventual implementation of Pillar One. If anything, the Section 301 disputes demonstrate mounting pressure on countries to avoid trade disputes and find resolutions satisfactory to all players.

What Is Pillar One?

We now turn to Pillar One itself to explore the current proposal, how it differs from existing laws, and how DS is anticipated to operate in the context of Pillar One. To contextualize the proposal’s potential impact on corporate risk management and DS work streams, we start with an overview of how, under current law, income is generally allocated among jurisdictions and disputes are generally resolved.

Current Law

As noted earlier, existing law generally provides that a country has no right to levy tax on the income of a nonresident company unless that company has a PE in the jurisdiction and that income is properly attributable to that PE.23 When it comes to taxing nonlocal persons, the international framework generally relies on the concept of PE to assign a country the right to tax and then employs economic (transfer pricing) principles to determine how much may be taxed.24 This framework is embedded in the local tax laws and tax treaties of a significant number of UN and OECD countries. Moreover, because the framework is reflected in thousands of income tax treaties that trading partners have negotiated over the years—most of which are concluded on a bilateral basis—its ubiquity arguably generates a network effect that further stabilizes it.

From the perspectives of corporate risk management and DS, the fact that the current framework for assigning taxing rights and allocating income is so pervasive helps drive certainty, since the underlying concepts are fairly uniform from country to country. This means that local revenue agents and arbiters should understand the underlying concepts well, appreciate the relative universality of the framework’s objective approach, and recognize that an extensive and developed body of interpretative support exists if challenging or novel issues arise. In theory, it also means that tax controversy teams may be able to manage disputes more strategically (for example, a successful argument made in one jurisdiction may resonate in others).

In addition, the vast network of bilateral income tax treaties that reflect the framework are mostly predicated on the model income tax treaties published by the UN or OECD, both of which contain an internal dispute resolution mechanism known as the “mutual agreement procedure” or MAP.25 The MAP offers taxpayers another option, beyond local administrative or judicial bodies, for resolving tax matters (such as PE or transfer pricing) that arise in a treaty jurisdiction. Under the MAP, taxpayers effectively seek to enlist the “competent authority” of either jurisdiction (for example, a designated IRS executive in the case of US income tax treaties) to help resolve a tax matter unilaterally or to negotiate on the taxpayer’s behalf with the other country’s own competent authority to reach bilateral resolution.26

Although the MAP is a government-to-government DS mechanism, the taxpayer is recognized as a stakeholder, can usually brief its case to its advocate before bilateral negotiations begin, and then remains active behind the scenes as the case progresses. The MAP provisions strongly encourage the competent authorities to reach a resolution, but taxpayers are free to withdraw from the MAP and pursue other remedies. Additionally, under the OECD model, if the competent authorities cannot resolve the case within two years, then the taxpayer can insist that any unresolved issues be submitted to mandatory binding arbitration, whose conclusions will be binding on the treaty countries; however, consistent with the MAP more generally, the taxpayer can always reject the binding arbitration decision and pursue other available remedies.27

Amount A

Pillar One seeks to alter the existing international tax framework for taxing nonresidents by modifying the rules for allocating taxing rights and income. As with the 2013 French report, Pillar One’s principal aim is to expand the taxing rights of market jurisdictions regardless of whether a nonresident has a true PE in that jurisdiction (that is, a market-is-the-measure nexus approach).28 To do this, Pillar One proposes to build atop the existing international tax framework new rules that focus on two items that must be monitored and tracked because they form the basis for ensuring that market jurisdictions get a “fair share” of a multinational’s income and profit—specifically, Amount A and Amount B. Amount A (which is defined below) represents Pillar One’s novel approach for allocating taxing rights and income by dispensing with physical jurisdictional presence requirements for targeted MNEs, whereas Amount B simply works within the existing international tax framework to ensure that in-country marketing and distribution activities of all MNEs are remunerated consistently.29 We limit our focus to Amount A.

Pillar One would not abandon the current international tax framework but instead would alter it by adding rules for “in-scope” multinationals. Thus, if implemented, Pillar One will mean that two international tax systems will operate at once—the one that currently exists and applies to all global enterprises and a new one that includes the concept of Amount A and applies only to in-scope enterprises. Assessing whether an MNE is an in-scope enterprise thus becomes critical.

Given Pillar One’s heritage, it is not surprising that the Inclusive Framework sought to apply the new international tax system only to a narrow subset of MNEs that essentially epitomize the digitized enterprise.30 The US Treasury, however, pushed back hard against defining the scope too narrowly and instead articulated a vision for scoping based on enterprise size and profitability rather than an MNE’s industry or business model.31

This past fall, the Inclusive Framework officially confirmed that certain “agreements” had been reached and that broader scoping had prevailed. As a result, the new international tax system (that is, the one involving Amount A) is now proposed to apply only to multinational companies with annual revenue exceeding €20 billion and a measure of profitability above ten percent. The official statement also confirmed that certain industries would be excepted from the new regime (for example, extractives and regulated financial businesses) and that scope creep was planned, with the revenue threshold expected to drop to €10 billion at some point.32

An MNE subject to the new international tax system will be required to determine its Amount A, which is defined as twenty-five percent of the enterprise’s “excess returns” (that is, profits beyond ten percent, an assumed standard return on invested capital). In essence, Amount A is the “supersized” profit of an MNE—that which theoretically arises from high-value services and intellectual property, which often can be sited in favorable tax jurisdictions with appropriate tax planning—that is destined for reallocation to market jurisdictions (which are much less prone to taxpayer manipulation). Once Amount A is established, “special purpose” PE rules will be used to identify those market jurisdictions to which Amount A may be allocated and, in doing so, the location of the consumer generally will be determinative.33 In short, this new parallel international tax system embraces, through Amount A, a market-is-the-measure approach.

While Amount A, including its allocation to market jurisdictions, is perfectly comprehensible on its own, greater challenges concern how it will work with the other international tax system that continues running in the background, how double taxation will be avoided or at least reasonably mitigated, and how tax controversy—particularly on a multilateral basis—can be managed and resolved. The complexity will be compounded by a host of new issues that will arise. Recognizing such concerns, the US Treasury in April 2021 sent a shot across the bow of the Inclusive Framework, warning that considerations relating to “tax certainty” were essential to achieving a “durable solution” to the questions at stake in Pillar One, that the scope of tax certainty would be “an important aspect” to reaching agreement and that “many details need to be worked out.”34

To the Inclusive Framework’s credit, the Pillar One proposal does acknowledge some practical issues that must be addressed for the new parallel international tax system to work. For instance, it recognizes the impracticality of having all countries audit an MNE’s calculation and allocation of Amount A. It also recognizes that addressing disputes concerning Amount A through the existing bilateral treaty dispute resolution mechanism (the MAP) would be challenging.35 Accordingly, the Inclusive Framework proposals broadly contemplate three principal mechanisms to identify and address Amount A issues and disputes: 1) a compliance and exchange-of-information system for Amount A (similar to country-by-country reporting), 2) a taxpayer-initiated early review process, and 3) a panel-driven dispute resolution process (hereafter the “representative panel process”).

Exchange of Information

The Amount A compliance-related mechanisms anticipate that in-scope MNEs will complete standardized self-assessment forms (like those used for country-by-country reporting) to document the group’s various Amount A determinations, and then one designated member of the group (that is, the “coordinating entity”) will submit that package by the filing deadline to the group’s “lead tax administration” (LTA), typically the tax authority for the country in which the group parent resides. The LTA will then perform a high-level review of the filing package and, if everything seems in order, will exchange the package with other relevant tax jurisdictions. Importantly, the expectation is that the filing package will be certified by every member of the group that undertakes “residual profit activities”—in essence each agreeing to be bound by the self-assessment return and any modifications thereto that may arise throughout the process.36

Early Review Process

The first mechanism for achieving certainty is the early review process, a voluntary, taxpayer-initiated process to request early confirmation of Amount A matters. The taxpayer submits a request for an early review to the LTA, which then notifies the tax authorities in affected jurisdictions. To participate, an MNE must agree to extend all relevant statutes of limitations and agree that any certainty gained through the process will be voided if the self-assessment data is inaccurate or if any covered group member pursues local legal remedies related to Amount A. In return, affected tax authorities will be expected to cease any associated audits or assessment activities relevant to Amount A (but not as to other matters) pending the outcome of the process. At this point, the LTA technically can perform its own detailed review of the MNE’s self-assessment, and if it finds no need for additional inquiry, it will then notify the other affected tax authorities of that decision, giving them the option to accept it or push the process to the next stage. If other tax authorities agree with the LTA or do not push the process forward, then the LTA will inform the MNE that its self-assessment was accepted (at which point it will be binding on the MNE and all other Inclusive Framework tax administrations). However, it appears that in all other cases the representative panel process is triggered.37

Two-Tier Representative Panel Process

A second mechanism for achieving certainty is the representative panel process, which contemplates a two-tier panel system—an initial review panel and a final determination panel. The review panel is intended to serve as the first body to fully address an MNE’s Amount A case when it arrives from the early review process (for instance, if an LTA’s initial review is overridden).38 The determination panel is intended to be the ultimate arbiter, and thus it must decide on any matters concerning Amount A that were unresolved at the review panel level.39 For each panel, the principal work appears to be conducted without the presence of the MNE. However, in certain cases, the enterprise may be asked—at least at the review panel level—to supply additional information, deliver presentations, or even work with the panel to consider revisions to the company’s Amount A self-assessment.40

The LTA chairs the review panel and invites the participation of representatives from five to seven impacted jurisdictions. The panel will generally limit its review to twelve months, at which point it will render a decision. If it cannot, the case will be elevated to the determination panel.

If the review panel disagrees with the company’s self-assessment (and the company does not agree to revise it), then the LTA will notify all affected tax authorities that a decision could not be reached, and the case will be referred to the determination panel; affected tax authorities generally will have a reasonable period to provide comments to the review panel regarding how it might have otherwise handled certain issues.

If the review panel does agree with the company’s self-assessment (including a revised version), then the LTA will notify all affected tax administrations of the panel’s recommendation. Barring objections from those tax administrations, the panel’s decision will be binding on the company and all tax administrations within the Inclusive Framework. However, if objections are raised, then a round-robin process ensues until either 1) there are no further objections and the company agrees to the modified position, making it binding on the company and all tax administrations within the Inclusive Framework, or 2) no agreement can be reached, and the matter is elevated to the determination panel.41

Who makes up the determination panel—and how impartiality can be maintained—appears to be under review.42 However, the Inclusive Framework makes clear that the determination panel has an appellate capacity and must render decisions on the questions the review panel presents to it.43 In rendering its decisions, the determination panel will follow a baseball arbitration (“last best offer”) approach and will choose from the alternative positions stated in the briefing without reopening elements already settled in the lower venue, the review panel.

The determination panel will seek to settle issues by consensus, but a simple majority is also acceptable; in certain cases, it is also possible that the panel chair will be entitled to cast a decisive vote. When a determination panel decision confirms an approach already agreed to by the MNE, that decision will be binding on the enterprise and every Inclusive Framework tax administration. However, if the determination panel reaches any other decision, then the MNE will be invited to accept it—and if it does, then that decision will also be binding on the enterprise and every Inclusive Framework tax administration.44

If an MNE disagrees with or is at any point dissatisfied with the process or outcomes of the representative panel process, it generally will be entitled to withdraw its request for an early review and instead simply rely on the domestic procedures in the relevant jurisdictions.45 If the enterprise withdraws from the process after a panel has completed its work, it is an open question whether the impacted tax administrations should nonetheless be bound by the panel determinations (and there is some suggestion that it may be appropriate to bind the tax authorities). However, the tax authorities will not be bound if the MNE withdraws from the various processes before a panel completes its work.46

Finally, it should be noted that certain developing countries will be permitted to opt out of the representative panel process.47

Standstill and Rollback Requirement

One of the most important aspects of the Pillar One “agreement” is the requirement that participating countries commit to unwinding and refraining from future promulgation of “unilateral” measures like the DSTs that nearly sparked a trade war in 2020.48 This element is essentially a line in the sand the United States has drawn, with the US government suggesting that its agreement to Pillar One (and perhaps all Inclusive Framework work) is in many respects conditioned on this element of the bargain being upheld.49 The United States has also signaled that it is concerned with potential work-arounds in this space and is pushing for clarity about what will be considered “relevant” unilateral actions and how appropriate criteria will be established.50

To its credit, the Inclusive Framework has indicated that as part of Pillar One implementation all participating countries will be required to remove DSTs and “other relevant similar measures,” and those countries need to commit to not introducing such items in the future. Moreover, participants will also need to commit to not imposing any newly enacted DST-like measures on companies between October 8, 2021, and the earlier of either Pillar One coming into force or December 31, 2023.51 As of late 2021, several key countries (for example, France, the United Kingdom, Italy, Spain, and Austria) have agreed to a DST standstill or otherwise expressed some degree of commitment to this element, and, as noted above, USTR terminated various Section 301 investigations and shifted to monitoring.52

The key questions in 2022 still center on whether standstill and rollback commitments can ultimately be maintained. Will governments have the political will to refrain from or unwind such measures, given their popularity at home? Is implementation truly achievable? Additionally, more work remains to adequately define what constitutes a “relevant similar measure”; OECD officials have been careful to walk a fine line between expressing confidence in the standstill and rollback commitments and assuaging fears that “relevant similar measures” might be so broadly construed as to capture withholding taxes.53


Because the concept of Amount A creates income taxing rights that do not now exist, to implement Pillar One the Inclusive Framework anticipates that 1) countries will need to pass legislation to incorporate Amount A into local law, 2) where traditional bilateral tax treaties are in force, steps must be taken to ensure that these treaties do not pose barriers to Amount A (that is, given that most treaties permit market country taxation only if a traditional PE exists), and 3) a multilateral tax convention must be developed and signed in order to broadly adopt the elements and mechanisms needed for Amount A to function as designed (Pillar One treaty). Existing bilateral tax treaties will continue to be relevant (for example, for all amounts outside Amount A including Amount B, etc.), and thus the Pillar One treaty is anticipated to supersede those instruments only in the case of a conflict for in-scope MNEs.54

The Inclusive Framework—recognizing that implementing this new parallel income tax system will take time in each country but still hoping that Amount A will take effect in 2023—has established an aggressive program to develop the Pillar One treaty, model rules for domestic implementing legislation, and supporting commentary to be published in early 2022. Moreover, there is hope that the new Pillar One treaty will be opened for signature by mid-2022.55 This is an exceedingly aggressive timeline, particularly since the BEPS multilateral instrument (which merely updated bilateral tax treaties to reflect BEPS Project agreements) is not considered a suitable template for achieving the goals set for the Pillar One treaty (for example, establishing a new taxing right, multilateral dispute management tools, etc.).

The need for a multilateral convention to implement Pillar One seems obvious, since it is hard to imagine how any framework for Amount A could come together given its multi-jurisdictional nature and the inevitability of market jurisdictions without robust treaty networks. More important, it is hard to imagine a world in which Amount A exists and MNEs might ever hope to achieve any semblance of certainty or efficient tax controversy management without a built-in multi-jurisdictional dispute resolution mechanism.

Editor’s note: Part Two of this article, which will include discussions of lessons to draw from international trade law, challenges to Pillar One, and what happens if Pillar One succeeds or fails, will be published in the May-June issue of the magazine.

J. Brian Davis is a partner in and leader of BakerHostetler’s international tax practice. Ronald J. Baumgarten is of counsel in BakerHostetler’s international trade and national security practice and formerly served as Deputy Assistant US Trade Representative (USTR) in the Office of Southeast Asia and the Pacific.


  1. The Inclusive Framework is a consortium of representatives from more than 135 countries and jurisdictions, working in coordination through the OECD and with the support of G-20 finance ministers to implement fifteen measures aimed at tackling tax avoidance, improving the international tax architecture and ensuring a more transparent global tax environment. The Inclusive Framework was established in 2016 following work done on an original “base erosion and profit shifting” (BEPS) project that started in 2013 and culminated with fifteen action item reports issued in October 2015. See the OECD’s description of the BEPS Project at (accessed January 6, 2022).
  2. See OECD (2019), Addressing the Tax Challenges of the Digitalisation of the Economy—Policy Note (agreed by Inclusive Framework on January 23, 2019) (Policy Note), 1. As work ensued on how to construct a Pillar One approach, it became obvious that some harmonization of competing ideas would be needed in order to achieve any result. Accordingly, in late 2019, OECD leadership proposed that work be done to adopt a “unified” approach to converge the various work streams already underway. In late January 2020, an outline of the architecture for the unified approach under Pillar One was released. See OECD (2020), Statement by the OECD/G20 Inclusive Framework on BEPS on the Two-Pillar Approach to Address the Tax Challenges Arising from the Digitalisation of the Economy—January 2020, OECD/G-20 Inclusive Framework on BEPS, OECD, Paris, January 2020.
  3. Both the UN and OECD are intergovernmental organizations, meaning that within these organizations the fiscal representatives of member countries voluntarily meet to cooperate and coordinate on, e.g., tax matters. However, unlike a supranational organization (e.g., the European Union), the tax-related decisions and agreements determined by the bodies within the UN and OECD are not enforceable as member countries do not surrender any sovereignty to the organization (i.e., member countries retain their independence regarding taxation).
  4. Kristen A. Parillo, in “Officials Describe Differences Between Model Tax Treaties,” 135 Tax Notes 51, April 2, 2012, discusses the historic divergence in “permanent establishment” standards in the OECD and UN model income tax treaties.
  5. Organisation for Economic Co-operation and Development, “Tax Challenges Arising from Digitalisation—Report on Pillar One Blueprint: Inclusive Framework on BEPS,” OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris (2020 Blueprint), 11. See also the Policy Note, 1–2.
  6. See Parillo. For many years leading up to the adoption of the UN’s 2011 model income tax treaty and coincident efforts to revise its transfer pricing manual, certain UN “large market” member states—those with populations exceeding one billion citizens, such as China and India—had aggressively pushed for the UN tax committee to recognize a market-is-the-measure approach in the transfer pricing arena.
  7. Around this time, courts began to challenge the notion that businesses with physical operations in a country could, by contract and cloud, restructure where profits were booked under existing tax laws without fundamentally changing the observable boots-on-the-ground substance of local operations. See Stephanie Soong Johnston, “France Considers New Ways to Tax Internet Companies,” 69 Tax Notes International 327, January 28, 2013.
  8. The G-20 called for this project in July 2012, and in February 2013 the OECD produced its “action plan,” which was approved at the G-20 summit in St. Petersburg, Russia, in September 2013. The initial draft reports for each of the fifteen action items were published in September 2014, and the final reports were published October 5, 2015.
  9. See OECD (2015), Addressing the Tax Challenges of the Digital Economy, Action 1 – 2015 Final Report, OECD/G-20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris (2015 Digital Report), 142; 2020 Blueprint, 10. This was the US position from the outset, as the US Treasury obviously was the authority most likely to lose revenue as a result of this work stream. See L. Sheppard and J. Arora, “ABA Section of Taxation Meeting: Multinationals Must Accept BEPS Project, Official Says,” 139 Tax Notes 876, May 20, 2013.
  10. See 2015 Digital Report, 149.
  11. Policy Note, 1.
  12. See, for example, Nicholas Winning, “UK Details ‘Google Tax’ Plans,” Wall Street Journal, December 10, 2014; Jamie Smyth, “Australia Warns Companies Against Trying to Avoid Its ‘Google Tax,’” The Financial Times, September 15, 2016. The final UK legislation implementing the diverted profits tax received royal assent on March 26, 2015, and took effect April 1, 2015. The Australian legislation was enacted on December 11, 2015, and took effect on January 1, 2016. It is uncertain that the United Kingdom’s diverted profits tax would be within the scope of taxes targeted to be unwound as part of the Pillar One project.
  13. See Natalia Drozdiak & Sam Schechner, “Tech Giants Face Hundreds of Millions in New Taxes in Europe,” Wall Street Journal, March 21, 2018; Timothy W. Martin and Sam Schechner, “Facebook, Google May Face Billions in New Taxes Across Asia, Latin America,” Wall Street Journal, October 28, 2018; and Paul Hannon and Nina Trentmann, “UK to Roll Out First-of-Its-Kind Digital Tax,” Wall Street Journal, October 29, 2018.
  14. The Tax Foundation produced a white paper in 2020 that provides a relatively comprehensive discussion of DSTs and other tax measures aimed at the digitization of the economy. Exhibit 1 of the document also contains an overview of DSTs announced, proposed, or implemented as of May 2020. See D. Bunn, E. Asen,
    and C. Enache, Digital Taxation Around the World, The Tax Foundation (Washington, D.C., 2020). Additional up-to-date information can be found on The Tax Foundation’s website.
  15. See Office of the United States Trade Representative, “Initiation of a Section 301 Investigation of France’s Digital Services Tax,” 84 Federal Register 34,042, July 16, 2019. Section 301 of the Trade Act of 1974, as amended, empowers USTR to investigate and sanction violations of trade agreements, as well as foreign trade practices that are “unreasonable” or “unjustifiable” and that burden or restrict US commerce. See 19 USC Sections 2411-2420. For more information concerning Section 301, see Andres B. Schwarzenberg, “Section 301 of the Trade Act of 1974,” Congressional Research Service, December 6, 2021,
  16. Office of the United States Trade Representative, “Notice of Determination and Request for Comments Concerning Action Pursuant to Section 301: France’s Digital Services Tax,” 84 Federal Register 66,956, December 6, 2019.
  17. Office of the United States Trade Representative, “Notice of Action in the Section 301 Investigation of France’s Digital Services Tax,” 85 Federal Register 43,292, July 16, 2020.
  18. Office of the United States Trade Representative, “Initiation of Section 301 Investigations of Digital Services Taxes,” 85 Federal Register 34,709, June 5, 2020.
  19. Office of the United States Trade Representative, “Notice of Determination Pursuant to Section 301: India’s Digital Services Tax,” 86 Federal Register 2478, January 12, 2021; Office of the United States Trade Representative, “Notice of Determination Pursuant to Section 301: Italy’s Digital Services Tax,” 86 Federal Register 2477, January 12, 2021; Office of the United States Trade Representative, “Notice of Determination Pursuant to Section 301: Turkey’s Digital Services Tax,” 86 Federal Register 2480, January 12, 2021; Office of the United States Trade Representative, “Notice of Determination Pursuant to Section 301: Austria’s Digital Services Tax,” 86 Federal Register 6406, January 21, 2021; Office of the United States Trade Representative, “Notice of Determination Pursuant to Section 301: Spain’s Digital Services Tax,” 86 Federal Register 6407, January 21, 2021; and Office of the United States Trade Representative, “Notice of Determination Pursuant to Section 301: United Kingdom’s Digital Services Tax,” 86 Federal Register 6406, January 21, 2021.
  20. Office of the United States Trade Representative, “Termination of Section 301 Digital Services Tax Investigations of Brazil, the Czech Republic, the European Union, and Indonesia,” 86 Federal Register 16,828, March 31, 2021.
  21. Schwarzenberg.
  22. Office of the United States Trade Representative, “Termination of Actions in the Section 301 Digital Services Tax Investigations of Austria, France, Italy, Spain, and the United Kingdom and Further Monitoring,” 86 Federal Register 64,590, November 18, 2021; Office of the United States Trade Representative, “Termination of Action in the Section 301 Digital Services Tax Investigation of Turkey and Further Monitoring,” 86 Federal Register 68,295, December 1, 2021; Office of the United States Trade Representative, “Termination of Action in the Section 301 Digital Services Tax Investigation of India and Further Monitoring,” 86 Federal Register 68,526, December 2, 2021; and Office of the United States Trade Representative, “Termination of Action in the Section 301 Digital Services Tax Investigation of Turkey and Further Monitoring,” 86 Federal Register 68,295, December 1, 2021.
  23. The discussion here focuses on a country’s ability to tax nonresidents. A country will always have the right to tax its residents—e.g., a subsidiary incorporated in the jurisdiction—and any income that may be allocated to that subsidiary under transfer pricing principles.
  24. If a jurisdiction does have the right to tax a nonresident because of PE, then that jurisdiction generally will use economic (transfer pricing) principles to identify how much may be taxed; but if a jurisdiction does not have a right to tax, then economic (transfer pricing) principles are essentially irrelevant.
  25. See UN Model Income Tax Treaty (2011) (UN Model) at Article 25; OECD Model Income Tax Treaty (2017) (OECD Model) at Article 25.
  26. See, e.g., UN Model, Articles 25(1) and (2); OECD Model, Articles 25(1) and (2). The MAP does not require that a taxpayer exhaust other DS options before proceeding to MAP, but a competent authority is not obligated to accept or negotiate the case on a taxpayer’s behalf if it does not feel there is merit to the case. Moreover, a taxpayer generally cannot bring a case through the MAP at the same time the case is being addressed in another venue.
  27. See OECD Model, Article 25(5). The UN model’s MAP article does not by default contain a binding arbitration provision. See UN Model, Article 25 (Alternative A). Instead, the UN model contains an alternative MAP article with a binding arbitration provision (which deviates significantly from the one in the OECD model). See UN Model, Article 25 (Alternative B). Thus, countries interested in binding arbitration must affirmatively adopt it as part of bilateral negotiations. This is because UN membership is broad, and many UN member countries are hesitant to accept a binding arbitration provision in a tax treaty (e.g., for reasons related to sovereignty, a lack of resources in the revenue authority).
  28. 2020 Blueprint, 11.
  29. Amount B is less complex or controversial and is designed to standardize the remuneration that should be paid to a PE or subsidiary that performs general marketing and distribution activities within a country on behalf of the larger multinational group. It is intended to be applicable to all taxpayers—unlike Amount A, which only applies to in-scope taxpayers—and the stated goals are to simplify transfer pricing administration, reduce taxpayer compliance costs and reduce overall controversy associated with the topic. See 2020 Blueprint, 155–56.
  30. 2020 Blueprint, 11–12, 19–21.
  31. See US Department of the Treasury, Steering Group of the Inclusive Framework Meeting – Presentation by the United States (April 8, 2021) (on file with authors) (hereafter “Treasury Slides”), slides 9 (“the United States cannot accept any result that is discriminatory towards US firms”) and 12 (should define scope as the 100 largest and most profitable multinational enterprises, without regard to industry classification or business model).
  32. See OECD (2021), Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris (October 8, 2021) (2021 Update), 1. The Inclusive Framework recognized from the beginning that some manner of scope creep was a possibility. See Policy Note, 2.
  33. The rules would not give a jurisdiction a taxing right for Amount A unless the MNE has at least €1 million in revenue arising from that jurisdiction (or €250,000 for small-economy jurisdictions). Financial accounting (with various adjustments) would be used to determine profits, and detailed sourcing rules for certain categories of transactions would be developed. See 2021 Update, 1–2.
  34. See Treasury Slides, slide 19. The US Treasury is not alone in the view that the hard questions associated with Pillar One will require significant additional work to achieve resolution. Some prominent commentators believe that the truly difficult questions may not have even been asked. See, for example, Scott Wilkie, “Next Steps for the OECD Pillars: Moving From a Political Deal to an Enforceable Law,” 104 Tax Notes International 889, November 22, 2021, which takes issue with the notion that Pillar One constitutes an “agreement” and argues that many if not most of the hard questions that must be answered for it to be implemented have not yet been asked.
  35. See 2020 Blueprint, 168.
  36. See 2020 Blueprint, 170–173.
  37. See 2020 Blueprint, 175–177.
  38. See 2020 Blueprint, 178–185. The representative panel process also serves as a baseline dispute resolution mechanism in respect of Amount A more generally (that is, in cases where the taxpayer did not initiate the early review process), but in such cases the process may simply end after the review panel unless the MNE makes a late request for tax certainty. While in theory the tax authorities could move the case on to the determination panel, it is hard to see why the effort would be made if no one would be bound thereby. See 2020 Blueprint, 188–189. We assume for purposes of this article that a taxpayer would initiate the early review process to have the option of receiving a determination that binds tax authorities.
  39. See 2020 Blueprint, 182 (obligation to reach decision ensures that certainty is offered to all multinationals in cases where company requests process and cooperates therein).
  40. 2020 Blueprint, 179–180.
  41. 2020 Blueprint, 178–182.
  42. 2020 Blueprint, 183. The proposal at least suggests that there may be a need to balance interested and disinterested parties on the determination panel. For some countries, this may raise sovereignty issues. This is but one of the many difficult questions that must be resolved to implement Pillar One. See Wilkie, 894.
  43. The review panel will provide the determination panel with a full briefing of the specific questions it intends to raise—including detail regarding positions held by panel members, objections that were raised and other relevant contextual information—and all impacted tax administrations are provided opportunity to review and comment on the review panel’s report before it is submitted to the determination panel. 2020 Blueprint, 182.
  44. 2020 Blueprint, 182–185.
  45. 2020 Blueprint, 184.
  46. 2020 Blueprint, 185; also Treasury Slides, slide 19 (“A binding, non-optional dispute prevention and resolution process is a key aspect of meaningful tax certainty”); 2021 Update, page 2, regarding how in-scope MNEs will benefit from dispute prevention and resolution mechanisms that apply in a mandatory and binding manner.
  47. See 2021 Update, 2. This presumably is designed to build consensus by alleviating sovereignty concerns.
  48. See OECD (2020), Statement by the OECD/G20 Inclusive Framework on BEPS on the Two-Pillar Approach to Address the Tax Challenges Arising from the Digitalisation of the Economy – January 2020, 20 (“The successful implementation of the unified approach hinges on the withdrawal of such actions because their continued application would challenge the legitimacy of the unified approach and undermine the future stability of the agreed framework”); also see Blueprint 2020, 204; 2021 Update, 3.
  49. See Treasury Slides, slides 7 and 21. See also T.D. 9959, 87 Federal Register 276, 285, January 4, 2022, where the preamble to the final foreign tax credit regulations notes that the jurisdictional nexus requirement (that is, the predecessor to the attribution requirement) is animated by the fact that “many foreign jurisdictions have disregarded international taxing norms to claim additional tax revenue, resulting in the adoption of novel extraterritorial taxes” that often target digital services.
  50. See Treasury Slides, slide 21 (unilateral action that is de facto discriminatory arguably is sufficient).
  51. See 2021 Update, 3.
  52. See US Department of the Treasury, “Joint Statement from the United States, Austria, France, Italy, Spain, and the United Kingdom, Regarding a Compromise on a Transitional Approach to Existing Unilateral Measures During the Interim Period Before Pillar 1 Is in Effect,” October 21, 2021, in which European countries will withdraw all unilateral measures once Pillar One takes effect, but agree to credit against Pillar One liability certain amounts of DST collected in the interim period; the United States will terminate trade actions proposed under Section 301 and not take further trade actions relating to these countries’ DSTs, provided standstill and rollback are respected. Turkey and India have reached similar agreements. See US Department of the Treasury, “Joint Statement from the United States and Turkey Regarding a Compromise on a Transitional Approach to Existing Unilateral Measures During the Interim Period Before Pillar 1 Is in Effect,” November 22, 2021, and Republic of India, “India and USA Agree on a Transitional Approach on Equalisation Levy 2020,” November 24, 2021.
  53. Stephanie Soong Johnston, in “Saint-Amans Rules Out ‘Fantasies’ on Digital Tax Rollback’s Scope,” 104 Tax Notes International 929, November 22, 2021, states that the OECD tax chief indicated that withholding taxes and other measures that are not equivalent to DSTs will not count as unilateral measures that countries must withdraw under Pillar One. This was intended to address concerns raised by Latin American countries.
  54. Blueprint 2020, 201–204.
  55. 2021 Update, 6–7.

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