What Is Pillar 1 of the OECD’s Global Tax Reform?

Pillar 1 of the OECD/G20’s global tax reform is a shift in international taxation addressing challenges from the digital economy. For decades, international tax rules tied a company’s taxable profits to its physical presence. This concept has been tested by digital business models, as companies can now derive substantial revenue from a country’s market without a significant physical footprint like offices or factories.

The goal of Pillar 1 is to modernize these rules by reallocating a portion of the profits of the world’s largest multinational enterprises (MNEs) to the jurisdictions where their customers are located. This change ensures market countries receive a share of tax revenue, regardless of an MNE’s physical presence, aiming to create a more equitable distribution of taxing rights.

Scope and Applicability of Pillar 1

Pillar 1’s scope is narrowly focused on the largest and most profitable MNEs. To fall within these rules, an enterprise must meet two quantitative thresholds. The first is a global turnover test, requiring global revenues exceeding €20 billion. The second is a profitability threshold, where an MNE is only in-scope if its profit before tax is above 10% of its revenue, meaning even very large companies with low-profit margins will not be affected.

Certain industries are explicitly excluded from Pillar 1. These carve-outs apply to extractive industries, which involve producing oil, gas, and other minerals, and regulated financial services. The rationale for these exclusions is that these sectors already operate under specific international tax and regulatory regimes, and the aim is to avoid disrupting established frameworks.

The rules are designed to be dynamic, with the intention to potentially lower the €20 billion revenue threshold after the system has been in effect for several years. This would gradually increase the number of MNEs subject to Pillar 1. This approach allows tax administrations and businesses to adapt to the new system before its scope is widened.

The Core Components of Pillar 1

Amount A

Amount A establishes a new taxing right for market jurisdictions, creating the mechanism to reallocate a portion of an MNE’s profits. The process begins by determining the MNE’s total profit, which is calculated based on its financial accounting income with limited adjustments to arrive at a standardized tax base. This ensures a consistent starting point for all in-scope companies.

From the total profit, the “residual profit” is identified. This is any profit exceeding a 10% margin on revenue, which is considered a routine return. Any profit above this benchmark is deemed excess profit subject to reallocation.

Of this residual profit, 25% is designated as Amount A and is reallocated to eligible market jurisdictions. The allocation among countries is based on a formula tied to where the MNE’s sales originate. This requires new revenue sourcing rules to identify the final location of consumption.

This system creates a “new nexus,” allowing a country to tax its share of Amount A even if the MNE has no physical presence there. This alters the long-standing principle that a company must have a permanent establishment in a country to be taxed. The nexus is instead created by the significant and sustained economic engagement a company has with a market, as evidenced by its revenue.

Amount B

Amount B is a component of Pillar 1 designed to simplify and streamline transfer pricing for baseline marketing and distribution activities. Transfer pricing involves the rules for pricing transactions between related entities within an MNE, which are often complex and a source of disputes.

Amount B provides a fixed, standardized remuneration for these routine activities. This approach reduces the compliance burden for businesses and increases tax certainty by approximating an arm’s-length price without requiring complex analyses. In early 2025, the final report on Amount B was incorporated into the OECD Transfer Pricing Guidelines, and jurisdictions can voluntarily apply the framework for fiscal years beginning on or after January 1, 2025.

By standardizing the return, Amount B helps ensure market jurisdictions receive an appropriate amount of tax for functions performed within their borders, focusing on routine profits rather than the excess profits targeted by Amount A.

Implementation and Tax Certainty Mechanisms

Implementing Amount A requires a coordinated legal framework, the Multilateral Convention (MLC), but its future is uncertain as the process has stalled. The MLC has not opened for signature due to a lack of consensus. For the treaty to enter into force, it must be ratified by at least 30 countries that are home to 60% of the parent companies of in-scope MNEs, a threshold that cannot be met without ratification by key nations like the United States.

A goal of the framework is the withdrawal of all Digital Services Taxes (DSTs) and similar unilateral measures to ensure a consistent global approach. However, a general moratorium on new DSTs lapsed at the end of 2024. As a result, some countries are now implementing or reconsidering their own unilateral taxes, leading to a fragmented landscape and the risk of retaliatory trade measures.

If Amount A is implemented, its framework includes mechanisms to prevent the double taxation of profits. The MNE’s home country would be required to provide relief for taxes paid in market jurisdictions, likely through an exemption or a foreign tax credit.

The Pillar 1 framework also includes provisions for mandatory and binding dispute prevention and resolution. This mechanism is designed to address disagreements on how to apply the allocation rules. A binding process ensures that MNEs are not caught in the middle of prolonged disputes between jurisdictions, which enhances overall tax certainty.