The last few years have seen some big changes in the corporate tax world – from ATAD1 & 2 and the EU Commission's anti-tax avoidance package to the recent US tax reform. The impact of these new rules has not gone unnoticed in many countries now subject to significant changes, and often harsher tax principles.

This is just a drop in the ocean, however, compared to what's on the horizon. Brace yourselves for BEPS 2.0 which is set to make waves as it dramatically changes the face of corporate tax.

How it all started

The initiative was originally triggered by discussions on digital tax and GAFA tax but will, in fact, apply to all taxpayers regardless of their activities. A recent OECD report examines two modifications to the existing tax system: new ways to apportion income between jurisdictions and, as a "backstop", imposing a minimum tax and denial of deductions or imposition of withholding taxes on payments to "low tax" entities.

So, will pressure from the OECD be enough to make its member countries change their rules? Will the EU Commission manage to achieve unanimity on this point? Or will they wait for the change from unanimity to Qualified Majority Voting (QMV) in the EU? Only time will tell.

What we do know is that, if embraced by the EU Commission, these two principles will become an unprecedented global benchmark.

Pillar by pillar – what are the proposed changes?


Under current transfer pricing principles, typically only a small portion of profit is taxable in a foreign jurisdiction where only basic distribution services take place. With Pillar One, long-standing and well-known transfer pricing methodologies (for example, comparable pricing also known as "CUP" or transactional net margin method -"TNMM") may become obsolete and would be replaced by new profit allocation rules.

These new profit allocation rules include:

  • Modified residual profit split method (MRPS) – this top-down approach would allocate a portion of a multinational's non-routine profit to the jurisdiction of the consumers.
  • Fractional apportionment method – it would not distinguish between routine and non-routine profits and might take into account the group's overall profitability.
  • Distribution-based approaches – bottom-up approach with simplified methods to shift taxable profits towards jurisdictions of the consumers.

It is uncertain whether these three methods will be optional, or whether further negotiations between the OECD and its member countries will lean towards a unique combination of some of them. The trend is here, however, and things will move forward.

So, what does this mean for companies with international business activities? A substantial part of their profits would become taxable in the countries where their consumers live (i.e. not in the country where the entrepreneur or headquarters are located). What would remain taxable for headquarters/entrepreneurs relates to routine income as well as other aspects including market intangible profits (generally ranging from 10% to 35% of the income, depending on the sector and location).

This means that potentially more than 50% of an entrepreneur's profits would become taxable in the country of the consumers!

This new trend will deeply impact (and even overlap with) current discussions around the set-up of a common consolidated corporate tax basis (CCCTB) in the EU.


Also known as the "global anti-base erosion proposal", Pillar Two aims to ensure that everyone pays a minimum amount of tax within the OECD zone. To achieve this, an income inclusion rule as well as a tax on base eroding payments is on the cards.

The income inclusion rule would supplement existing CFC rules by taxing the income of a foreign branch or a controlled entity (if that income was subject to tax at an effective rate that is below a certain minimum rate). What would be the minimum applicable rate? And what about prior losses? These are just some of the many questions that are likely to emerge.

The second key element of Pillar Two is the tax on base eroding payments that complements the income inclusion rule by allowing a source jurisdiction to protect itself from the risk of base eroding payments (by denying a deduction, imposing source-based taxation or not granting treaty benefits). The EU has already recommended its member states introduce tax sanctions against payments made to low tax or tax-free countries.

The whole picture

As the BEPS 2.0 action plan clearly focuses on and prioritizes countries with the highest number of consumers (rather than countries where investors are based), some developing countries would be able to generate more tax in the future.

Despite these new rules, however, it is likely that competition between countries to attract new investors will still remain (whether through specific tax policies or other benefits).

In addition to an impact on the effective tax rate and the amount of cash taxes paid by multinationals, the changes could cause certain tax management strategies, tax rulings or advance pricing agreements to become obsolete, or less effective. What's more, the proposals may also affect multinationals' choice of capital structure, location of intangible property and related development R&D activities, not to mention the entire business model.

KPMG tools & expertise

KPMG has developed a specialized tool enabling you to assess the tax impact of BEPS 2.0. Our experts will then help you to devise a tax strategy aligned with your business.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.