The following article was produced by Mandy Li, Transfer Pricing Managing Director and Shuang Feng, Transfer Pricing Senior Manager at MGO LLP, our member based in California.

On October 8, 2021, an overwhelming majority of countries in the Organization for Economic Co-operation and Development (OECD) Inclusive Framework (IF) on Base Erosion and Profit Shifting (BEPS) preliminarily committed to the overhaul of global tax regimes called BEPS 2.0 and took one step closer to making it a reality. Even though the ultimate adoption of BEPS 2.0 is not guaranteed, and it may take at least a couple of years for its full implementation, it is not too soon for multinational enterprises (MNEs) to engage in some analysis of the impact of these global tax rule changes as well as the current U.S. tax reform by the Biden administration. The result of all these changes means a challenging tax environment for the foreseeable future.

OECD BEPS 2.0 Overview

The OECD/G20 IF on BEPS has finalized a two-pillar agreement to address challenges arising from the digitalization of the global economy. Pillar One establishes new nexus and profit allocation rules for large multinational enterprises meeting certain revenue and profitability thresholds, and Pillar Two establishes mechanisms to ensure large multinationals pay a 15% minimum level of tax.

MNEs are in-scope for Pillar One, where they have global turnover above €20 billion and profitability above 10% (calculated using an averaging mechanism). The three basic elements of Pillar One are:

  • A new taxing right for market jurisdictions based upon a share of a business’ residual profits (Amount A);
  • A fixed return for certain distribution and marketing activities physically in a market jurisdiction (Amount B); and
  • Enhanced dispute prevention and resolution mechanisms to improve tax certainty.

What is Amount A?

Amount A grants market jurisdictions new taxing rights using a formula that is not based on the arm’s length principle. For an MNE to be subject to tax in a market jurisdiction (i.e., for Amount A to be allocated to that jurisdiction), it must have a nexus with that jurisdiction, which generally requires at least €1 million in revenue from the jurisdiction. For smaller jurisdictions with GDP lower than €40 billion, the nexus will be set at €250,000.

For in-scope MNEs, 25% of residual profit defined as profit in excess of 10% of revenue will be allocated to market jurisdictions with nexus using a revenue-based allocation key. Where the residual profits of an in-scope MNE are already taxed in a market jurisdiction, a marketing and distribution profits safe harbor will cap the residual profits allocated to the market jurisdiction through Amount A.

The original October 2020 Blueprint applied to MNEs that met a specified threshold requirement and were either “Consumer Facing Businesses” or provided “Automated Digital Services” in the market jurisdiction. The 2021 Statement makes it clear that an MNE is in scope if it meets the revenue and profitability threshold without any requirement to be a Consumer Facing Business or provide Automated Digital Services.

For the implementation of Amount A, extractive industries and regulated financial services are excluded. Also, the global turnover threshold can be reduced to €10 billion if there is successful implementation of the Pillar One proposals (including the tax certainty aspects). The review as to whether these requirements are met will begin seven years after the agreement is enforced, and the review is to be completed within one year.

What is Amount B?

Amount B is separate from the Amount A calculation. It attempts to simplify and streamline the application of the arm’s length principle to in-country baseline marketing and distribution activities. The 2021 Statement states that the original provisions provided in the October 2020 Blueprint are to be simplified and streamlined, with a particular focus on the needs of low capacity countries. It is anticipated that this will be completed by the end of 2022.

Removal of Unilateral Measures

From the outset, a key impetus of the OECD/G20 Inclusive Framework’s negotiations was to stop the proliferation of “Digital Services Taxes and other relevant similar measures” (collectively “Unilateral Measures”) by replacing them with a consensus-based reallocation of taxing rights among IF members. In line with this objective, Austria, France, Italy, Spain, and the United Kingdom have agreed that as part of Pillar One, they will withdraw all Unilateral Measures on all companies and refrain from imposing new Unilateral Measures. In general, Austria, France, Italy, Spain, and the United Kingdom had preferred for withdrawal of Unilateral Measures to be contingent on implementation of Pillar One, while the U.S. had preferred withdrawal of Unilateral Measures immediately as of October 8, 2021, the date political agreement with respect to Pillar One was reached.

New rules establish a global framework of minimum taxation for multinationals

Pillar Two ensures that large MNEs pay a minimum level of tax. It grants jurisdictions additional taxing rights where other jurisdictions have not exercised their primary taxing rights or income is subject to low tax rates. Pillar Two consists of:

  • Two interlocking domestic rules (together the Global anti-Base Erosion Rules (GloBE) rules): (i) an Income Inclusion Rule (IIR), which imposes top-up tax on a parent entity in respect of the low taxed income of a constituent entity; and (ii) an Undertaxed Payment Rule (UTPR), which denies deductions or requires an equivalent adjustment to the extent the low tax income of a constituent entity is not subject to tax under an IIR; and
  • A treaty-based rule (the Subject to Tax Rule, or STTR) that allows source jurisdictions to impose limited source taxation on certain related party payments subject to tax below a minimum rate. The STTR will be creditable as a covered tax under the GloBE rules.

Pillar Two would normally only apply to MNE groups with a total consolidated revenue above €750 million ($870 million). In addition, MNEs with less turnover may also be impacted as different jurisdictions overhaul their tax codes to conform with the IF.  Pillar Two is expected to be brought into law in 2022 and to be made effective in 2023, with the UTPR coming into effect in 2024.

Outlook on BEPS 2.0 Implementation

Technical details on BEPS 2.0 are to be finalized. For example, revenue sourcing rules determine the revenue deemed to derive from a market jurisdiction. Detailed sourcing rules for specific categories of transactions are to be developed. Members of the IF are targeting an effective date of 2023 for the two pillars. That seems aggressive from a practical implementation standpoint, considering key details of both pillars have not been worked out, and unrealistic from a political perspective, since major components of the plan will need to be ratified in each of the member countries.

Biden Tax Reform – International Tax Rule Changes

The Biden administration has responded to the OECD BEPS 2.0 as well as proposed changes for the U.S. tax policy. Biden’s proposals were aimed at helping fund his multi-trillion infrastructure plan with a big focus on clean energy. Clearly, they were also an attempt to stabilize the international tax architecture.

The House’s current version of President Joe Biden’s tax-and-spend package includes the following international tax rule changes:

  • Global Intangible Low-Taxed Income (GILTI): changes include increasing GILTI rate from the current 10.5% to 15%, using a country-by-country regime, and 5% Qualified Business Asset Investment (QBAI) (except for US possessions). These changes generally apply to tax years beginning after December 31, 2022.
  • Foreign-derived intangible income (FDII): effective FDII rate will be increased from 13.125% to 15.8%, and changes generally apply to tax years beginning after December 31, 2022.
  • Base Erosion and Anti-Abuse Tax (BEAT): Biden framework calls for “penalty rate on any foreign corporations based in countries that do not” abide by OECD agreement. The revised House BEAT provision includes increasing the BEAT tax rate from the current 10% to 18% by 2025. In interim years, the BEAT rate increases to 12.5% in 2023 and 15% in 2024.
  • 163(n) limitation on deduction for interest expense: there will be no 5-year carryforward limitation, which allows indefinite carryforward of disallowed interest.

Transfer pricing implications for MNEs

A lot of uncertainties remain. COVID-19 has had fundamental impacts on how we live, work, and do business. COVID-related spending and other economic challenges may prompt increased scrutiny from tax authorities. But some businesses may be able to turn these challenges into opportunities. Here are some strategies and practices that can make a difference:

  • Plan for uncertainty. The economic and regulatory environments remain fluid, so it is critical for companies to review their business operations and transfer pricing policies more regularly and adjust along with these changes. The proposed tax rules may affect incentives regarding the location of profits and investments. MNEs should plan ahead by modeling the potential tax impacts of these new rules to quantify the effects. Reviewing financial results and adjusting only for the year-end may trigger customs and corporate tax audits.
  • Optimize operating model and strategic planning. Broadly speaking, one might expect BEPS 2.0 to lead MNEs to shift from centralized operating structures to multi-hub models where high-value business functions are spread out across multiple jurisdictions. This potential shift from centralized to multi-hub operating models through business restructurings and reorganizations may require additional resources and efforts in business valuation, financial reporting, and tax planning.
  • Supply or value chain restructuring. Businesses need to consider both temporary and permanent impacts of COVID-19 and the new tax rules. This is a critical time to review how to adapt business structures to the changing consumer behavior, supply chain dynamics, and tax policy updates. It’s also time to evaluate the digitalization of business and its tax implications.
  • Add more rigor to compliance. Meeting the requirements for documentation is more critical. To minimize audit risks, it is extremely important for taxpayers to ensure consistency in intercompany agreements, transfer pricing policies, and documentation. Businesses should have intercompany agreements in place and keep them up to date. Appropriate transfer pricing policies and documentation should reflect the new economic and business environment.
  • Talk to your tax advisors. Transfer pricing analysis can begin a healthy discussion that identifies business challenges and opportunities. Exploring your business and tax structures can help you plan for economic and regulatory uncertainties and minimize your risks.

MGO’s specialized transfer pricing team offers you the resources you need to develop a solution that is designed to meet the specific needs of your business. Contact us for more information about transfer pricing.

OECD/G20 Base Erosion and Profit Shifting Project, Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy, October 8, 2021, as accessed via on November 9, 2021.

BTAX OnPoint Tax Challenges Arising in the Digital Economy – Report on the Statement on a Two-Pillar Solution by the OECD/G20 Inclusive Framework on BEPS, Bloomberg Tax Analysts, October 12, 2021, as accessed via on November 9, 2021.

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, US department of the Treasury, October 21, 2021, as accessed via, on November 9, 2021.

With Global Tax Deal Close,  It’s Time to Assess Implications, Bloomberg tax, November 22, 2021, as accessed via, on November 9, 2021.

BGOV Bill Summary: House-Passed Reconciliation Plan (3), Bloomberg Tax, November 4, 2021, updated November 19, 2021, as accessed via, on November 29,2021.

The article was produced by Mandy Li, Transfer Pricing Managing Director at MGO, and Shuang Feng, Transfer Pricing Senior Manager at MGO.

Shuang Feng, PhD, CFA


Shuang is a transfer pricing senior manager at MGO. With deep experience in transfer pricing planning, compliance and controversy, valuation, and economic analysis, she advises and helps clients in a wide range of industries, including technology, pharmaceuticals, energy, and media.

Shuang has more than 10 years of experience as an economist, specializing in transfer pricing, and financial analyst working in academia and at a Big Four accounting firm. She is skilled in a host of statistics and data analytics programming and tools including Python.

Peking University, B.S., Economics and International Economics and Trade
National University of Singapore, M.S., Economics
University of Massachusetts Amherst, PhD, Finance

Mandy Li


Mandy leads the transfer pricing practice and is a tax and valuation managing director at MGO. She has more than 16 years of global transfer pricing experience for public and private multinationals — including China-based companies and provides valuable leadership to MGO China. Mandy has worked with clients in the technology (software and consumer management), semiconductor, pharmaceutical, agriculture, and energy and resources industries.

She has deep experience providing multinational companies with strategic and tactical transfer pricing solutions that include global structuring and value chain analysis, U.S. and global transfer pricing documentation, audit support, unilateral and bilateral advance pricing agreements, provision review, pre-acquisition due diligence and post-acquisition structuring. Mandy is a proactive advisor who takes satisfaction in guiding U.S. and Chinese companies through highly complex engagements. Fluent in Mandarin and Japanese, Mandy works closely with Chinese tax advisors and law firms to optimize her Greater China region clients’ after-tax profits.

University of Georgia, Terry College of Business
Exchange Program
Waseda University, Tokyo
M.A., International Business