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BEPS 2.0 – Part 4: Pillar Two

The proposals under Pillar One and Pillar Two represent an ambitious attempt to transform the international tax system. However, as has been seen from the earlier parts in this series, a number of practical issues remain to be resolved under both Pillar One and Pillar Two before any tangible change will be seen at an international level. Such issues have failed to dampen the appetite of jurisdictions to address the problems to be solved by BEPS 2.0 and, indeed, some jurisdictions have taken unilateral action in the absence of an international solution. The fourth and final part of this series (albeit not the end of BEPS 2.0) considers the responses of different jurisdictions to the proposals under Pillar One and Pillar Two.

EU response

Simultaneously with the work of the Inclusive Framework, the European Commission has also considered the taxation of the digital economy. The European Commission has recognized the need for an international solution to taxation questions relating to the digital economy but has also noted the challenges of achieving progress at an international level, given the complex nature of the problem and the wide variety of issues that need to be addressed.

In a 2018 communication from the European Commission to the European Parliament and the European Council, the European Commission proposed an EU-level solution on the basis that "by being a first mover in proposing an overarching response to fix the issue and mitigate the immediate risks, the EU and its Member States will be at the forefront in shaping a global solution." In particular, the EU proposed a new Directive on the corporate taxation of a significant digital presence (i.e., a digital services tax, or DST). However, an EU-wide approach was paused until the end of 2020 to permit further progress to be made at an international level.

Notwithstanding the EU position, the UK, France, Austria, Belgium, The Czech Republic, Hungary, Italy, Norway, Poland, Slovakia, Slovenia, Spain and Turkey have all either introduced a DST, or announced or published proposals to introduce a DST. Interestingly, each jurisdiction has taken a different approach to the design of their respective DSTs, including by reference to the applicable rate, sectors and industries within scope, and both global and domestic revenue thresholds.

UK response

In line with the EU response, the UK introduced a digital services tax with effect from April 2020. However, the UK Government has confirmed its commitment to an international solution to the digitalization of the economy, and there is thus an expectation that the UK’s DST may be repealed if, and when, an international solution is reached.

The UK’s digital services tax will apply where a group’s worldwide revenues from certain digital activities are more than £500 million and more than £25 million of those revenues are derived from "UK users." If the group's revenues exceed these thresholds, the revenues derived from UK users will be taxed at a rate of 2%, subject to an allowance of £25 million.

The impact of the UK DST remains to be seen, but it is worth noting the extent to which multinationals are willing to absorb the cost of the tax. For example, multinationals such as Amazon and Google have announced that the cost of the UK’s DST will be passed on to sellers and advertisers, while eBay has announced that those costs will not be passed on.

U.S. response

While the U.S. has reiterated its support for a multilateral solution, it has called for the suspension of unilateral DSTs and proposed that Pillar One be implemented on a "safe harbor" basis. The U.S. is broadly supportive of Pillar Two, which is conceptually aligned with the Global Intangible Low Taxed Income (GILTI) provisions introduced as part of the Tax Cuts and Jobs Act of 2017.

Many members of the Inclusive Framework have expressed concerns that implementing Pillar One on a safe harbor basis could raise major difficulties, increase uncertainty and fail to meet all of the policy objectives of the overall process. The Inclusive Framework has noted that, although a final decision on the matter will be taken only after the other elements of the consensus-based solution have been agreed upon, resolution of this issue is crucial to reaching consensus.

Most recently, the U.S. announced an investigation into a number of countries that either have implemented, or are planning to implement, a digital services tax. Depending on the outcome of these investigations, the U.S. may impose tariffs or import restrictions on the particular jurisdiction. This was the basis on which the U.S. threatened to impose tariffs on $2.4bn of French goods, including champagne and cheese, after the French DST was introduced in July 2019. However, following the U.S. investigation, France agreed to suspend further collections of any DST revenues. The UK’s DST has also been the subject of discussion between the U.S. and the UK; however, the UK has reiterated its commitment to the UK DST, and no suspensions of collections or other amendments appear imminent.


Notwithstanding the clear consensus for broad international tax reform, there remain questions as to precisely what shape that reform will take. Following delays related the COVID-19 pandemic, further announcements in respect of the design of Pillar One and Pillar Two are expected after the meeting of the Inclusive Framework in October 2020. However, further work is still expected to be required before any changes actually take effect.

The changes to the international tax system as a result of BEPS 1.0 were a significant achievement. The implementation of further reform under BEPS 2.0 would be an even greater achievement given the potential for the fundamental reform of the approach to international taxation.

The implementation (or even simply the consideration) by jurisdictions of unilateral DSTs underlines the appetite for fundamental reform of the international tax system. DSTs also highlight the challenges in achieving international consensus in respect of the taxation of the digital economy, let alone designing a tax system that reflects the broader digitization of the economy since the current international tax rules were first drafted. Perhaps even more fundamental international tax reform will form the basis of a BEPS 3.0 project!

Key Contacts

Adam Blakemore
T. +44 (0) 20 7170 8697

Linda Z. Swartz
T. +1 212 504 6062

Jon Brose
T. +1 212 504 6376

Andrew Carlon
T. +1 212 504 6378

Mark P. Howe
T. +1 202 862 2236

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