[Opinion] Policy Expectations and Advancements Around Pillar I and Pillar II | Renewed Focus on the Global South

CA Hunny Munjal – [2025] 170 taxmann.com 115 (Article)

1. Introduction

The international tax landscape is being fundamentally reshaped by the implementation of Pillars 1 and 2 of the OECD’s Inclusive Framework on Base Erosion and Profit Shifting (BEPS). These reforms are designed to modernize global tax rules to account for the digital economy and to curb the longstanding issue of profit shifting by Multinational Enterprises (‘MNEs’) to low-tax jurisdictions. For developing economies, particularly those in the Global South, the implications of these reforms are profound, potentially altering the ways in which these countries generate tax revenues and attract foreign direct investment (FDI).

Pillar 1 aims to redistribute taxing rights, giving market jurisdictions (i.e., countries where consumers or users are located) the right to tax a portion of the profits generated by highly digitalized and consumer-facing MNEs, even when these companies do not maintain a physical presence within the country. On the other hand, Pillar 2 establishes a Global Minimum Tax (GMT) to ensure that MNEs pay at least 15% in corporate taxes on their profits, no matter where they operate. While these reforms aim to promote fairness and equity in global taxation, they also present significant challenges, especially for developing countries that have traditionally used low taxes to attract investment.

This article examines the key components of Pillars 1 and 2, their legal and economic implications, and how they are likely to affect the fiscal sovereignty, tax policy, and economic strategies of developing countries in the Global South.

2. Key Features of Pillar 1 and Its Impact on Developing Economies

2.1 Overview of Pillar 1

Pillar 1 is primarily concerned with the reallocation of taxing rights, particularly targeting the digital economy and large consumer-facing businesses. Traditional international tax rules rely on the physical presence of a company in a jurisdiction to establish tax liability. However, many digital and consumer-facing MNEs generate substantial profits in market jurisdictions without having a significant physical presence. This discrepancy has allowed MNEs to avoid paying taxes in countries where they derive significant economic benefits.

Pillar 1 seeks to address this issue by reallocating a portion of non-routine profits to the market jurisdictions, regardless of the company’s physical presence. This is a groundbreaking departure from the traditional principles of international taxation, which have long been based on the notion that physical presence dictates where profits are taxed.

2.2 The key components of Pillar 1 include

1. Amount A: This is a new taxing right that allocates a portion of an MNE’s non-routine profits to the market jurisdictions where it has significant consumer interaction, even if the MNE lacks a physical presence. Amount A applies to MNEs that exceed a global revenue threshold of EUR 20 billion and have profit margins above 10%. This measure is primarily aimed at large digital platforms and consumer-facing businesses.
2. Amount B: A simplified and standardized method for baseline marketing and distribution activities within market jurisdictions. This ensures that these activities are remunerated based on arm’s length principles, providing certainty and reducing the potential for disputes between tax authorities and MNEs.
3. Amount C: A mechanism to address potential disputes over profits not captured by Amount A or B, focusing on ensuring that in-country activities are appropriately compensated if they exceed baseline marketing and distribution functions.

2.3 Impact of Pillar 1 on Developing Economies

For developing countries in the Global South, Pillar 1 presents both opportunities and challenges.

• Revenue Reallocation and New Taxing Rights: The primary benefit for developing countries under Pillar 1 is the ability to tax MNEs based on their economic activity within a jurisdiction, even if the MNE has no physical presence. This could lead to a significant increase in tax revenues for countries with large consumer markets, such as India, Brazil, South Africa, and Indonesia. These countries have traditionally faced challenges in taxing digital giants like Google, Amazon, and Facebook, which generate substantial profits from users and consumers within these jurisdictions without paying significant local taxes. For example, under Amount A, a portion of the non-routine profits of digital and consumer-facing MNEs will be reallocated to countries in which their users are based. This could result in increased tax receipts for countries with large populations and consumer bases, enabling them to mobilize more domestic resources for development projects, infrastructure, and social programs.
• Administrative and Implementation Challenges: While the potential for increased revenue is substantial, many developing countries face significant administrative hurdles in implementing Pillar 1. The calculation of non-routine profits, the identification of eligible MNEs, and the apportionment of taxing rights based on user interaction all require advanced tax administration capabilities that are lacking in many countries within the Global South. For instance, determining the share of non-routine profits to be taxed in a market jurisdiction involves complex economic and legal considerations, including defining the economic nexus and ensuring data transparency. Many developing countries will need substantial technical assistance and capacity-building to implement these rules effectively.
• Negotiation Power and Dispute Resolution: A key concern for developing countries is whether they will have sufficient negotiation power to secure their fair share of the reallocated profits under Pillar 1. MNEs and high-income countries may have the resources to engage in prolonged tax disputes, potentially leaving developing countries at a disadvantage. The dispute resolution mechanisms under Pillar 1 will need to be robust and equitable to ensure that countries in the Global South are not left out of the redistribution of tax revenues.

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