OECD Pillar One Rules and Market Jurisdiction Taxation
- Graziano Stefanelli
- Aug 14
- 2 min read
Pillar One reallocates taxing rights over multinational enterprise (MNE) profits, shifting a portion of residual profits from home jurisdictions to market jurisdictions where users or customers are located, even without traditional physical presence.
Scope targets large and highly profitable MNEs.
The rules generally apply to groups with consolidated global revenue exceeding €20 billion and profitability above 10 percent of revenue. Certain sectors—such as extractives and regulated financial services—are excluded. Once in scope, an MNE allocates a portion of “Amount A” profit to market jurisdictions based on revenue sourcing rules.
Amount A reassigns residual profits to markets.
Residual profit is calculated as global profit above the 10 percent margin, with 25 percent of that excess allocated to market jurisdictions according to the share of in-scope revenue sourced there. This allocation occurs regardless of whether the MNE has physical presence in those markets.
Example:
Global revenue: €30 billion
Global profit: €5 billion (margin ~16.7%)
Residual profit: €2 billion (€5b – 10% of €30b)
Amount A: €500 million (25% of €2b), allocated among market jurisdictions proportionally to sourced revenue.
Revenue sourcing follows detailed hierarchy.
MNEs must apply transaction-level sourcing rules, prioritizing actual customer location data. For goods, this is the final delivery point; for services, the location of use; for digital content, the user’s habitual residence. If precise location cannot be determined, reasonable proxies—such as IP address or billing address—may be used.
Amount B standardizes baseline marketing and distribution returns.
While Amount A reallocates residual profits, Amount B sets a fixed return for baseline marketing and distribution activities carried out in market jurisdictions, streamlining transfer-pricing compliance for routine functions.
Elimination of double taxation requires offsetting adjustments.
Jurisdictions from which Amount A profit is reallocated must relieve double taxation, typically via exemption or credit mechanisms. Coordinated multilateral dispute prevention and resolution processes are intended to avoid overlapping claims, but compliance demands synchronized treaty updates and domestic-law amendments.
Interaction with existing transfer-pricing systems.
Pillar One operates alongside traditional transfer pricing under OECD guidelines, meaning MNEs must still perform functional analyses for routine and non-routine returns. Amount A overlays residual-profit reallocation without replacing intercompany pricing for tangible goods, services, or financing.
Journal entry — recording a Pillar One reallocation adjustment.
Dr Income Tax Expense – Foreign €50 000 000
Cr Accrued Income Taxes €50 000 000
Offsetting entry for relief in home jurisdiction:
Dr Accrued Income Taxes €50 000 000
Cr Income Tax Expense – Domestic €50 000 000
This nets the reallocation without inflating total tax expense but may shift effective tax rates geographically.
Compliance and reporting demands.
Centralized revenue tracking: Systems must capture end-customer location for every transaction.
Profit segmentation: Financial data must allow for residual-profit calculation at the group level.
Audit readiness: Maintain evidence for revenue sourcing and proxies used.
Treaty alignment monitoring: Verify domestic implementation in both home and market jurisdictions.
Coordination with Pillar Two: Model combined effect of market reallocations and global minimum tax top-up liabilities.
Early adoption of transaction-level data capabilities, precise profit segmentation, and treaty-implementation tracking positions MNEs to comply with Pillar One while mitigating disputes over market-jurisdiction allocations.
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