International tax rules on allocating taxing rights among countries were designed a century ago. Changing business models and a heavy reliance on intangibles rather than capital and labour to generate profits mean they are in certain cases no longer fit for purpose. In particular, existing rules rely on a concept of physical presence for deciding tax obligations, and fail to allocate taxing rights in situations where highly digitalised companies can earn substantial profits in a jurisdiction without the need for a physical presence.
Amount A of Pillar One provides for a co-ordinated reallocation of taxing rights over a portion of the profits of the largest and most profitable MNEs to market jurisdictions (the location of the customers or users), including in situations where the MNE has no physical presence in that market.
