Pillar 2 Safe Harbors: An Overview of the Key Provisions

The Organisation for Economic Co-operation and Development’s (OECD) Pillar 2 framework establishes a global minimum tax for large multinational enterprises (MNEs), ensuring they pay a minimum effective tax rate of 15% on income in each jurisdiction where they operate. These Global Anti-Base Erosion (GloBE) rules are intricate and create a substantial compliance workload. To address this complexity, the OECD introduced safe harbors, which are simplification measures for MNEs to meet their obligations in low-risk jurisdictions. By meeting a safe harbor’s criteria, a company can significantly reduce the detailed computations required under the main Pillar 2 rules.

The Transitional CbCR Safe Harbor

The Transitional Country-by-Country Reporting (CbCR) Safe Harbor provides temporary relief for fiscal years beginning on or before December 31, 2026, and ending on or before June 30, 2028. It leverages data an MNE already prepares for its annual CbC Report, reducing the need to perform full GloBE calculations. If a company satisfies one of three tests for a jurisdiction, the top-up tax for that jurisdiction is deemed to be zero for the fiscal year.

De Minimis Test

This test is met if a jurisdiction’s CbC Report shows total revenue of less than €10 million and a profit before income tax of less than €1 million. This includes situations where the jurisdiction reports a loss. The threshold identifies jurisdictions with a limited economic presence where a full GloBE calculation is unnecessary during the transitional period.

Simplified ETR Test

This test compares a simplified measure of taxes to the profit or loss before income tax as stated in the CbC Report. The simplified covered taxes are calculated by taking the income tax expense from financial statements and adjusting for items like uncertain tax positions. To pass the test, this simplified ETR must be at least 15% for fiscal years in 2023 and 2024, 16% for 2025, and 17% for 2026.

Routine Profits Test

This test is satisfied if the jurisdiction’s profit or loss before income tax is less than or equal to the substance-based income exclusion (SBIE) amount. The SBIE is a carve-out under the GloBE rules that excludes a fixed return on tangible assets and payroll costs from the tax base. The test determines if profits in a jurisdiction are attributable to substantive business activities, posing a low risk of base erosion.

The QDMTT Safe Harbor

A Qualified Domestic Minimum Top-up Tax (QDMTT) is a minimum tax that a country incorporates into its domestic law, designed to align with the standards of the OECD’s GloBE Rules. The purpose of a QDMTT is to allow the local jurisdiction to collect the 15% minimum tax on the excess profits of an MNE operating within its borders, ensuring that the tax revenue is captured locally.

The safe harbor operates directly: if a jurisdiction implements a domestic minimum tax that the OECD recognizes as “qualified,” an MNE group can reduce its GloBE top-up tax to zero for that jurisdiction. This relieves the MNE of performing a separate GloBE calculation, as the local entity handles compliance directly with the local government. The designation of a domestic minimum tax as “qualified” is subject to a detailed peer review process managed by the OECD’s Inclusive Framework to ensure consistency with the GloBE Rules.

The Permanent Simplified Calculations Safe Harbor

Beyond the initial transitional period, the OECD is developing a permanent safe harbor for ongoing compliance relief. This long-term solution is intended to replace the Transitional CbCR Safe Harbor and create a lasting mechanism for reducing the administrative burden in low-risk jurisdictions.

Unlike the transitional measure that relies on CbC Report data, the permanent safe harbor will be based on simplified calculations using data points defined under the GloBE Rules themselves. This approach is designed to provide more accuracy and consistency with the Pillar 2 framework while still offering a tangible reduction in compliance effort.

The proposed structure is anticipated to mirror the three tests found in the transitional version: a de minimis test, a simplified ETR test, and a routine profits test. However, these tests will be adapted to use the simplified GloBE-based data. For instance, the simplified ETR test would compare taxes to profits derived from the simplified GloBE calculation methodology.

As the rules for the permanent safe harbor are still under development, definitive details are not yet finalized. The framework proposes to establish clear definitions for the simplified income, revenue, and tax calculations that will form the basis of these tests. The goal is a durable system that allows MNEs to avoid the most complex aspects of the GloBE rules in jurisdictions where tax risk is low.

Required Data and Election Process

To use the Pillar 2 safe harbors, particularly the Transitional CbCR Safe Harbor, an MNE must use specific data from a “Qualifying Country-by-Country Report.” Data points for the jurisdictional tests include the profit or loss before income tax and the income tax accrued for the current year, as reported on the CbCR.

The data must originate from “Qualifying Financial Statements,” which are the consolidated financial statements of the ultimate parent entity. For the routine profits test, additional data is necessary to calculate the SBIE. This requires identifying the value of eligible payroll costs and the net book value of eligible tangible assets within the jurisdiction.

Applying for a safe harbor is an annual election that an MNE must make for each eligible jurisdiction. This election is made on the GloBE Information Return (GIR), the standardized tax return for Pillar 2 reporting. The process involves the MNE indicating its choice to use the safe harbor for a specific jurisdiction on the GIR form.

By making the election, the MNE affirms it has met all requirements of the chosen safe harbor test. The company must have all supporting calculations and source data documented and available for review. Tax authorities can audit these claims, and failure to provide adequate support could disqualify the election, requiring a full GloBE calculation and potential penalties.