What Are the OECD Pillar 2 Safe Harbor Rules?

The Organisation for Economic Co-operation and Development’s (OECD) Pillar Two initiative establishes a 15% global minimum corporate tax for large multinational enterprises (MNEs) with at least €750 million in consolidated revenue. The Global Anti-Base Erosion (GloBE) rules enforce this framework. If an MNE’s effective tax rate in a country is below the 15% minimum, a “top-up tax” is applied to the company’s profits to meet the threshold.

Performing detailed GloBE calculations for every jurisdiction presents a significant compliance challenge. To address this, the OECD introduced safe harbors, which are simplification measures that allow an MNE to avoid the extensive calculations for a specific jurisdiction. Meeting a safe harbor’s requirements demonstrates a low risk of top-up tax being due, reducing the administrative burden on the company.

The Transitional Country-by-Country Reporting Safe Harbor

The Transitional Country-by-Country Reporting (CbCR) Safe Harbor is a temporary measure that uses data MNEs already collect for their CbC Reports. It applies to fiscal years that begin on or before December 31, 2026, and end no later than June 30, 2028. If an MNE can satisfy one of three available tests for a jurisdiction, the top-up tax for that location is deemed to be zero for the year.

The De Minimis Test

The de minimis test is designed to exclude jurisdictions with a limited economic footprint. An MNE meets this test for a jurisdiction if its CbC Report shows total revenues 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 Simplified ETR Test

A second path to qualifying is the simplified effective tax rate (ETR) test. This test is met if a jurisdiction’s simplified ETR meets or exceeds a specified rate, which increases over the transitional period. For fiscal years beginning in 2023 and 2024, the required ETR is 15%, rising to 16% for 2025 and 17% for 2026. The calculation uses the profit before income tax from the CbC Report and the income tax expense from the MNE’s qualified financial statements.

The Routine Profits Test

The third test is the routine profits test. This test is satisfied if the profit before tax in a jurisdiction is equal to or less than the “substance-based income exclusion” (SBIE) amount for that jurisdiction. The SBIE amount is calculated based on a percentage of the carrying value of tangible assets and the cost of payroll, suggesting that profits are linked to genuine economic substance.

Required Data for Safe Harbor Calculations

To utilize the Transitional CbCR Safe Harbor, an MNE must use data from specific, qualified sources.

Qualified Country-by-Country Report Data

The primary data source is the CbC Report, which must be “Qualified.” This means it has been prepared and filed using data from qualified financial statements. The report provides the total revenue and profit or loss figures needed for the tests.

Financial Statement Data

The income tax expense figure for the simplified ETR test must be pulled directly from the MNE’s consolidated financial statements. This specific figure is required, not the tax data that may be included in the CbCR.

The Qualified Domestic Minimum Top-up Tax Safe Harbor

Separate from transitional measures, the OECD framework includes a permanent safe harbor centered on a Qualified Domestic Minimum Top-up Tax (QDMTT). This mechanism allows a country to implement its own domestic minimum tax that aligns with the Pillar Two GloBE rules.

Defining a QDMTT

A QDMTT is a minimum tax incorporated into a country’s domestic law and calculated in a manner consistent with the GloBE rules. Its purpose is to ensure that any top-up tax on the profits of an MNE’s entities located in that jurisdiction is collected locally. For a domestic minimum tax to be recognized as “Qualified,” it must meet a set of standards prescribed by the OECD’s Inclusive Framework.

How the Safe Harbor Works

If a jurisdiction’s QDMTT meets an additional, more stringent set of safe harbor standards, any top-up tax liability under the GloBE rules is reduced to zero for that jurisdiction. This allows an MNE to avoid performing the full, complex GloBE calculations. If a domestic tax is a QDMTT but does not meet the higher safe harbor standards, the tax paid is treated only as a credit against any top-up tax liability, and the MNE must still complete its GloBE calculations.

Outcomes of Applying the Safe Harbor Rules

The primary outcome of qualifying for any safe harbor is that the top-up tax for the jurisdiction is deemed to be zero for that fiscal year. This provides tax certainty and eliminates the need for additional GloBE calculations for that location.

The Transitional CbCR Safe Harbor has a “once out, always out” principle. If an MNE is eligible to use this safe harbor for a jurisdiction but fails to qualify or chooses not to, it is barred from using it for that same jurisdiction in any future year. An exception exists if the MNE establishes operations in a jurisdiction where it previously had no presence.