What Are the Pillar Two Safe Harbor Elections?

The Organisation for Economic Co-operation and Development’s (OECD) Pillar Two framework, also known as the Global Anti-Base Erosion (GloBE) rules, establishes a global minimum tax for large multinational enterprises (MNEs). The rules are designed to ensure that MNEs with annual consolidated revenues of €750 million or more pay a minimum effective tax rate of 15% on profits in each jurisdiction where they operate. The GloBE rules introduce complex calculations to determine this effective tax rate and any resulting “top-up tax.”

To alleviate this complexity, the OECD framework includes several safe harbor provisions. A safe harbor is a simplified method that allows a company to demonstrate compliance without performing the full GloBE calculations for a specific jurisdiction. If an MNE meets a safe harbor’s criteria for a country, its top-up tax liability for that jurisdiction is deemed to be zero for that year, providing significant administrative simplification.

Required Data for Safe Harbor Elections

To use the Pillar Two safe harbors, a multinational enterprise must gather data from a Qualified Country-by-Country (CbC) Report and Qualified Financial Statements. The CbC Report provides a country-level overview of an MNE’s global operations, income allocation, and taxes paid. The key data points from this report are the Total Revenue and the Profit or Loss before Income Tax for each jurisdiction.

A CbC Report is considered “Qualified” when it is prepared and filed using information from Qualified Financial Statements. Qualified Financial Statements include the consolidated financial statements of the Ultimate Parent Entity (UPE) and the separate financial statements of each entity within the MNE group. These individual statements must be prepared using an acceptable standard, like International Financial Reporting Standards (IFRS) or a local jurisdiction’s generally accepted accounting principles (GAAP). An MNE must be prepared to demonstrate the link between the data in its CbC Report and the underlying financial statements, as tax administrations can challenge eligibility without this traceability.

The Transitional CbCR Safe Harbor

The Transitional Country-by-Country Reporting (CbCR) Safe Harbor offers temporary relief for fiscal years beginning on or before December 31, 2026, and ending on or before June 30, 2028. If an MNE satisfies any one of three tests for a jurisdiction, it can avoid detailed GloBE calculations and will have no top-up tax for that jurisdiction for the year. The tests are performed on a jurisdictional basis, but if an MNE does not apply for the safe harbor in a jurisdiction for a year it is subject to the GloBE rules, it cannot use the safe harbor for that jurisdiction in any subsequent year.

The three tests are:

• The de minimis test: To qualify, the MNE’s Qualified CbC Report must show that for the fiscal year, its Total Revenue in the jurisdiction is less than €10 million and its Profit or Loss before Income Tax is less than €1 million.
• The simplified effective tax rate (ETR) test: This requires calculating a simplified ETR for the jurisdiction using data from its CbC Report. To pass, this simplified ETR must be 16% for fiscal years beginning in 2025 and 17% for 2026.
• The routine profits test: This test is met if the jurisdiction’s profit before tax, as stated in the CbC Report, is less than or equal to its substance-based income exclusion (SBIE) amount, which is a carve-out for routine returns on tangible assets and payroll.

The QDMTT Safe Harbor

The Qualified Domestic Minimum Top-up Tax (QDMTT) Safe Harbor is a permanent compliance simplification mechanism. It applies when a country implements its own domestic minimum tax that aligns with the OECD’s Pillar Two framework. A QDMTT allows a jurisdiction to collect the 15% minimum tax on MNE profits within its borders, rather than another country collecting it under the GloBE rules.

For a domestic tax to be considered a “Qualified” DMTT, it must follow the design and operational standards of the GloBE rules. The OECD’s Inclusive Framework uses a peer-review process to assess if a jurisdiction’s tax meets this standard. If an MNE operates in a jurisdiction with a recognized QDMTT, it can make an election for that jurisdiction. This election reduces the top-up tax calculated under the GloBE rules to zero, allowing the MNE to rely on the local QDMTT payment to satisfy its Pillar Two obligations for that country.

The Permanent Simplified Calculations Safe Harbor

The Permanent Simplified Calculations Safe Harbor is a long-term solution designed to provide ongoing relief after the Transitional CbCR Safe Harbor expires. This framework will reduce the administrative burden for MNEs in jurisdictions that are consistently low-risk. The permanent safe harbor will be built upon the same three tests as the transitional version: a de minimis test, a simplified ETR test, and a routine profits test.

The principles of these tests will remain consistent, allowing MNEs to exempt jurisdictions based on minimal presence, a high tax rate, or profits tied to substantive activities. The most significant change is the data source for the calculations. Instead of using data from a CbC Report, the permanent safe harbor will require information from “simplified calculations.” These calculations will use data already compiled for the full GloBE computations, ensuring the data is more closely aligned with the main Pillar Two rules. While technical details are still being finalized, this structure offers a permanent path for MNEs to manage compliance obligations.