Pillar Two: what is the importance of the Country-by-Country Safe Harbors?

The “Transitional CbCR Safe Harbor” lowers the administrative burden for multinationals active in low-risk countries during the initial GloBE years.

In brief

• The OECD implemented the “Transitional CbCR Safe Harbor” as a temporary initiative to ease the administrative burden for Multinational Enterprises (MNEs).
• This framework simplifies the determination of low-taxed profit risks in a specific jurisdiction with less extensive calculations than the full GloBE rules.
• While offering temporary relief, MNEs must prioritize CbCR quality and prepare for full GloBE rule implementation beyond the safe harbor period.

International taxation will be thoroughly redesigned by the introduction of the global minimum taxation, also known as the GloBE rules, resulting from the OECD's BEPS 2.0 project. From a public consultation on the implementation of the GloBE rules, it quickly became clear that the GloBE rules would impose a disproportionately high burden on certain multinational companies with regard to their operations in countries with a high tax burden or in countries with a low-risk profile (in terms of tax avoidance). In addition, the Inclusive Framework (the body within the OECD that deals with the implementation of the GloBE rules) realized that more practical guidelines are needed and that these guidelines are only being made available gradually. For all these reasons, it was considered to implement “safe harbors” for a certain period.
 

Temporary exemption of the GloBE rules

To mitigate the administrative burden for Multinational Enterprises (MNEs) in complying with the OECD Global Anti-Base Erosion rules (“GloBE rules”) during the initial years of implementation, the OECD developed the temporary “Transitional Country-by-Country (CbCR) Safe Harbor”.

Under the Transitional CbCR Safe Harbor, the GloBE Information Return should not be completed in full for a jurisdiction. The top-up tax for such jurisdiction is deemed to be zero, provided that at least one of the following tests is met for the selected jurisdiction.
 

Three tests

To qualify for the Transitional CbCR Safe Harbor, a tested jurisdiction should meet one of the following tests:

1. De minimis test: the total revenue in the CbCR is less than EUR 10 million and the profit (loss) before income tax is less than EUR 1 million; or
2. ETR test: the simplified ETR is greater or equal to 15% (2023-2024), 16% (2025), 17% (2026) or;
3. Routine profits test: the profit (loss) before income tax is equal or less than the substance-based income exclusion amount as calculated under the GloBE rules. 

The Transitional CbCR Safe Harbor is only a temporary measure applicable to financial years beginning after 30 December 2023 and on or before 31 December 2026 but not including a financial year that ends after 30 June 2028.

The importance of the “once out, always out” rule

In addition, the Transitional CbCR Safe Harbor features the ‘once out, always out’ rule, whereby a jurisdiction not meeting any of the safe harbor provisions in one period or meeting the provisions but choosing not to apply the safe harbors for certain jurisdictions cannot benefit from any of the safe harbors in a subsequent period.