Note that the first two are temporary, whereas the Simplified Calculations Safe Harbours are permanent.
Whilst the safe harbours/harbors represent a significant simplification for MNEs, qualifying for a safe harbour for a jurisdiction does not exempt an MNE Group from complying with group-wide GloBE requirements such as the requirement to prepare and file its GloBE Information Return.
Transitional CbCR Safe Harbour
The Transitional CbCR Safe Harbour is a short-term measure that would allow an MNE to avoid undertaking detailed GloBE calculations for a jurisdiction if it can demonstrate, based on its qualifying CbCR and financial accounting data, that in the jurisdiction it has:
- revenue and income below the de minimis threshold (the de minimis test);
- an ETR that equals or exceeds an agreed rate (the ETR test); or
- no excess profits after excluding routine profits (the routine profits test).
The above is based on the revenue and profit before income tax from an MNE’s CbC Report and the income tax expense from an MNE’s financial accounts (which therefore also includes the deferred tax expense).
The purpose of the safe harbour is to ease compliance difficulties that MNEs will face and in particular the significant systems changes required to collect the data for full GloBE calculations.
As noted above, this safe harbour is limited and applies to fiscal years beginning on or before December 31, 2026 but not after June 30, 2028.
The safe harbour operates on a jurisdictional level. As such, once it has been determined that a jurisdiction meets one of the above tests, then any constituent entity that is located in the jurisdiction will qualify for the safe harbour.
How the Safe Harbour Applies
During the transitional period, top-up tax in a jurisdiction is deemed to be nil where one of the following tests are met:
- the MNE Group reports total revenue of less than EUR 10 million and profit before income tax of less than EUR 1 million in the jurisdiction in its CbC Report for the Fiscal Year (the de minimis test);
- the MNE Group has a Simplified ETR that is equal to or greater than the transition rate in a jurisdiction for the Fiscal Year (the ETR test). The Simplified ETR is simply the income tax expense in the MNE Group’s financial statements (after removing any taxes that are not covered taxes and uncertain tax positions) divided by the profit before income tax in the MNE Group’s CbC Report. This does not require any GloBE adjustments (eg the allocation of CFC or Main Entity taxes). The transition rate is 15% for Fiscal Years beginning in 2023 and 2024, 16% for Fiscal Years beginning in 2025; and 17% for Fiscal Years beginning in 2026.
- the MNE Group’s profit before income tax in the jurisdiction is equal to or less than the Substance-Based Income Exclusion amount for that jurisdiction calculated under the GloBE Rules (the routine profits test). Therefore, the MNE would calculate the jurisdiction’s SBIE in accordance with the GloBE Rules and compare that to the jurisdiction’s profit before income tax in the MNE’s CbC Report. If the jurisdiction’s SBIE is equal to or exceeds the profit before Income Tax, it would qualify for the safe harbour.
The following are excluded from the Transitional CbCR Safe Harbour:
- Stateless Constituent Entities;
- Multi-parented MNE Groups where a single Qualified CbC Report does not include the information of the combined groups;
- Jurisdictions with Constituent Entities that have elected to be subject to Eligible Distribution Tax Systems; and
- Jurisdictions that have not benefited from the Transitional CbCR Safe Harbour in a previous fiscal year in which the MNE Group is subject to the GloBE Rules, unless the MNE Group did not have any Constituent Entities in that jurisdiction in the previous year
The final exclusion should be particularly noted. The OECD rules apply what they call a “once out, always out” approach. As such if an MNE Group has not applied the Transitional CbCR Safe Harbour in a jurisdiction in a fiscal year in which it is subject to the GloBE Rules, it cannot qualify for the safe harbour for that jurisdiction in a subsequent year.