Pillar Two: Simplified ETR Safe Harbour

This is a new Safe Harbour included in the January 2026 OECD Side-by-Side Tax Package (see: Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two), Side-by-Side Package).

This new Safe Harbour is a substantial element of the new Side-by-Side Guidance (of the total 88 pages, around 50 relate to this new Safe Harbour). 

This new Safe Harbour deems the top-up tax for a jurisdiction to be zero where the MNE group has Simplified ETR of at least 15%. The Simplified ETR is calculated as Simplified Taxes/ Simplified Income. There are, however, a lot of adjustments and exceptions that apply in the OECD Guidance.

In summary, both simplified taxes and income are generally based on the financial accounting numbers used to prepare the Consolidated Financial Statements, however, QDMTT jurisdictions that use a local financial accounting standard rule  (eg Hong Kong, Luxembourg, Poland) would generally use those accounting standards.

The Simplified income calculation is subject to a number of adjustments including the exclusion of dividends and equity gains and losses, industry adjustments and M&A simplifications.

Aside from this the standard GloBE elections also apply for the calculation of Simplified income.  The OECD Guidance also provides that GloBE adjustments for Asymmetric Foreign Exchange Currency Gains/Losses and Accrued Pension Expenses are required unless a five-year election is made not to include them. 

Simplified Taxes are based on the income tax expense in the financial accounts and includes deferred tax accounting (although DTLs subject to the GloBE recapture rules are not included).

In addition taxes pushed down to eg CFCs and hybrids are not included (unless a 5 year election is made). This doesn’t apply to domestic withholding tax on dividends, which is similar to the QDMTT provisions. 

Note that Simplified income and Simplified taxes can be calculated on a jurisdictional basis (as opposed to an entity basis).

The Simplified ETR will generally apply for financial years from December 31, 2026, however, it can apply from December 31, 2025 in certain cases (eg if the QDMTT Safe Harbour applied or only 1 jurisdiction had GloBE taxing rights for that jurisdiction). 

New Elections in the Safe Harbour

Aside from the main election for this Safe Harbour to apply, the detailed computational rules include numerous elections, particularly with regards to calculating simplified income and taxes, including:

Investment Entity Election (2(3)

A Filing Constituent Entity can make an Annual Election to include Constituent Entities (that aren’t Minority-Owned Constituent Entities) and Investment Entities located in the same jurisdiction as a single jurisdiction for the purposes of the Safe Harbour.

Financial Services Election (3.3.1)

Simplified income excludes the insurance company income in Article 3.2.9 of the GloBE rules, unless the MNE Group makes an Annual Election not to apply the exclusion.

Shipping Income Election (3.3.2)

Simplified income excludes International Shipping Income and Qualified Ancillary International Shipping Income in Article 3.3 of the GloBE rules, unless the MNE Group makes a Five-Year Election not to apply the exclusion.

Election to exclude certain GloBE adjustments (3.5.2)

The GloBE adjustments for Asymmetric Foreign Exchange Currency Gain or Losses (Article 3.2.1(f)) and Accrued Pension Expenses (Article 3.2.1(i)) apply for the calculation of the simplified ETR unless the MNE Group makes a Five-Year Election not to make the adjustments.

Loss DTA Adjustment Election (4.3)

The Safe Harbour rules include rules for excess Negative Tax adjustments to be  carried forward in a similar way to Excess Negative Tax Carry-forwards under the main GloBE rules. However, MNE groups can elect for a different treatment (a Loss DTA Adjustment) for a transitional period (subject to various conditions). 

Income Tax Expense Election (4.4)

An MNE Group can make an Annual Election to include in its Simplified Taxes covered taxes accrued as an expense but not included in income tax expense in the financial accounts.

Equity Reported Tax Election (4.4)

An MNE Group can make an Annual Election to include in Simplified Taxes Covered Taxes related to an Equity-reported item of income that is included in Simplified Income. This applies to Included Revaluation Method Gain or Losses (Article 3.2.1(d) of the GloBE rules) and Prior Period Errors and Changes in Accounting Principle (Article 3.2.1(h) of the GloBE rules).

Tax Credit Election (4.4)

 An MNE Group can make an Annual Election to include in Simplified Taxes and Simplified Income the amount of any tax credits that:

-are Qualified Refundable Tax Credits or Marketable Transferable Tax Credits;

-are accounted as tax reductions in the jurisdictional income tax expense; and

-arose in the election year (or in a prior fiscal year but are not fully utilised in the year of the election). 

Tax Adjustment Election (4.6)

An MNE Group can make a Five-Year Election to include all increases or decreases in Covered Tax liability and income that accrue within 12 months of the end of the year in Simplified Taxes and Simplified Income of the transaction year. 

PE Simplification Election (5.1)

This applies to Permanent Establishments of Main Entities located in a jurisdiction that has adopted anti-hybrid rules and that has a taxable branch regime.

It is an annual election made on a jurisdictional basis that includes the Simplified Income (and related current and deferred taxes) of a PE in the Simplified Income of the Main Entity’s Jurisdiction where it is treated as taxable income under a taxable branch regime.

Pushed Down Taxes Election (5.1)

An MNE Group can make a Five-Year Election to apply the push down rules for PEs, CFCs, Hybrids/Reverse Hybrids and distributions in Article 4.3.2 of the GloBE rules. If the election isn’t made these taxes are generally excluded from Simplified Taxes (aside from domestic WHT on dividends). Nb this doesn’t apply to PE taxes  where a PE Simplification Election is made, the election applies to all the taxes (and for example cant be limited to just CFCs), and for QDMTT purposes the taxes would be excluded anyway.

Transfer Pricing Adjustments Election (5.2)

An MNE Group can make a Five-Year Election to include TP taxable income adjustments (and any related increases or decreases in taxes) that accrue within 12 months of the end of the Fiscal Year as an adjustment to Simplified income and taxes of the transaction year (instead of being included in the year it was accrued).  

QDMTT LFAS Election

In general both simplified taxes and income are based on the financial accounting numbers used to prepare the Consolidated Financial Statements. However, QDMTT jurisdictions that use a local financial accounting standard rule (eg Hong Kong, Luxembourg, Poland) would generally use those accounting standards. The OECD guidance notes that a QDMTT jurisdiction can provide an election for an MNE Group to perform the simplified ETR calculations using any other ‘Authorised Financial Accounting Standard that the jurisdiction’s tax administration is familiar with or considers sufficiently similar to the LFAS’.