Sample Calculator for the New Substance-based Tax Incentive Safe Harbour

On January 5, 2025, the OECD released guidance on the operation of the 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 included a new Substance-based Tax Incentive Safe Harbour to apply (once enacted in domestic jurisdictions) apply from fiscal years beginning from January 1, 2026.

The safe harbour exempts (or deems to be zero) the amount of Top-up Tax in a Jurisdiction that corresponds to Qualified Tax Incentives (QTIs) for the Fiscal Year. It does this by comparing the amount of top-up tax without the safe harbour election (ie under the standard GloBE rules) with the amount of top-up tax if the election is made. The difference is the amount attributable to QTIs.

For the recalculation of the top-up tax where the safe election is made, the amount of QTIs used in the year is added to adjusted covered taxes (subject to a substance cap based on (generally) the higher of 5.5% of payroll costs or depreciation/depletion in the financial account for the jurisdiction). 

The amount of QTIs used is (1) the amount of a covered tax reduction from using tax credits (2) the amount of an enhanced allowance or super deduction multiplied by the statutory tax rate, or (3) the amount of income attributable to eligible expenditure that is exempt (multiplied by the statutory tax rate) NB if a preferential rate is given the amount is multiplied by the difference between the statutory and preferential tax rates.

There are therefore a series of ‘steps’ to calculate the safe harbour amount:

-calculate the standard GloBE top-up tax amount

-calculate the QTI used in the jurisdiction

-calculate the substance cap

-add the lower to adjusted covered taxes

-redo the GloBE calculation with the amended adjusted covered taxes

-identify the amount of the SBIT Safe Harbour Exclusion.

The tool below provides a high level overview of the calculation.  Note that the standard substance cap is generally 5.5% of the higher of (1) Eligible Payroll Costs in the jurisdiction or (2) the depreciation and depletion recorded in FANIL for Eligible Tangible Assets located in the jurisdiction. However, an MNE group can make a 5 year election for the jurisdiction for the substance cap to be 1% of the carrying value of Eligible Tangible Assets located in the jurisdiction (excluding land and other non-depreciable assets) for that Fiscal Year.