In our last Pillar Two 101 blog, we explored some of the issues facing large multinationals based in and operating out of Ireland when it comes to complying with the OECD’s anti-base erosion measures.
In brief, we highlighted the additional accounting and reporting burden placed on corporations in calculating whether their core business tax liabilities met the agreed 15% effective floor rate on profits, and whether they would fall under one of the ‘top-up’ mechanisms. We also covered how the OECD had responded to these concerns by introducing three ‘safe harbours’ aimed at simplifying compliance, two of them temporary measures to create a transitionary period to help enterprises adjust.
Like the top-up mechanisms themselves, which we covered in our first blog in the series, the safe harbours are fairly dense protocols in their own right which are worth unpicking. So to round our Pillar Two 101 series off, here’s a little more detail about what the safe harbours are and what you need to know about them.
Country-by-Country Reporting (CbCR) Safe Harbour
The most obvious administrative burden created by Pillar Two is the need to analyse accounts in every country an enterprise operates in to assess whether the 15% base rate of tax is met under the terms of the new rules.
The initial difficulty multinational businesses face here is that, in many cases, their accounting and reporting arrangements as a group have evolved to take advantage of differences in tax rates to minimise their overall tax bill. So compliance with Pillar Two in the first instance requires a certain degree of unravelling of these arrangements and then calculating tax from a different perspective.
The CbCR safe harbour aims to help corporations with this initial transition by allowing them to declare a nil-rate of top up in a certain jurisdiction (i.e. assume their tax liabilities meet the 15% rate there) if it passes one of three tests:
- De Minimis Test: The overall turnover in that country is less than €10m and profit-before-tax (PBT) less than €1m.
- Effective Tax Rate Test: Operations in that country meet a simplified effective tax rate test, namely tax expense adjusted for non-covered taxes and uncertain tax positions divided by PBT. This calculation show an effective tax rate of 15% in 2024, but then 16% in 2025 and 17% in 2026.
- Routine Profits Test: PBT is equal to or less than Substance Based Income Exclusion (permitted expenditure and cost deductions), or the company has made a loss in that country.
The above tests can be applied to existing data from the group consolidated statement or from the individual entity accounts, postponing the need for enterprises to introduce new data-gathering and reporting processes that align specifically with Pillar Two.
However, the CbCR safe harbour is only open to the end of 2026, after which corporations will be required to account fully for tax liabilities on a country by country basis under the terms of the Pillar Two rules. So while this safe harbour does ease the compliance burden for now, we would advise organisations to use the headroom it offers to look at the detail of post-2026 compliance, and implement the changes required asap.
Undertaxed Profits Rule (UTPR) Safe Harbour
The UTPR is the second of the OECD’s transitional measures, and can be applied in accounting periods ending before 31 December 2025. The UTPR is described as a ‘back stop’ measure for situations where a group’s parent entity might be subject to tax below the 15% effective rate (thus negating the IIR top-up which makes parent companies liable for undertaxed profits across the group) AND there are no domestic top-up rules in place.
This applies to corporations which may have their headquarters in countries which have not signed up to the Pillar Two, but have subsidiaries based in signatory jurisdictions. The UTPR safe harbour in effect gives such enterprises a year’s grace to avail themselves of the new regime. However, making use of the UTPR safe harbour rules out being able to use the CbCR safe harbour, which is open for longer.
Qualified Domestic Minimum Top-up Tax (QDMTT) Safe Harbour
Unlike the other two, the QDMTT safe harbour is a permanent measure aimed at avoiding duplication of reporting requirements and providing clarity on where top-ups are owed. For example, Ireland has introduced a domestic top-up (a QDMTT) which now means all corporations with turnover in excess of €750m operating in the country will now pay corporation tax at 15%, rather than the national rate of 12.5%.
Corporations based in Ireland that also have operations elsewhere would, given the separation of the centralised Pillar Two scheme and the domestic tax regime, face having to account for profits and tax calculations twice, using slightly different criteria, to comply with both. The QDMTT safe harbour waives the need to account separately under the Pillar Two rules where a QDMTT is in place, so long as the QDMTT accounting, calculation and administration standards align with those used with the OECD.
