CbCR data will have an impact on the Pillar 2 safe harbour provisions. It will begin to form the core of Pillar 2 compliance.
What are the Pillar 2 safe harbour tests?
The Pillar 2 GloBE regulations, as published by the OECD on 20 December 2021, contain the following safe harbour tests:
- Minimum Revenue / Income (De Minimis Test)
- Routine Profit Exclusion (Routine Profit Test)
- Minimum Effective Tax Rate (ETR Test)
No top-up tax is due if an MNE Group meets one of these tests. These tests are part of the normal Pillar 2 compliance workstreams, i.e., MNE Groups must show proper controls and audit trails that (one of) these tests have been satisfied.
What are transitional Pillar 2 safe harbour tests?
In the consultation documents published by the OECD on 15 December 2022, an attempt has been made to offer temporary relief in the Pillar 2 compliance burden by allowing simplified source data to assess whether these tests are met. Meeting the safe harbour would allow an MNE Group to avoid undertaking detailed GloBE calculations in respect of a jurisdiction.
The simplified source data involves the following:
- For GloBE Income: MNE Groups may rely on the income as per CbCR data without adjustments (exception: adjustment required for fair value loss > € 50 million)
- For Covered Taxes: MNE Groups may rely on income tax expenses (current/deferred) as per qualified financial statement(s) without adjustments (exception: adjustment required for Uncertain Tax Positions)
The transitional safe harbour tests apply for the fiscal years starting after the 31st of December 2023 and end for fiscal years beginning on or before 31st December 2026 (excluding fiscal years that end after the 30th of June 2028). A once out, always out approach applies.
Does CbCR data materially help to reduce the Pillar 2 compliance burden?
The Pillar 2 analysis and the CbCR analysis have a different timing. The relief is limited due to a timing difference between when the Pillar 2 analysis should be made and when the CbCR report has to be prepared and filed.
The Pillar 2 data collection, calculations, assessment, and audit trailing will typically be done during the year-end tax provisioning process. Including the Pillar 2 analysis in the year-end tax provisioning process is a must-have because tax accounting laws and regulations (e.g., IFRS/IAS12) require the analysis of Pillar 2 for the relevant fiscal year, the first one being 2023. Secondly, tax provisioning aims to warn investors and stakeholders as early as possible by estimating the income tax return outcome for all reporting entities of an MNE Group (consolidated) for the relevant fiscal year. The Pillar 2 domestic top-up tax return is just another income tax return to be estimated. Therefore, all Pillar 2 data should be collected and assessed during the year-end tax provisioning process, the same as normal income tax data.
At this point, the CbCR data has yet to become available, as the CbCR report is only due 12 months after year-end, for which a tax provision is prepared. Therefore, during the annual tax provisioning process, MNE Groups will have to rely on the permanent safe harbours tests to assess whether top-up tax is due instead of the transitional safe harbours. This means that most Pillar 2 compliance is already done by the time the simplified rules can be applied.