Global Anti-Base Erosion (GloBE) rules under Pillar Two

Understanding OECD Pillar Two: Global Minimum Tax and Safe Harbours 

Introduction 

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) has introduced a two-pillar solution to address the tax challenges of the digitalised global economy. 

Under Pillar Two, a global minimum corporate tax of 15% has been agreed, designed to set a floor on tax competition and ensure a level playing field. Multinational Enterprises (MNEs) with revenues of at least €750 million—measured under BEPS Action 13’s country-by-country reporting threshold—will be subject to this regime if they operate in at least two jurisdictions. 

Already, more than 50 jurisdictions are moving forward with implementing Pillar Two, signaling that this framework is quickly becoming a new reality for global business. 

What is Pillar Two? 

Pillar Two is essentially a Global Anti-Base Erosion (GloBE) system. Its purpose is to: 

  • Prevent profit shifting to low-tax jurisdictions. 
  • Establish a minimum effective tax rate (ETR) of 15% across participating countries. 
  • Provide tools for jurisdictions to protect their tax bases. 

Pillar Two Rules 

  1. Income Inclusion Rule (IIR): 
  • Allows a parent jurisdiction to tax the profits of foreign subsidiaries or branches if those profits are taxed below the 15% minimum. 
  • Shifts from an exemption method to a credit method of taxation. 
  1. Undertaxed Payments Rule (UTPR): 
  • Applies where related-party payments are not taxed at or above the minimum rate. 
  • Denies deductions or imposes source-based taxation (such as withholding tax). 
  1. Subject to Tax Rule (STTR): 
  • A treaty-based rule implemented via the Multilateral Instrument (MLI). 
  • Overrides treaty benefits for certain related-party payments (e.g., interest and royalties) that are taxed below 9% in the recipient jurisdiction. 
  • Creditable under both the IIR and UTPR. 

Together, these rules form the GloBE framework, which operates as a common approach. Members of the Inclusive Framework (IF) are not compelled to adopt the rules, but if they do, they must apply them consistently and accept their application by other members. 

Safe Harbours: Simplifying Compliance 

While Pillar Two strengthens the global tax net, it also introduces a complex compliance burden for MNEs. Recognizing this, the OECD has introduced safe harbours—simplification mechanisms to reduce costs and ease administration. 

Transitional Safe Harbour (TSH) 

Introduced as a temporary measure, the TSH excludes an MNE’s operations in certain low-risk jurisdictions from full GloBE calculations for an initial period. 

It relies on Country-by-Country (CbC) reports and Qualified Financial Statements (QFS) and uses three main tests: 

  1. De Minimis Test: 
  • If revenue < €10 million and income < €1 million (or there is a loss), the jurisdiction qualifies. 
  1. Effective Tax Rate (ETR) Test: 
  • If the jurisdiction’s ETR equals or exceeds the transitional threshold (starting at 15% in 2023 and rising thereafter), the jurisdiction qualifies. 
  1. Routine Profits Test: 
  • If reported profits are fully covered by the Substance-Based Income Exclusion (SBIE) (linked to payroll and tangible assets), the jurisdiction qualifies. 

These tests relieve smaller or high-substance operations from the heavy burden of detailed calculations. 

Permanent Safe Harbour (PSH) 

For cases where the TSH doesn’t apply, the OECD is developing a Permanent Safe Harbour (PSH). 

  • Provides simplified calculation methods to reduce complexity. 
  • Not limited in time (unlike the TSH). 
  • If a jurisdiction passes one of the three tests (De Minimis, ETR, or Routine Profits), its Top-up Tax is deemed zero. 
  • Still under development, with further administrative guidance expected. 

Impact of Safe Harbours 

  1. Simplification 
  • Reduce the compliance burden by using readily available data like CbC reports. 
  • Particularly useful in the early adoption period. 
  1. Data Availability 
  • Leverage financial statements and audited records already required under law. 
  • Avoids creating entirely new reporting systems. 
  1. Data Quality 
  • Access to safe harbours depends on accurate, high-quality CbC data. 
  • MNEs with poor data must improve reporting systems. 
  1. Ease vs. Precision 
  • Simplification reduces administrative costs but may sacrifice precision. 
  • A trade-off between practicality and accuracy. 
  1. Impact on MNEs 
  • Immediate relief in high-tax or low-risk jurisdictions. 
  • Helps MNEs adjust to the GloBE regime gradually. 
  • However, MNEs must still prepare for full compliance once the transitional period ends. 

Conclusion 

The Transitional Safe Harbour (TSH) and Permanent Safe Harbour (PSH) are critical tools in easing the compliance burden under Pillar Two. They provide breathing space for MNEs while systems and processes adapt to the demands of global minimum taxation. 

That said, both safe harbours come with conditions—particularly around data quality and jurisdictional application. Businesses that invest early in robust reporting systems will be best placed to benefit. 

Ultimately, while these measures streamline the transition, MNEs must prepare for the future: once the TSH expires and the PSH matures, the full weight of GloBE rules will apply. Continuous evaluation and adaptation will be essential for long-term compliance. 

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