Pillar 2 safe harbours: how your country-by-country report will be central to compliance

The Inclusive Framework on BEPS (IF) continues to release more details on the implementation of the Pillar 2/Global Anti-Base Erosion (GloBE) rules. In December 2022, the IF agreed and published rules and guidance on a temporary country-by-country (CbCR) safe harbour intended to mitigate the complexity and compliance hurdle for taxpayers (read about the announcement in more detail in this article). As a reminder, the GloBE rules look to ensure multinational groups (MNEs) pay an effective tax rate (ETR), as calculated under GloBE, of at least 15% in each jurisdiction where they are located. If the GloBE ETR is below 15%, a top-up tax will be applied to achieve the internationally agreed 15%.

Crucially, the safe harbour conditions involve less extensive calculations, draw on a smaller pool of data than the fully fledged GloBE calculations, and utilise data that is, theoretically, already available. With one exception, the data required is CbCR data and not accounting data.

The temporary safe harbour sets out three routes to a nil top-up tax position in a specific jurisdiction for the three years of its application (Financial years 2024-2026). The GloBE top-up tax in a jurisdiction is deemed to be nil if the CbCR is ‘qualifying’ (see below) and one of the following conditions are met: 

1. De minimis test: The jurisdiction has CbCR revenue of less than EUR10m and a CbCR profit and loss before income tax (PBT) of less than EUR1m (including a loss).

2. Effective tax rate test: The Simplified ETR for a jurisdiction is at least 15% for 2024 (16% for 2025, 17% for 2026). The Simplified ETR is calculated as the Simplified Covered Taxes (income tax expense per the accounts, adjusted for non Covered Taxes and uncertain tax positions) divided by PBT from the CbCR. 

3. Routine profits test: the PBT from the CbCR is smaller or equal to the Substance Based Income Exclusion calculated according to the model rules. This test will also be met for a jurisdiction where it has a loss per the CbCR. 

A ‘qualifying’ CbCR is a CbCR compiled with data drawn either from the group consolidated statement or from the individual entity accounts, provided they are prepared using an acceptable financial standard, as defined in the GloBE rules.

Implications for your GloBE compliance: a real simplification?

A critical question is whether these new rules will lead to a tangible simplification for MNEs or whether the use of the safe harbour will be the exception rather than the norm. In many instances, the CbCR safe harbour may reduce the immediate burden of compliance. Taxpayers within the scope of GloBE already prepare CbCR data and given the testing thresholds, significant portions of MNE groups could fall, as intended, into the safe harbour provisions, provided the CbCR is ‘qualifying’.

However, this does not mean that groups should delay considering and implementing changes to their data gathering and compliance processes. It may be the case that not all jurisdictions benefit from the safe harbour such that a full data set is required for at least one jurisdiction. In this case, MNEs should consider whether it is more efficient to undertake a data gap analysis and compliance for all jurisdictions rather than undertake the exercise twice. 

In addition, the safe harbour provisions feature the ‘once out, always out’ rule, whereby a jurisdiction not meeting any of the safe harbour provisions in one period cannot benefit from any of the safe harbours in a subsequent period. Further, one-off transactions, or anomalous, unexpected results have the potential to push a territory outside the safe harbour conditions. In the same way, the increasing rates (from 15% in 2024 to 17% in 2026) could exclude a jurisdiction from the safe harbour. This could mean that at the last minute, an MNE group has to engage in a disjointed and fragmented data-gathering exercise that will include having to build the compliance infrastructure for different jurisdictions in different periods rather than approaching it on a holistic basis. 

A new, centre-stage role for your CbCR?

So far, tax authorities have used the CbCR as a directional risk assessment tool, following the 2015 IF agreement on Action 13 which restricts the use of the CbCR to “high level transfer pricing risk assessment, but should not be used by itself as a basis for proposing changes to transfer prices or adjusting a taxpayer's income using global formulary apportionment.” In addition, according to the OECD guidance, tax authorities should not require a reconciliation of the CbCR with the consolidated statements. In this context, as a general rule, the CbCR and its data integrity have not been scrutinised in depth and have been used for the intended purpose by tax authorities. 

This could, and most likely will change. Under the new rules, tax authorities can challenge the use of the CbCR safe harbour. Policymakers have repeatedly reassured that the role of the CbCR will not be transformed and that they recognise that CbCR data is different and sometimes inconsistent with the data needed for GloBE compliance. Nonetheless, because for three years it will be central to determining whether top-up taxes arise, the function of the CbCR will naturally transition beyond being a simple risk assessment tool. Consequently, tax authorities may want to focus more substantially on it. This could be a step change in how MNEs need to approach and document the preparation of their CbCR.

In this context, what are the key questions that MNEs should consider when assessing whether their CbCR is ready for the new environment? 

• Is your CbCR a ‘qualifying’ CbCR?
  

Answering this question could be challenging also because the OECD and local GloBE rules remain partially unclear. For instance, it is not clear whether the CbCR has to be prepared using solely ‘top down’ or ‘bottom up data’, or whether the CbCR can use a mix of the two approaches. It is also currently uncertain whether consolidation adjustments will have to align in the GloBE and CbCR positions.

• Has your CbCR been prepared compliantly, following the relevant OECD and national rules and regulations? Do you have documentation in place to support the preparation and decisions made in relation to the data?

This question relates to the process for compiling the CbCR and includes identifying and collecting the necessary data, allocating data to the appropriate jurisdictions (including consolidation adjustments), aggregating the data within a jurisdiction and definitional decisions and judgements. CbCR preparation is currently governed by guidance which often leaves some uncertainty in relation to calculation definitions and therefore, lends itself to judgement. 

• Are you aware of the consequences of your CbCR on the Pillar 2 safe harbour provisions?
  

CbCR data will now have a concrete effect on your Pillar 2 compliance. Has your CbCR been prepared with this important implication in mind? Are you aware of the implication of the “once out, always out” rule? Do you know what the impact would be if you were required to take a different approach with relevant elements of your CbCR data - e.g. purchase price adjustments or consolidation adjustments?

Conclusion

A safe harbour regime leading to simplified implementation is helpful and for some groups, it may allow better preparation for the full implementation of Pillar 2. However, it is unclear to what extent MNEs will be able to fully make use of the safe harbour, and whether the scrutiny and focus of tax administrations merely shifts from one set of calculations to another.

We could see the evolution of CbCR from being a directional risk assessment tool (not audited) to becoming a set of data determining whether a GloBE top-up tax arises. MNEs will need to review their CbCR in the light of its new role, with three questions in mind: 

1. Is your CbCR a qualified CbCR? 
2. Has your CbCR been prepared compliantly and can it withstand a deeper scrutiny by authorities? 
3. How should your CbCR be revised so as to shape your Pillar 2 compliance as efficiently and effectively as possible?   

PwC has developed a technology tool and a technical methodology which can assist in your overall readiness for the Pillar 2 Rules and your safe harbour analysis. Our approach will help you frame what we view as two critical aspects of most MNEs’ analysis:

• Determining where the safe harbour rules can be applied to your group: On the basis of your data our CbCR modelling tool can assess whether and where the Pillar 2 Transitional CbCR Safe Harbour provisions apply to your group. This exercise will also identify where the full data gap analysis and calculations are needed, should a jurisdiction not benefit from the safe harbour.
• Determining how your CbCR calculations align with the OECD Guidance and your Pillar 2 outcomes: We can carry out a technical review of the current CbCR process along with associated inputs, outputs and definitional points. The aim is to ensure alignment with OECD Guidance and best practice, with the Transitional CbCR Safe Harbour provisions and enhance your Pillar 2 compliance outcomes. 

To discuss these questions, or any other points relating to Pillar 2, please contact the authors of this article directly, or speak to your usual PwC contact.