BDO Corporate Tax News

As the OECD’s BEPS Pillar Two framework gains traction across jurisdictions, multinational enterprises (MNEs) are navigating a rapidly evolving landscape of global tax reforms. Among the transitional measures introduced, the transitional CbCR safe harbour stands out as a key mechanism aimed at easing the initial compliance burden.

The Promise of Relief

The transitional CbCR safe harbour provides temporary relief to MNE groups by allowing jurisdictions to be treated as having a zero top-up tax, thereby exempting them from full GloBE calculations provided they meet any one of the following three tests based on qualified CbCR and financial data:

• De Minimis Test: Jurisdictional total revenue is less than EUR 10 million and the profit (or loss) before income tax is less than EUR 1 million.
• Simplified ETR Test: The jurisdiction’s effective tax rate, calculated using the CbCR profit and qualified financial statement tax expense, meets or exceeds a threshold (15% for 2024, 16% for 2025 and 17% for 2026).
• Routine Profits Test: The profit (loss) before income tax in the jurisdiction is equal to or less than the Substance-based income exclusion under the GloBE rules.

This transitional relief enables MNEs to leverage existing CbCR data and qualified financial information to determine whether a jurisdiction qualifies for exemption from detailed GloBE computations. It is particularly beneficial during the initial years of implementation, as it:

• Reduces compliance complexity by allowing simplified compliance.
• Buys time for MNEs to build robust systems and processes aligned with GloBE requirements.
• Minimises immediate top-up tax exposure in jurisdictions where the safe harbour applies.

For many tax teams, this relief is a welcome step, especially in jurisdictions like the UAE, where Pillar Two is being implemented alongside the newly released domestic corporate tax rules. While it offers short-term relief, it also presents long-term risks if not approached strategically.

The Hidden Challenges

Despite its benefits, the safe harbour is not without its challenges. MNEs must be aware of several practical and technical issues that could impact eligibility and long-term compliance:

• Data alignment: CbCR data was originally designed for high-level risk assessment, not for detailed tax computations. It lacks the granularity and adjustments required under Pillar Two, such as deferred tax accounting, CFC considerations and timing differences. As a result, assessing the safe harbour tests solely based on CbCR data may prove challenging, given its lack of alignment with the specific Pillar Two requirements.
• Qualification criteria: Only “qualified” CbCRs are eligible for the safe harbour. These must be based on consolidated or entity-level financials prepared using acceptable accounting standards (or authorised accounting standards that are reliable). Ensuring consistent qualification across all jurisdictions can be complex, particularly for decentralised groups with varied reporting practices.
• “Once out always out” rule: If a jurisdiction fails to qualify for the safe harbour in any fiscal year, the MNE group cannot reapply the safe harbour for that jurisdiction in subsequent years. This “once out, always out” rule means that a single lapse could result in permanent exclusion from the simplified compliance in that jurisdiction.
• Limited timeframe: The safe harbour applies only to fiscal years beginning before 1 January 2027 and ending before 1 July 2028. This narrow window requires MNEs to act swiftly to benefit from the relief while simultaneously preparing for full GloBE compliance once the transition period ends.
• Jurisdictional Inconsistencies: Different jurisdictions may interpret or implement the safe harbour differently. This creates uncertainty for MNEs operating across borders, as eligibility and application may vary significantly from one country to another.
• False sense of security: Perhaps the most significant risk is complacency. The safe harbour may delay the urgency to build GloBE-compliant systems, train teams and align internal processes. When the relief expires, MNEs could find themselves underprepared for the full scope of Pillar Two compliance.

BDO Insights

To benefit from the transitional CbCR safe harbour, MNEs should treat it as a strategic transition tool, not a long-term solution. Key actions to consider include:

• Using the relief period wisely to build internal capabilities, automate data collection and align reporting systems with GloBE requirements.
• Conducting preliminary assessments to identify jurisdictions where the safe harbour applies and where full compliance may be needed.
• Engaging with advisors early to interpret local rules, assess risks and prepare for post-relief compliance.
• Staying technically updated on evolving OECD guidance and domestic regulations to ensure readiness and minimise future compliance risks.

The transitional CbCR safe harbour is a valuable tool but only if used strategically. MNEs must look beyond the short-term relief and prepare for the full scope of Pillar Two compliance. The real challenge lies not in avoiding complexity today, but in being ready for it tomorrow.

Ashish Athavale
Mufaddal Safdari
Abhishek Palav
BDO in United Arab Emirates