Loading...
Loading...
Borys Ulanenko
CEO of ArmsLength AI
Get the latest transfer pricing insights, AI benchmarking tips, and industry updates delivered straight to your inbox.
A pillar two safe harbour is a simplification mechanism that can reduce (or temporarily eliminate) detailed GloBE calculations where the risk of Top-up Tax is low. The most used relief is the Transitional CbCR Safe Harbour, which can deem a jurisdiction’s Top-up Tax to zero during the Transition Period if you pass one of three mechanical tests (de minimis, simplified ETR, or routine profits) using Qualified CbC Report and Qualified Financial Statements data (OECD Safe Harbours and Penalty Relief, Dec 2022). In practice, eligibility often turns less on the math and more on CbCR data lineage—mixing statement sources or making “helpful” adjustments can disqualify a jurisdiction (OECD Administrative Guidance, Dec 2023).
“Safe harbour” is used loosely in the market, but under OECD Pillar Two (GloBE) there are two concepts practitioners typically mean:
The CbCR connection matters because the Transitional CbCR Safe Harbour uses data primarily drawn from the group’s Country-by-Country reporting package—so CbCR stops being a “high-level transparency report” and becomes an input that can determine whether Top-up Tax is deemed zero (OECD Safe Harbours and Penalty Relief, Dec 2022).
If you need a refresher on Pillar Two fundamentals (scope, IIR/UTPR/QDMTT mechanics), start with our overview: /blog/pillar-two-guide and the glossary entry: /glossary/pillar-two.
The Transitional CbCR Safe Harbour applies by Tested Jurisdiction and can deem the jurisdictional Top-up Tax to zero for a Fiscal Year in the Transition Period if any of the three tests is satisfied (OECD Safe Harbours and Penalty Relief, Dec 2022).
| Test | What it’s trying to prove | Core thresholds / rule | Main data sources (OECD design) |
|---|---|---|---|
| De minimis | Jurisdiction is too small to matter | Revenue < €10m and PBT < €1m | Qualified CbC Report |
| Simplified ETR | ETR is safely above the minimum during transition | Simplified ETR ≥ 15% / 16% / 17% (by year) | Qualified CbC Report + Qualified Financial Statements |
| Routine profits | Excess profit is not present | PBT ≤ SBIE | Qualified CbC Report + SBIE inputs under GloBE rules |
Source: OECD Safe Harbours and Penalty Relief (Dec 2022) and SBIE transition mechanics in the OECD GloBE Model Rules (Dec 2021).
Rule: A jurisdiction passes if both are true (OECD Safe Harbours and Penalty Relief, Dec 2022):
Why it’s practical: it often lets you conclude quickly, without building the simplified ETR numerator or SBIE calculations.
Practice note: Ensure you’re using the jurisdictional totals as presented in the CbCR prepared from Qualified Financial Statements—this test is simple, but the qualification rules are not.
Rule: A jurisdiction passes if:
Core formula (OECD design):
The common operational issue isn’t the division—it’s getting the numerator right without breaking the OECD “no adjustments” and “consistent source” requirements (OECD Administrative Guidance, Dec 2023).
Rule: A jurisdiction passes if:
SBIE is computed under GloBE rules and uses transitional carve-out rates (OECD GloBE Model Rules, Dec 2021, Article 9.2).
Many groups run the tests in this order: (1) de minimis, (2) simplified ETR, (3) routine profits. It minimizes SBIE work while still capturing the most common “passes.”
A jurisdiction can only benefit from the Transitional CbCR Safe Harbour if the underlying CbCR data is a Qualified CbC Report, meaning it is prepared and filed using Qualified Financial Statements (OECD Safe Harbours and Penalty Relief, Dec 2022).
At a high level, Qualified Financial Statements include (OECD Safe Harbours and Penalty Relief, Dec 2022):
The detail that matters operationally is not the definition—it’s how OECD guidance polices data sourcing and data handling.
OECD December 2023 Administrative Guidance introduced clarifications that are now central to safe harbour governance.
For safe harbour computations, all relevant data used for an Entity or Permanent Establishment should come from the same Qualified Financial Statements source. Mixing sources (e.g., PBT from consolidation pack, taxes from local statutory accounts) can disqualify the Tested Jurisdiction (OECD Administrative Guidance, Dec 2023).
This “no mixing” constraint is a frequent failure mode because CbCR processes often merge data from multiple systems (statutory ledgers, management reporting, consolidation). If you cannot prove consistent sourcing, assume the jurisdiction’s Transitional CbCR Safe Harbour position is vulnerable.
A CbCR can be “qualified” for some jurisdictions and not for others, depending on whether each jurisdiction’s data is sourced from Qualified Financial Statements (OECD Administrative Guidance, Dec 2023). This is useful (you may still claim safe harbour where you’re clean), but it increases governance complexity.
OECD guidance generally disallows adjustments to data drawn from Qualified Financial Statements when computing the Transitional CbCR Safe Harbour—even if the adjustment is intended to better align the dataset to GloBE (OECD Administrative Guidance, Dec 2023).
This is where transfer pricing and Pillar Two collide: post-close true-ups, reclassifications, and “finalization” entries are normal in tax processes, but they can break safe harbour eligibility if they change the safe harbour dataset outside permitted OECD exceptions.
A recurring pitfall is trying to use the CbCR template’s “income tax paid” or “income tax accrued” as the numerator. Under the OECD design, the simplified ETR numerator is based on income tax expense from Qualified Financial Statements, with required removals (OECD Safe Harbours and Penalty Relief, Dec 2022).
Uncertain Tax Positions (UTPs) must be removed from income tax expense for simplified covered taxes, including UTP components embedded in return-to-provision adjustments (OECD Administrative Guidance, Dec 2023).
December 2023 guidance also clarifies specific allocation rules for simplified ETR purposes (for example, tax expense related to PE income should be allocated to the PE jurisdiction as described in the guidance). These are exactly the kinds of “small” mapping decisions that can swing a simplified ETR around the 15%/16%/17% threshold (OECD Administrative Guidance, Dec 2023).
The transitional relief is powerful precisely because it’s time-limited. Planning needs to be calendar-aware.
The Transition Period covers Fiscal Years beginning on or before 31 December 2026, but not including a Fiscal Year that ends after 30 June 2028 (OECD Safe Harbours and Penalty Relief, Dec 2022).
| Group year-end pattern | Last FY that can still be within the OECD Transition Period (typical) | Why |
|---|---|---|
| Calendar year (Jan–Dec) | FY beginning 1 Jan 2026 | Begins on/before 31 Dec 2026 and ends before 30 Jun 2028 |
| Non-calendar year (e.g., Jul–Jun) | FY beginning 1 Jul 2026 (ending 30 Jun 2027) | Meets the “begins by 31 Dec 2026” and “not ending after 30 Jun 2028” guardrail |
Domestic implementation can vary (start dates, elections, filing mechanics). Use the OECD transition window as the baseline, then confirm local law where you have Constituent Entities.
OECD July 2023 Administrative Guidance introduced a Transitional UTPR Safe Harbour under which the UTPR Top-up Tax Amount for the UPE jurisdiction can be deemed zero for a short period if conditions are met (including a nominal corporate income tax rate ≥ 20%, as described in the guidance) (OECD Administrative Guidance, July 2023).
The relevant Fiscal Years are those (≤ 12 months) that begin on or before 31 Dec 2025 and end before 31 Dec 2026 (OECD Administrative Guidance, July 2023).
Separate from the transitional CbCR relief, OECD July 2023 guidance established standards for a permanent QDMTT Safe Harbour intended to avoid duplicated computations where a jurisdiction’s Qualified Domestic Minimum Top-up Tax meets OECD-agreed standards (OECD Administrative Guidance, July 2023).
Where the safe harbour applies (generally by election and subject to the guidance conditions), the IIR/UTPR Top-up Tax for that jurisdiction can be treated as zero, relying instead on the domestic minimum tax outcome (OECD Administrative Guidance, July 2023).
OECD guidance frames three standards (OECD Administrative Guidance, July 2023):
The QDMTT safe harbour is not “automatic.” You still need to confirm the jurisdiction’s QDMTT design and whether you meet the election/“payable” conditions described in the OECD guidance.
Below is a workflow that aligns with the OECD mechanics and the most common failure points in real implementations.
Create a jurisdiction-level matrix that answers:
This is explicitly contemplated by OECD guidance that qualification can differ by jurisdiction (OECD Administrative Guidance, Dec 2023).
Minimum controls that materially improve success rates:
Treat the safe harbour dataset as “regulatory reporting data.” If you wouldn’t adjust a filed statutory number without an audit trail, don’t adjust a safe harbour input.
Even when multiple tests pass, document:
OECD materials include a lock-out concept commonly described as “once out, always out”: if you do not apply the Transitional CbCR Safe Harbour for a jurisdiction in a year when you are subject to GloBE, you generally can’t apply it for that jurisdiction in later years (OECD Safe Harbours and Penalty Relief, Dec 2022).
That turns safe harbour into a multi-year strategy decision, not a year-by-year convenience election.
Even if safe harbour deems Top-up Tax to zero, build a light-touch directional model for:
This avoids “cliff effects” when the transition period expires.
The mechanics below reflect the OECD design (confirm local implementation details in each jurisdiction).
Facts (FY beginning 1 Jan 2025; Tested Jurisdiction = Country A):
Test (OECD de minimis thresholds):
Result: Country A passes de minimis → Transitional CbCR Safe Harbour can apply and Top-up Tax is deemed zero for that jurisdiction for FY 2025 (OECD Safe Harbours and Penalty Relief, Dec 2022), assuming the jurisdiction’s CbCR data is qualified and meets sourcing/no-adjustment rules.
Facts (FY beginning 1 Jan 2025; Tested Jurisdiction = Country B):
Step 1: Simplified Covered Taxes
Step 2: Simplified ETR
Step 3: Compare to transition rate
Result: 16.67% ≥ 16% → Country B passes simplified ETR and Top-up Tax is deemed zero under the Transitional CbCR Safe Harbour (subject to qualification and data-handling rules).
Facts (FY beginning 1 Jan 2024; Tested Jurisdiction = Country C):
Assume transitional SBIE rates for FY 2024 (OECD GloBE Model Rules, Dec 2021, Article 9.2):
Compute SBIE
Test
Result: Country C passes routine profits → Transitional CbCR Safe Harbour can deem Top-up Tax zero (OECD Safe Harbours and Penalty Relief, Dec 2022), assuming qualified inputs and compliant sourcing.
In all three examples, the “win” is not just a zero Top-up Tax outcome—it’s avoiding full jurisdictional GloBE computations and the operational burden of building complete covered tax/deferred tax detail in the early years.
This article focuses on OECD-designed mechanics; domestic law controls in each jurisdiction. A few operational realities are worth calling out:
EU Member States implement Pillar Two through Council Directive (EU) 2022/2523, generally applying rules for FYs beginning from 31 Dec 2023 (i.e., 2024) with UTPR-related provisions generally from 31 Dec 2024 (i.e., 2025), subject to options and derogations (Directive (EU) 2022/2523).
The UK has implemented Pillar Two via Multinational Top-up Tax and Domestic Top-up Tax, with UTPR effective for accounting periods beginning on/after 31 Dec 2024, supported by HMRC operational guidance and processes (see HMRC collection: https://www.gov.uk/government/collections/multinational-top-up-tax-and-domestic-top-up-tax).
Even without US domestic GloBE rules, US-headed groups can be subject to IIR/UTPR/QDMTT regimes elsewhere—and the Transitional CbCR Safe Harbour relies on CbCR data quality. US CbCR filing mechanics (Form 8975 framework) are governed under rules such as 26 CFR §1.6038-4.
If you’re building a Pillar Two operating model, the safe harbour question should sit inside a broader data and documentation plan.
It’s a transitional CbCR safe harbour that can deem a Tested Jurisdiction’s Top-up Tax to zero if you meet one of three tests (de minimis, simplified ETR, or routine profits) using data from a Qualified CbC Report and Qualified Financial Statements (OECD Safe Harbours and Penalty Relief, Dec 2022).
Under the OECD design, it applies for Fiscal Years beginning on or before 31 Dec 2026, but not including a Fiscal Year ending after 30 Jun 2028 (OECD Safe Harbours and Penalty Relief, Dec 2022).
They are: de minimis, simplified ETR, and routine profits (OECD Safe Harbours and Penalty Relief, Dec 2022).
The transition rates are 15% (FYs beginning 2023–2024), 16% (FYs beginning 2025), and 17% (FYs beginning 2026) (OECD Safe Harbours and Penalty Relief, Dec 2022).
A Qualified CbC Report is a CbCR prepared and filed using Qualified Financial Statements (OECD Safe Harbours and Penalty Relief, Dec 2022), with jurisdiction-specific qualification assessed based on sourcing and data-handling rules clarified in OECD December 2023 guidance.
Generally, no. OECD December 2023 guidance indicates that adjusting Qualified Financial Statement data used for safe harbour computations can disqualify the Tested Jurisdiction, except where OECD guidance explicitly requires adjustments (OECD Administrative Guidance, Dec 2023).
It refers to the OECD-designed lock-out: if you don’t apply the Transitional CbCR Safe Harbour for a jurisdiction in a year when you are subject to GloBE, you generally cannot apply it for that jurisdiction in later years (OECD Safe Harbours and Penalty Relief, Dec 2022).
It’s a mechanism that can deem IIR/UTPR Top-up Tax to zero for a jurisdiction where a QDMTT meeting OECD standards applies (typically by election), reducing duplicated computations (OECD Administrative Guidance, July 2023).
UTPs must be removed from income tax expense when computing Simplified Covered Taxes, including UTP amounts embedded in return-to-provision adjustments (OECD Administrative Guidance, Dec 2023).
Data governance and lineage: non-qualified sources, mixed sourcing, and prohibited adjustments are common disqualifiers, and weak documentation makes it harder to defend the position if challenged (OECD Administrative Guidance, Dec 2023).