Episode Transcript
[00:00:00] Foreign.
[00:00:04] Hello everyone and welcome to our podcast series A and M Tax Talks. Within these sessions we are looking to provide you with tax policy updates in which we will bring you insights into the latest developments in global tax policy and controversy matters.
[00:00:21] I'm Jordan Gill, an International Tax Director heavily supporting the Pillar 2 and international tax practice of of Alvarez and Marcel. Based out of Dubai, I have focused the last 10 years of my career on specialising in international tax matters both within the UK and the Middle East. Upon the release of the first rendition of the model rules in 2021, I sought to pivot my international tax specialism to incorporate the evolving Pillar 2 framework.
[00:00:50] From that point I've looked to support my multinational clients to navigate the complexities and challenges that Pillar two brings alongside building on my core experience in tax, local corporate tax law and technical tax accounting considerations which form core pillars of the Globe Model Rules.
[00:01:09] So what is the focus of today's session?
[00:01:12] This is a continuation of our series in which we are digesting each of the key areas of the OECD and G20 side by side package, commenting on the key technical items within each of these updates and and looking to then provide practical guidance to impacted multinational groups on how these updates may impact their compliance and reporting readiness. Today we'll be looking into the extension of the CBCR Safe Harbors and what that could mean to multinational groups within the Pillar 2 framework.
[00:01:43] Firstly, it is worth us quickly touching on the introduction of the Transitional CBTR Safe Harbors and why they were introduced in the first place.
[00:01:51] In December 2022, the Inclusive Framework members agreed to introduce Transitional CBCR Safe Harbours as a transitional support mechanism to the Globe Model Rules in order to provide in scope multinationals with a reduction to the initial data collection and compliance burden, providing transitional relief in the first few years of the group falling within the Framework.
[00:02:16] This was in response to the Inclusive Framework appreciating the technical complexity of the new Globe method alongside the new data requirements that the Pillar two compliance would bring.
[00:02:29] The hope behind such transitional safe harbors was that multinationals would be provided more time to ensure their internal processes were updated and the key stakeholders within the relevant business functions were appropriately upskilled to deliver the new compliance task based on the new data requirements. A successful application of the Transitional CBCR Safe Harbors significantly reduces the compliance and filing requirements on the basis that the computational data required is related to the qualifying CBCR report and financial accounting data.
[00:03:06] Upon a successful application, the topot tax of the applicable jurisdiction is effectively deemed to be zero as way of A Recap the transitional CBCR safe harbors include three available tests, these being the effective tax rate test, which looks at a simplified effective tax rate calculation based on a simplified cover tax calculation over a jurisdiction's profits as per the qualified CBCR report secondly the de minimis test, which considers if the CBCR revenues and profits will fall below the respective 10 million euro and 1 million euro thresholds and finally the routine profits test which looks to assess if a jurisdiction substance based income exclusion, which is briefly the percentage of a jurisdiction's qualifying eligible payroll costs and eligible tangible assets over the profits as per the qualified cbcr. So in such a case, if the SBIE exceeds the profits as per the qualified cbcr, the routine profits test would be available.
[00:04:20] Okay, so what's changed? Previously, the transitional CBCR safe harbors had been due to apply to fiscal years beginning on or before 31 December 2026.
[00:04:33] However, within the side by side package this has now been extended to fiscal years beginning on or before 3031 December 2027.
[00:04:42] However, this does not include fiscal years that end after 30 June 2029.
[00:04:50] As such, the three available safe harbours will continue to apply for multinational groups within their 2027 fiscal years, meaning that the transitional relief would have been available for a total of four years.
[00:05:04] Therefore, for qualifying jurisdictions in which these safe harbours apply, they have potentially benefited from four years of relief from applicable income inclusion rules and domestic minimum top up tax regimes and in some cases potentially three years of protection against applicable qualifying utprs. One useful point to note within the update is that the effective Tax Rate test For the effective tax rate test, the 17% rate applied to 2026 fiscal years is also going to apply for the extended 2027 fiscal year. Finally, with the introduction of the simplified ETR safe harbour, it is clear that the Inclusive Framework intends to find permanent solutions to the transitional simplifications granted within the CBCR safe harbors. The OECD provides assurances within the side by side package that the de minimis and routine profits test will also be made permanent at some point in the future, with the mechanics of this calculation still to be approved by the Inclusive Framework members.
[00:06:15] So what impact does this have on Inscope multinationals?
[00:06:19] These groups can continue to use simplified CBCR based calculations to demonstrate compliance and potentially avoid a full globe calculation for one more year than previously anticipated.
[00:06:32] This will continue to provide significant compliance savings for Inscope multinationals alongside deferring the full data and compliance complexities to the 28th fiscal year.
[00:06:44] Thank you for joining us today.
[00:06:47] Stay with us as we continue this journey in our upcoming podcast.
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[00:07:14] Thank you so much for your time.
