Pillar Two: OECD releases new safe harbours, including U.S. group exemption

On 5 January 2026, the OECD released the details of a package of new safe harbours for the Pillar Two regime. This package also includes a new mechanism that will effectively exempt U.S. parented multi-national enterprises (MNEs) from the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR) on the basis the U.S. has a tax regime that is aligned with the global minimum tax framework. It is expected that Australia and other jurisdictions that have introduced Global Minimum Tax regimes will incorporate the new safe harbours into their Pillar Two enabling legislation.

New safe harbours and U.S. exemptions explained

The OECD Pillar Two global anti-base erosion (GloBE) model rules are designed to ensure that large MNEs have an effective tax rate of at least 15 per cent in each jurisdiction in which they operate. These rules generally apply to MNE groups with annual consolidated revenues of at least EUR 750 million in at least two out of the prior four accounting periods. Australia and more than 56 other jurisdictions have enacted domestic legislation implementing Pillar Two, including all of the EU member states, the UK, Canada, Japan, Malaysia, Korea and New Zealand.

The Global Minimum Tax framework is a substantial global tax policy initiative. Following the introduction of the foundations of the Global Minimum Tax (GMT) regime, the OECD has agreed on a package of further measures that support the fundamental principles of the GMT whilst providing for increased certainty and simplicity in relation to the compliance and reporting obligations. 

1. Permanent simplified ETR safe harbour

The permanent simplified ETR safe harbour is intended to reduce administrative burdens by allowing MNEs to demonstrate a sufficient ETR using simplified data rather than full GloBE calculations. Under this safe harbour, an MNE group’s ETR is determined under a simplified calculation based on the income and taxes drawn from the MNE group’s consolidated financial statements data, but with minimal adjustments. The simplified ETR safe harbour also allows for a simplified deferred tax calculation.

The permanent simplified ETR safe harbour will be available to MNE groups in all jurisdictions from the beginning of 2027 or the beginning of 2026 in certain circumstances.

Key features of the permanent simplified ETR safe harbour are:

• Tested jurisdiction requirements: The simplified ETR safe harbour is applied to the jurisdiction subgroups instead of an entity-by-entity analysis, which is a simplification compared to a full GloBE calculation. Some entities may qualify under the simplified ETR safe harbour that were not capable of applying the transitional CbCR safe harbour.
• Simplified income: The starting point for calculating simplified income is the jurisdictional income (i.e. jurisdictional profit before tax or JPBT), which is the MNE’s aggregated income in the tested jurisdiction, with certain adjustments including:
  • Mandatory adjustments, such as removing excluded dividends and equity gains or losses and policy-disallowed expenses (e.g. bribes and kickbacks)
  • Potential adjustments (subject to election/circumstances): Asymmetric foreign exchange gain or loss, accrued pension expense and transfer pricing
  • Industry adjustments to exclude insurance income and shipping income
  • Adjustments for equity reported items
  • M&A simplification adjustments to exclude the impact of certain M&A transactions.
• Simplified taxes: The simplified taxes calculation is based on the jurisdictional income tax expense reported in the financial accounts and incorporates deferred tax accounting to address the impact of timing differences and to minimise record-keeping burdens. The income tax expense is adjusted for:
  • Non-covered taxes and tax refunds
  • Alignment with simplified income
  • Removal of uncertain tax positions
  • Deferred taxes at the 15 per cent minimum rate
  • Negative taxes
  • Optional inclusion of accrued covered taxes that are not included in the financial statements.
• Special elections: The simplified ETR safe harbour introduces new elections that MNEs can make to mitigate the administrative burden:
  • Post-year adjustments recognised when reflected in the financial statements
  • An option to include the income and tax of a permanent establishment in the head office calculation
  • Any of the GloBE elections permitted under Chapter 3 of the GloBE model rules and commentary.

The new permanent ETR safe harbour replaces the transitional simplified ETR safe harbour. The transitional ETR safe harbour is based on the CbC report, and in contrast, the permanent simplified ETR safe harbour will rely primarily on the financial statements (similar to the GloBE calculation).

For MNE groups that have invested in processes to do the GloBE calculations, there may be fewer advantages in using the permanent simplified ETR safe harbour, but for MNE groups that have not yet invested heavily in Pillar Two compliance, the new ETR method may offer helpful simplification.

2. Substance-based Tax Incentive (SBTI) safe harbour

In recognition of the importance of government tax incentives as a tool to promote investment, research and development (R&D), and economic development, the OECD has introduced a new safe harbour that allows for certain Qualified Tax Incentives (QTI) to be added into the calculation of covered taxes of constituent entities. A QTI is one that is substance-based and generally available to taxpayers based on either expenditures incurred or tangible property produced in the jurisdiction. This safe harbour will be available for fiscal years starting on or after 1 January 2026.

QTIs are capped at:

• 5 per cent of the higher of payroll expense or depreciation of tangible assets, or
• One per cent of the carrying value of eligible tangible assets (if a five-year election is made).

It is expected that the Australian non-refundable R&D tax offset, as an example, will be a QTI and included in the calculation of covered taxes. We await the issue of the Australian implementing legislative instrument to confirm this.

Extension of the transitional CbCR safe harbour

To allow sufficient time for the smooth implementation of the permanent simplified ETR safe harbour, the transitional CbCR safe harbour has been extended for one year. This will provide in-scope taxpayers the choice of either the permanent simplified ETR safe harbour or the transitional CbCR safe harbour during a transition period.

The transitional CbCR safe harbour is now extended to fiscal years commencing on or before 31 December 2027, but not to fiscal year-ends that end after 30 June 2029.

3. Side-by-Side safe harbour

The U.S. Government has consistently advised it will not be implementing Pillar Two legislation on the basis that it has similar minimum tax measures in place, such as the Global Intangible Low-Taxed Income (GILTI), and Base Erosion and Anti-Abuse Tax (BEAT) regimes.

The U.S. and the OECD have come to an agreement to, in effect, exclude MNEs with U.S. UPEs from two of the Pillar Two tax measures, being the IIR and UTPR. The Qualified Domestic Minimum Top-up Tax (QDMTT) will still apply to MNE subsidiaries of U.S. parented groups where the subsidiaries are in jurisdictions that have implemented a QDMTT.

The SbS safe harbour applies to exempt the application of the IIR and UTPR for MNE groups that have their UPE located in a jurisdiction that the OECD determines has:

• An eligible domestic tax system
• A comprehensive worldwide tax regime.

The jurisdiction must have enacted its eligible domestic tax system and eligible worldwide tax system prior to 1 January 2026.

An eligible domestic system is one that has:

• A statutory nominal corporate income tax rate of at least 20 per cent after accounting for preferential adjustments and sub-national corporate income taxes
• A QDMTT or corporate alternative minimum tax based on financial statement income at a nominal rate of at least 15 per cent
• No material risk that covered MNE groups headquartered in a jurisdiction will be subject to an ETR below 15 per cent.

An eligible worldwide tax system is one that has:

• A comprehensive tax regime covering all resident corporations on foreign income, including the active and passive income of foreign branches and controlled foreign companies (CFCs)
• Incorporated substantial mechanisms that operate unilaterally to address BEPS risks
• No material risk that in-scope MNE groups headquartered in a jurisdiction will be subject to an ETR below 15 per cent on foreign operations.

At this stage, the U.S. is the only jurisdiction that has been approved by the OECD for the SbS safe harbour.

The SbS safe harbour has no effect on the QDMTT in jurisdictions that have implemented a QDMTT e.g. subsidiaries of U.S. parented groups, where the subsidiary is in a jurisdiction that has implemented a QDMTT will still be subject to the QDMTT.

The SbS safe harbour applies for fiscal years commencing on or after 1 January 2026. Therefore, MNE groups with a U.S. headquartered UPE must still apply the IIR and UTPR measures for group entities in jurisdictions that have enacted the IIR and/or UTPR for fiscal years that started before 1 January 2026.

4. UPE safe harbour

The UPE safe harbour also applies to fiscal years commencing on or after 1 January 2026 and effectively replaces the transitional UTPR safe harbour. 

Where an MNE group has its UPE located in a jurisdiction with a qualified UPE regime and makes an election to apply the UPE safe harbour, the UPE and all its constituent entities located in the UPE jurisdiction will be exempt from the UTPR.

A qualified UPE regime has the same conditions that apply under the SbS safe harbour, except there is no need to have a comprehensive worldwide tax regime, and the jurisdiction’s eligible domestic tax system must have been enacted and in effect as at 1 January 2026.

How BDO can help

Should you have any questions regarding these new safe harbours or exemptions, please contact your BDO tax adviser for further guidance, or visit our tax services page to see how we can help.