BDO breaks down OECD global minimum tax safe harbours

On 5 January, the Organisation for Economic Co-operation and Development (OECD) unveiled a fresh ‘side-by-side’ global minimum tax framework, which included special safe harbour arrangements for US multinationals under global minimum tax rules.

Last Thursday (22 January), BDO provided a breakdown of the OECD’s 88-page administrative guidance package, likely to be integrated soon into Australia’s base erosion and profit shifting (BEPS) legislation.

In the updated framework, the OECD introduced a permanent simplified effective tax rate (ETR) safe harbour, which would allow eligible multinational entities (MNEs) to submit aggregated income and tax data.

“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,” BDO said.

The simplified ETR would be applied to jurisdiction subgroups instead of on an entity-by-entity basis, reducing compliance burdens. Simplified income would be calculated based on aggregated income in each jurisdiction, subject to certain adjustments.

Next, the OECD introduced a substance-based tax incentive (SBTI) safe harbour to recognise the policy intent of domestic tax incentives such as the Research and Development Tax Incentive (RDTI) in Australia.

Under the SBTI, certain qualified tax incentives designed to achieve a material policy objective – such as the encouragement of R&D activities – would be added to the calculation of covered taxes of constituent entities.

Qualified tax incentives would be capped at 5 per cent of payroll expense or depreciation of tangible assets, whichever was higher. Alternatively, they could be capped at 1 per cent of the carrying value of eligible tangible assets, if a five-year election was 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,” BDO noted.

The OECD also introduced a new ‘side-by-side’ (SbS) safe harbour following US resistance to global minimum tax rules, BDO said.

“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,” BDO said.

This safe harbour would be available to jurisdictions with eligible domestic and worldwide tax systems enacted before 1 January 2026.

Eligible domestic systems needed to have a nominal corporate income tax of at least 20 per cent, a qualified domestic minimum top-up tax (QDMTT), and no material risk that domestically headquartered MNEs would be subject to an effective tax rate below 15 per cent.

Worldwide tax systems would need to include a comprehensive regime covering all resident corporations on foreign income, incorporate substantial mechanisms to address profit shifting risks, and ensure domestically headquartered MNEs would be subject to at least a 15 per cent effective tax rate on foreign operations.

Qualified side-by-side entities would be exempt from global minimum tax rules, including the income inclusion rule (IIR) and the undertaxed profits rule (UTPR).

Currently, the SbS safe harbour only applies to US-headquartered multinationals. The QDMTT would still apply to subsidiaries of US-headquartered groups when subsidiaries operated in jurisdictions implementing a QDMTT.

The updated OECD framework also included an ultimate parent entity (UPE) safe harbour, replacing 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,” BDO said.

A qualified UPE regime would be subject to the same conditions applicable to SbS safe harbour jurisdictions, aside from the need for a comprehensive worldwide tax regime.

Overall, BDO welcomed the updated side-by-side package, saying it had provided necessary certainty and simplicity for in-scope MNEs.

“The SbS package is widely expected to help secure the long-term viability of the Pillar Two regime. It offers welcome clarity for in-scope MNE groups and supports more effective planning around resourcing, compliance models and the use of technology,” BDO said.

“The Australian Government is expected to incorporate the SbS package by updating Australia’s Global and Domestic Minimum Tax Rules via the registration of a legislative instrument.”

For now, BDO urged in-scope entities to assess their safe harbour eligibility, revisit their ETR modelling, and map interactions between the different provisions under the new package. Further ATO guidance was expected to be forthcoming.

“We expect the Australian Taxation Office (ATO) will release guidance on how the SbS package will fit into the Australian Pillar Two rules, including the effective date of the measures for Australia.”