Pillar Two Safe Harbour - Is your Country-by-Country Report Qualified?
As part of the Luxembourg draft law published on 4 August 2023 (n°8292) implementing the EU Pillar Two Directive, the Luxembourg draw law includes the Transitional Safe Harbour Rules that were issued by the OECD (Organisation for Economic Cooperation and Development) in December 2022.
The Transitional Safe Harbour Rules for Pillar Two would allow Multinational Enterprises (MNEs), falling in the scope of Pillar Two, to prevent from undertaking detailed Global Anti-Base Erosion Rules (GloBE Rules) computations in Luxembourg and potentially be exempt from any top-up taxes. The exemption may apply for fiscal years starting before 31 December 2026, but not including a fiscal year ending after 30 June 2028. Hence, for groups with a calendar year-end, the transitional safe harbour rules would end on 31 December 2026.
To benefit from the Transitional Safe Harbour Rules, in-scope groups should have qualified country-by-country reporting (CbCR) and financial accounting data.
Thresholds for CbCR and Pillar Two?
The CbCR applies to all MNEs (Multinational enterprises) with annual consolidated revenue above EUR 750 million in the immediately preceding fiscal year.
The Pillar Two rules apply to MNEs or large-scale domestic groups with a consolidated revenue of EUR 750 million or more for at least two out of four previous years. Given the discrepancy of revenue thresholds, this could mean that groups may be subject to CbCR, but not yet to Pillar Two. In more exceptional cases, groups could also be subject to Pillar Two but not subject to CbCR (i.e., if the preceding year does not reach EUR 750 million consolidated revenue but prior years do).
While no definition is foreseen of “revenue” in the Pillar Two rules, it is generally understood that the revenue concept is expected to be the same as provided in the OECD guidance for CbCR.
How to qualify and apply for the Transitional CbCR Safe Harbours?
Groups are generally expected to exclude a large number of the jurisdictions in which they operate on the basis of the Transitional Safe Harbour Rules. To apply for the Safe Harbour, the following will be required:
- the CbCR has to be prepared based on qualified financial statements;
- the CbCR is prepared in line with the domestic and OECD guidance.
In Luxembourg, the preparation of the CbCR should be based on the Law of 23 December 2016 and further explanatory domestic guidance provided (e.g., Q&A issued by the Luxembourg tax authorities).
Note that the current CbCR may have to be amended to become a qualified CbCR. Based on our experience, we see several common issues (e.g., foreign branches which are not correctly mapped, mistakes with currencies, figures presented in the wrong columns, etc.). Given the potential of the Transitional CbCR Safe Harbours to reduce the amount of top-up taxes, we would expect increased levels of audit from tax authorities with respect to CbCR. In case the information in the CbCR is incorrect, there is a risk that the entire CbCR could be disqualified for the purpose of calculating the Transitional Safe Harbour Rules (i.e., not only the jurisdiction for which there is incorrect information).
Once the CbCR data have been properly reviewed, the Transitional CbC Safe Harbour may apply if at least one the following tests is met:
| De Minimis Test | Effective Tax Rate Test | Routine Profits Test |
Jurisdiction with
|
The simplified ETR ≥ the Transition Rate in the jurisdiction for the FY Transition Rates:
|
CbCR Profit (Loss) before Income tax ≤ to the Substance-based Income Exclusion amount as calculated under GloBE Rules |
If one of the above tests is not met for a given year, the Transitional CbCR Safe Harbours cannot be applied for the following year (i.e., the “once out, always out” principle).
How can PwC assist you?
1. Assess the correctness of the CbCR
Assessment if the CbCR would be qualifying based on the Luxembourg and OECD guidance, including the use of Qualified Financial Statements.
2. Assistance with amendments to the CbCR
PwC can assist with proposing amendments to the CbCR required for the Transitional Safe Harbour Rules for Pillar Two, which could range from adjustments to definitions applied to more complex matters such as the application to transparent or investment entities.
3. Transitional Safe Harbour testing
Further to the above steps, PwC can assist you in performing the tests to determine whether you could qualify for one of the Transitional Safe Harbours. This includes the identification of any Luxembourg or foreign entities that potentially cannot qualify, and recommendations on a go-forward approach.
Conclusion
The Transitional Safe Harbour Rules are considered an important simplification for many MNEs in delaying the detailed Pillar Two calculations. The need for qualifying CbCR is in this respect key. Absence of annual qualifying CbCR and meeting the minimum tests may result in significant additional taxes.
Considering the importance of applying the Transitional Safe Harbour Rules for Pillar Two, it is expected that there will be a significant increase of audits on the scope of Pillar Two as well as the qualifying CbCR.
