Pillar 2 – How to avail of transitional safe harbours and exclusions

Safe harbour tests

There are three different transitional CbCR safe harbour tests. Where one of these applies to the Irish entities of a group, the Pillar 2 jurisdictional top-up tax for a fiscal year during the transition period will be deemed to be zero. To qualify, the group will need to demonstrate that it meets the conditions of one of the following tests:

• De minimis test - The MNE group reports total revenue in Ireland of less than €10m and profit or loss before income tax of less than €1m in its qualified CbC report.
• ETR test - The MNE group’s simplified Effective Tax Rate (ETR) for that jurisdiction is equal to or greater than the transition rate for the fiscal year.
• Routine profit test - The MNE group reports profit or loss before income tax in Ireland in its qualified CbC report that is equal to or less than the substance-based income exclusion amount in respect of constituent entities located in Ireland. A group will be required to perform a full substance-based income exclusion calculation for the purposes of this test.

“Once Out, Always Out” rule

The safe harbour provisions include a “once out, always out” rule, which means:

• If the conditions are not met in one fiscal period, the jurisdiction cannot use the safe harbour in future years.
• If a jurisdiction qualifies but chooses not to avail of the safe harbour, it cannot benefit from it in future years.

Calculation basis

The safe harbour calculations use revenue and profit (loss) before income tax from a group’s CbC report and income tax expense from its financial accounts (after eliminating taxes which are not covered taxes and uncertain tax positions) to determine whether the tests are met.

The transition rate to which the simplified ETR is compared is:

• 2023–2024 fiscal years: 15%
• 2025 fiscal year: 16%
• 2026 fiscal year: 17%

What constitutes a ‘qualified’ CbCR?

To be considered qualified, a CbC report must use qualified financial statements, which include:

• The financial statements used to prepare the consolidated accounts of the Ultimate Parent Entity (UPE) before adjustments for intra-group transactions; or
•  Separate financial statements for each constituent entity, joint venture, or joint venture affiliate, prepared in accordance with:
  • An acceptable financial accounting standard, or
  • An authorised financial accounting standard with reliable information.

For entities excluded from consolidated accounts on a line-by-line basis solely due to size or materiality grounds, the financial accounts used for the MNE group’s CbC report are acceptable.

Importance of a qualified CbCR

Groups seeking to avail of transitional safe harbours must ensure their CbC report meets these quality standards. A review of the current CbC report is recommended to to ensure it meets all the quality standards to be a “qualified” report for Pillar Two purposes.

Examples:

Example 1 – Group A

Detail for Irish constituent entity:

• Total revenue of €8m.
• Profits before income tax of €2.5m in Ireland (as shown in the CbC report for 2024).
• Simplified ETR of 16%.
• Substance-based income exclusion of constituent entities resident for the purposes of the CbC report and located in Ireland is €3m.

Outcome:

The simplified ETR of 16% is above the required ETR for the year of 15%. Therefore, group A will qualify for the CbCR safe harbour in Ireland for 2024, as only one of the three tests above needs to be met. In addition, the substance-based income exclusion of constituent entities located and resident in Ireland for the purposes of the CbC report is €3m, which is in excess of the profit before income tax of €2.5m for the jurisdiction.

In this example, the CbCR safe harbour will apply to group A, deeming the top-up tax due for Ireland in 2024 to be zero.

Example 2 – Group B

Detail for Irish constituent entity:

• Total revenue of €11m.
• Profits before income tax of €2m in Ireland.
• Simplified ETR of 10%.
• Substance-based income exclusion of constituent entities resident for the purposes of the CbC report and located in Ireland is €1m.

As Group B has failed all three criteria in Ireland, the CbCR safe harbour will not apply.

Finally, please be aware that there are also specific rules in relation to joint ventures and the operation of the calculations to flow-through entities.

If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact a member of our corporate tax team below: