Global minimum tax: Understanding the Transitional CbCR Safe Harbour

The “global minimum tax”, also known as Pillar Two of the OECD/G20 BEPS initiative, aims to ensure a global minimum taxation for multinational enterprises (MNEs) and to combat aggressive tax avoidance strategies. It provides for a coordinated, but highly complex system of taxation that intended to ensure large multinational enterprise (MNE) groups pay a minimum level of tax on the income arising in each of the jurisdictions where they operate. In this blog post, we take a look at the transitional CbCR Safe Harbour provision – one of two temporary measures to reduce the compliance burden upon the initial years of application of the global minimum tax - and its significance within the framework of the global minimum tax1.

Transitional relief explained: Easing the initial compliance burden

The CbCR Safe Harbour pursuant to Sec. 84, 87 MinStG is designed to provide transitional relief for MNE groups in the initial years during which the GloBE rules come into effect. This safe harbour seeks to ameliorate the immediate compliance difficulties that MNEs will face in building systems to collect the data needed for undertaking full GloBE calculations by limiting the circumstances in which an MNE will be required to undertake such calculations to a smaller number of higher-risk jurisdictions. If the CbCR Safe Harbour will be met for a jurisdiction for a fiscal year, the top-up tax – if any – will be deemed to be zero.

The transitional CbCR Safe Harbour is applicable during the transition period for fiscal years beginning on or before 31 December 2026 and ending before 1 July 2028. After the transition period, the CbCR Safe Harbour will – as of now - no longer be applicable.

How to benefit: Three alternative tests for compliance

It is important to notice that the CbCR Safe Harbour can also solely be meet for “tested jurisdiction” meaning, that a MNE group does not have to apply for the CbCR Safe Harbour in every jurisdiction where it operates. However, if the MNE group decides not to apply for the CbCR Safe Harbour for a specific jurisdiction, for this jurisdiction the CbCR Safe Harbour cannot be applied in subsequent years (“once out – always out” approach).

Data requirements: What you need to know

The CbCR Safe Harbour relies on CbCR data as the basis for calculating an MNE’s revenue and income on a jurisdictional basis. Because the global minimum tax and the rules for CbCR pursuant to Sec. 138a German tax Code have a similar scope, respective data should generally be already available for the MNE’s.

A CbC-report further must be considered as “qualified” for the purposes of the CbCR Safe Harbour pursuant to Sec. 87 no. 1 MinStG. This is the case, when:

1. it has been prepared with the accounts used to prepare the consolidated financial statements of the ultimate parent entity or separate financial statements of each constituent entity provided, they are prepared in accordance with an acceptable financial accounting standard pursuant to Sec. 7 para. 4 MinStG, or
2. if the information contained in such statements is reliable, another authorized financial accounting standard Sec. 7 para. 32 MinStG, or
3. alternatively, if a constituent entity has not been included in the MNE group’s consolidated financials statements on a line-by-line basis due to size and materiality reasons, the financial statements used to prepare the CbC-report can be used notwithstanding the requirements outlined before.

Wrapping up: The value of CbCR Safe Harbour as a transitional relief

The CbCR Safe Harbour is a true relief for MNE groups and mitigates compliance difficulties that MNE face when building a system to collect the data needed for the complex calculation required under the full scope of the global minimum tax. Hence, the CbCR Safe Harbour effectively buys time by using data which should generally already be available within the MNE group.

However, further adjustments to the CbCR data are expected to be necessary based on the recent published draft law (MinStGAnp-E, dated August 20, 2024), which – among other changes – tackles the so-called “hybrid arbitrage arrangements” to ensure the integrity of the CbCR Safe Harbour. Such adjustments, however, are expected to significantly increase the compliance burden for both – MNG groups and tax authorities – and therefore contradicts the outlined bright line approach by the OECD.

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