77. The goal of the Simplified Calculations Safe Harbour is to allow MNE Groups to avoid making certain complex GloBE calculations in situations where the calculation could be simplified without altering the MNE Group’s GloBE outcomes or otherwise undermining the integrity of the GloBE Rules.

Agreed Administrative Guidance

78. The safe harbour as described in this chapter provides a framework for the subsequent development of Agreed Administrative Guidance on the use of these Simplified Calculations. Such guidance could be released by the Inclusive Framework and incorporated by reference into the Simplified Calculations Safe Harbour. The MNE Group would then be able to rely on that safe harbour when filing its GloBE Information Return and calculating its ETR on a jurisdictional basis. To access the benefit of the Simplified Calculations Safe Harbour, the MNE Group would need to comply with the filing requirements that are agreed as part of the Agreed Administrative Guidance for that Safe Harbour.

79. Basing the safe harbour on simplifications that are agreed through Administrative Guidance: protects the integrity of the outcomes under the GloBE Rules by ensuring that these simplifications are applied on an agreed and consistent basis; provides Inclusive Framework members with a degree of flexibility in the design and application of the safe harbour by allowing them to add additional simplifications in the future; and creates an additional element of tax certainty for MNEs that rely on the safe harbour when completing their GloBE Information Return and calculating their Top-up Tax liability in each implementing jurisdiction.

80. This approach, however, applies without prejudice to Article 8.3 of the Model Rules which provides that the application of Agreed Administrative Guidance is subject to the requirements of domestic law.

Application of the safe harbour

81. The Routine Profits, De Minimis and ETR tests set out in the framework for the Simplified Calculations Safe Harbour are intended to be the same as those set out in the GloBE Rules: the routine profit test mirrors the SBIE amount; the De Minimis Test follows the De Minimis Exclusion; and the ETR test is based on the GloBE ETR calculations. Where a Tested Jurisdiction meets the requirements of one of these tests, the MNE would be treated as not having any top-up tax liability arising in that jurisdiction.

82. Where a Tested Jurisdiction qualifies for the Simplified Calculations Safe Harbour, the current topup tax will be reduced to zero in accordance with Article 8.2. The application of this safe harbour does not reduce to zero any Additional Current Top-up Tax that may arise.

De Minimis Test

83. The De Minimis Test follows the De Minimis Exclusion in Article 5.5. It applies where the Average GloBE Revenue of such jurisdiction is less than EUR 10 million, and the Average GloBE Income is less than EUR 1 million (including cases where the jurisdiction has a loss). The rules in Article 5.5 are equally applicable for purposes of determining such numbers. The only difference is that the Simplified Income and Revenue Calculations will provide for adjustments or simplifications to undertake this test.

Routine Profits Test

84. Similarly, the Routine Profits Test mirrors the SBIE in Article 5.3. Thus, the amount is the same that would otherwise be computed under the general GloBE computation, with the only difference being that the Simplified Income Calculation will provide for adjustments or simplifications to undertake this test.

85. In cases where a jurisdiction has a GloBE loss as determined under the Simplified Income Calculation, the Routine Profits Test will apply because no profits arise with respect to that jurisdiction. The effect of satisfying the routine profit test will be to deem the current Top-up Tax to be zero (i.e., not the Additional Top-up Tax including one that arises under Article 4.1.5). Further Agreed Administrative Guidance could be developed to allow MNEs to avoid undertaking the full loss computations for purposes of determining whether an Article 4.1.5 liability arises.

ETR Test

86. The ETR Test follows the GloBE Rules because it requires the jurisdiction ETR to be at least 15%. The ETR of the jurisdiction is equal to the sum of Adjusted Covered Taxes of each Constituent Entity located in the jurisdiction divided by the Net GloBE Income of the jurisdiction for the fiscal year. As part of the permanent safe harbour, the ETR of the jurisdiction can be computed based on the Simplified Calculations.

Parameters of Simplified Calculations

87. All the Simplified Calculations developed in Agreed Administrative Guidance would need to meet one of the parameters set out in Paragraph 4 of the box above. That is to say the calculations would provide for the same outcomes as those contemplated under the Model Rules and Commentary or be based on alternative calculations that would not otherwise undermine the integrity of the GloBE Rules.

Same outcomes under GloBE rules

88. Under the first parameter, the final outcome of the Simplified Calculations must be the same as those provided in the GloBE Rules. This means that the calculations need to serve as a “shortcut” to determine whether Top-up Tax liability will arise with respect to a jurisdiction or a Constituent Entity.

89. For example, the Inclusive Framework could agree on further Administrative Guidance that allows an MNE to disregard a particular adjustment to the Financial Accounting Net Income or Loss (FANIL) where the adjustment does not change the outcome of the GloBE Rules. Assume that the FANIL includes portfolio dividends and the jurisdiction already meets the De Minimis Exclusion without any adjustment. Under GloBE, the MNE would be required to determine which of those dividends are excluded from the GloBE base, which requires the MNE to determine whether such dividends derive from Short-term Portfolio Shareholdings or from Investment Entities subject to Article 7.6. The Administrative Guidance could allow the MNE to avoid making this adjustment because even if all the portfolio dividends are excluded, the MNE would still comply with the De Minimis Test.

Outcomes do not undermine integrity of GloBE Rules

90. Under the second parameter, the calculations need to provide for outcomes that do not otherwise undermine the integrity of the GloBE Rules. This standard allows the Inclusive Framework to provide alternative calculations for determining GloBE Income or Revenue, or Adjusted Covered Taxes even if these calculations would not result in the same outcomes as under the GloBE Rules, as long as they do not create an integrity risk to the GloBE Rules. For example, a Simplified Calculation may result in the understatement of revenues or GloBE Income, or overstatement of Adjusted Covered Taxes when compared to the outcomes that would have occurred if such Constituent Entities had performed the full GloBE calculations. Such calculation could still be incorporated into a Simplified Calculation if the reduction in compliance burden as a result of the Safe Harbour would sufficiently outweigh the risk of a small loss in Top-up Tax liability.

91. The simplifications agreed through Agreed Administrative Guidance could be developed in consultation with the Pillar 2 Business Advisory Group (BAG) and other stakeholders. The focus of this work will be targeted at those aspects of income, revenue, and tax calculations that raise the greatest compliance concerns.

Simplified Calculation for Non-Material Constituent Entities

92. The following paragraph below sets out the Simplified Income and Tax Calculations which an MNE could apply for its Non-Material Constituent Entities (NMCEs) under the Simplified Calculation Safe Harbour framework described in this Chapter.

93. For the purposes of the Simplified Calculations:

• The GloBE Revenue and GloBE Income of a NMCE is the Total Revenue of that Constituent Entity as determined in accordance with Relevant CbC Regulations. Relevant CbC Regulations shall mean the CbCR regulations of the UPE jurisdiction or of the surrogate parent entity jurisdiction if a CbC Report is not filed in the UPE jurisdiction. If a jurisdiction does not have domestic CbC regulations, Relevant CbC Regulations shall mean the OECD BEPS Action 13 Final Report and the OECD Guidance on the Implementation of Country-by-Country Reporting (OECD CbCR Guidance).
• The Adjusted Covered Taxes of a NMCE is the Income Tax Accrued as determined in accordance with the Relevant CbC Regulations.
• A NMCE is a Constituent Entity of an MNE Group that is not consolidated on a line-by-line basis in the MNE Group’s audited consolidated financial statements solely for size or materiality grounds and includes any Permanent Establishment of such Constituent Entity.

94. Entities that are related through ownership or control but are excluded from the MNE Group’s consolidated financial statements solely on size or materiality grounds qualify as Constituent Entities of an MNE Group under Article 1.2.2(b) of the GloBE Rules. NMCEs typically include subsidiaries with no or minimal operations, or with operations that are in wind-down or liquidation phase.

95. While the exclusion of NMCEs is not mandatory under the applicable accounting framework, it is common practice for MNEs to exclude their NMCEs from the scope of their consolidated financial statements where it could be reasonably expected that the omission of the NMCEs’ financial data would not influence the decisions made by primary users of the financial statements. The decision to exclude an Entity from the consolidated financial statements is typically driven by a cost-benefit analysis, where the expected cost of incorporating financial information of NMCEs into the consolidated financial statements would be disproportionate in terms of its impact on those financial statements as a whole. NMCEs are, however, included in the scope of GloBE and CbCR because they may play a role in achieving low tax outcomes, and therefore could pose a GloBE integrity risk if excluded entirely from the GloBE calculations.

96. Under the GloBE Rules, the starting point for determining the GloBE Income or Loss is the financial accounts used for the preparation of the Group’s consolidated financial statements determined in accordance with the accounting standards applied by the UPE of the MNE Group. NMCEs might prepare their financial accounts in accordance with local accounting standards which might be different than the ones used at the UPE for the consolidated financial statements. Furthermore, the NMCE may not have any legal obligation to prepare financial accounts and may rely on management accounts for the purposes of CbCR. These accounts are not required to be in line with the accounting standards of the UPE because this step is not necessary for the preparation of the consolidated financial statements, however, those accounts are expected to be used by the external auditor to determine the materiality of the Entity.

97. Where the NMCE’s financial statements are prepared in accordance with local accounting standards other than the ones used by the UPE, it is possible for the MNE Group to rely on those financial accounts for GloBE purpose provided that the conditions set forth in Article 3.1.3 are met.

98. In general terms, the inclusion of all NMCEs within the scope of GloBE Rules raises the following compliance challenges in terms of data collection, processing and recording, even in cases where Article 3.1.3 is claimed. In particular, information may not be incorporated into group accounting systems but may be kept and managed on separate accounting platforms, even outsourced to external providers. Even where the UPE maintains management accounts for NMCEs under Acceptable or Authorised Accounting Standards, such set of financial data on NMCEs may not be sufficiently detailed or complete, and they may not be available in a timely manner to comply with the GloBE relevant obligations.

99. MNE Groups have raised concerns about incurring significant additional compliance costs in bringing the financial accounts (and financial accounting systems) of NMCEs located in jurisdictions in which no Top-up Tax would arise into line with GloBE requirements and the potential compliance risk for failure to do so. Therefore, the objective of the Simplified Calculations for NMCEs is to avoid detailed adjustments as would otherwise be required in the GloBE Rules by allowing computations that are both simplified and conservative, and which will not compromise the integrity of the GloBE Rules.

Simplified Calculations Safe Harbour for NMCEs

100. Using the objectives outlined above, a Simplified Calculations Safe Harbour is developed for NMCEs. The Simplified Income, Revenue and Tax Calculations of the NMCEs under the safe harbour use conservative elements to avoid undermining the integrity of the GloBE Rules. The NMCE Simplified Calculations could be combined with the GloBE calculations of other Constituent Entities for the purposes of determining whether a Tested Jurisdiction meets the requirements of the Simplified Calculations Safe Harbour. Those calculations may include other Simplified Calculations that could be developed in the future through Agreed Administrative Guidance.

101. The NMCE Simplified Calculations, together with any transition rules, will be incorporated into future Agreed Administrative Guidance on Permanent Safe Harbour.

Definition of NMCE

102. The NMCE definition includes all the subsidiaries and their Permanent Establishments (if any), that, as a matter of fact, are excluded from the scope of the consolidated financial statements in a given Fiscal Year. The NMCE definition is based on the common practice of MNE Groups in excluding nonmaterial subsidiaries from the scope of the consolidated financial statements, where they can demonstrate that the omission would not influence the judgement of the stakeholders to which the consolidated financial statements is addressed. There is not an unequivocal bright-line definition of materiality threshold within the relevant accounting principles. For example, both IFRS4 and US GAAP5 provide for a general concept of materiality, which is essentially whether the omission or misstatement of an item could reasonably influence the judgement of a person who is relying on the financial report., This general concept needs to be adapted to the specifics of each MNE Group (e.g., industry and size).

103. The determination of whether to treat a subsidiary as outside the scope of consolidation is grounded on quantitative and qualitative criteria, and this assessment is carried out by the MNE’s management, and then shared and agreed in advance with the external auditor in charge of the statutory audit of the consolidated financial statements. Within its mandate, the auditor verifies that the proposed exclusion of the non-material subsidiaries does not have a financial impact exceeding, on an aggregate basis, the materiality thresholds which are fixed by the auditor itself for the purpose of its mandate (quantitative analysis). Under a qualitative assessment, MNEs further take into account other elements, such as the projected performance of the business (e.g., typically only run-down businesses are excluded), the existence or the likelihood of a legal controversy, etc. Non-material subsidiaries are treated as third parties for financial reporting purposes (i.e., no elimination for intragroup flows, including dividends) and do not have to prepare their financial statements under the accounting standards of the UPE. The investment in these Entities is generally recorded at cost and distributions are treated as income.

104. Non-material subsidiaries are identified for the purposes of the preparation of consolidated financial statements, where the external auditor has an important role in the definition of the relevant materiality thresholds for a given MNE Group. Therefore, to meet the definition of NMCE for the purpose of the Simplified Calculations, the consolidated financial statements must be subject to external audit. Where the consolidated financial statements are prepared but not subject to an external audit, or where they are prepared solely for GloBE purposes, the NMCE definition would not be met, and the Simplified Calculations provided for the NMCE would consequently not be available for the MNE Group. Providing the requirement of an external audit aims at granting impartiality to the definition of NMCEs for a given MNE Group and ensures the reliability of the NMCE’s financial data because it is subject to certain checks in order to properly judge the relevant materiality. In this respect, the external audit requirement could be considered as a safeguard to the integrity of the rule.

Source of Information

105. The Simplified Calculations for NMCEs shall be extracted, on a Constituent Entity-by-Constituent Entity basis, from the financial accounts available to NMCEs using definitions stipulated in the Relevant CbC Regulations, provided that the external auditor to the consolidated financial statements relied on the data taken from these financial accounts to determine the non-materiality of that NMCE.

106. For NMCE whose revenues exceeds EUR 50 million, the financial accounts used to qualify for the Simplified Calculations Safe Harbour must be prepared in accordance with either an Acceptable Financial Accounting Standard or an Authorised Financial Accounting Standard.

Simplified Revenue and Income Calculation

107. The GloBE Revenue and GloBE Income of an NMCE is the Total Revenue of the NMCE as determined in accordance with the Relevant CbC Regulations. The OECD CbCR guidance provides for a broad definition of Revenue, which includes: “revenues from sales of inventory and properties, services, royalties, interest, premiums and any other amounts”, including any “extraordinary income and gains from investment activities”. Revenue excludes dividends received from other Constituent Entities and other comprehensive income (e.g., “comprehensive income/earnings, revaluation, and/or unrealised gains reflected in net assets and the equity section”). 6 Revenue as defined in the CbCR framework is a suitable proxy under the Simplified Income Calculation because it is readily available and because it represents a conservative approximation of the GloBE Income for an NMCE since the GloBE Income of an Entity is reasonably expected to be significantly lower than its Total Revenue as defined in the CbCR. Total Revenue also serve as a reasonable proxy for revenue under the Simplified Revenue Calculation.

Simplified Tax Calculation

108. The Adjusted Covered Taxes of a NMCE is the Income Tax Accrued as determined in accordance with the Relevant CbC Regulations. Under CbCR, Income Tax Accrued excludes any deferred tax expenses, other non-current items (such as transfer pricing adjustments), and provisions for uncertain tax liabilities. Income Tax Accrued as determined in line with the CbCR framework is a suitable proxy for the Simplified Tax Calculation because it is readily available.

Future changes to CbCR

109. The OECD’s CbCR model rules are undergoing review as part of the 2020 Review of Country-byCountry Reporting. The Inclusive Framework will monitor changes to the model rules as they relate to Total Revenues and Income Tax Accrued, so that any changes do not give rise to issues which may cause the NMCE Simplified Calculations to undermine the integrity of the GloBE Rules.

Simplified Calculation does not undermine integrity of GloBE Rules

110. The Simplified Calculations for NMCEs provide an alternative method of calculating the ETR of such Entities, the alternative method does not undermine the integrity of the GloBE Rules. The calculation of GloBE Income and Adjusted Covered Taxes for an NMCE are based on a conservative measure of income.

• GloBE Income is based on Total Revenue as determined under CbCR which is broadly defined to capture revenues of any description and includes any “extraordinary income and gains from investment activities” without a deduction for current expenses. While Total Revenue does not include intra-group dividends and “comprehensive income/earnings, revaluation and/or unrealised gains reflected in net assets and the equity section”, this is consistent with the requirements for calculating GloBE income under the ordinary rules.
• Similarly, the measure of Adjusted Covered Taxes is based on the Current Year’s Accrued Income Tax which excludes any deferred tax expenses, adjustments for non-current items and provisions for uncertain tax liabilities. The exclusion of deferred taxes can be expected to give rise to some volatility in the numerator of the ETR fraction, however, the exclusion of deferred taxes is generally consistent with the exclusion of expenses from the denominator given that such expenses are generally the items that give rise to deferred tax assets. The exclusion of deferred tax items is also broadly consistent with the treatment of Unclaimed Accruals under the GloBE Rules.

The definitions of Total Revenue and Accrued Income Tax in CbCR provide a measure of consistency and reliability in the determination of revenues and taxes of NMCEs.

111. Given the broader definition of income and the narrower definition of taxes, the Simplified Income, Revenue and Tax Calculations under this safe harbour are expected to result in a higher income and lower ETR than that provided under the GloBE Rules. Accordingly, the Inclusive Framework considers that the Simplified Calculations for NMCEs should not undermine the integrity of the GloBE Rules and will review the methodology used in this Simplified Calculation no later than 2028 to evaluate whether the integrity of the GloBE Rules is undermined.