New OECD Rules Impact Tax Incentive Design for Global Businesses

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting side-by-side package marks a significant evolution of the global minimum tax regime. The package substantially revises the treatment of tax incentives under the global minimum tax. Although developed at the request of the US, its implications extend well beyond.

The introduction of the substance-based tax incentives safe harbor reflects a substantial policy shift. It realigns the global minimum tax with the original BEPS objective of preventing profit shifting without discouraging genuine investment.

The new framework is likely to influence the design of tax incentive regimes across jurisdictions. It provides greater flexibility for countries to introduce or maintain incentives aimed at supporting economic activities without the concern that the resulting relief, when granted to multinational enterprises, will effectively be clawed back through the application of the global minimum tax rules.

Multinational enterprises need to navigate this new landscape and carefully evaluate how their existing and future incentives align with the qualified tax incentive criteria to optimize their effective tax rate under the Global Anti-Base Erosion Rules.

Side-by-Side Package

Under the original Pillar Two design, tax incentives that reduced a taxpayer’s liability generally also reduced the numerator of the effective tax rate calculation, increasing the likelihood of triggering top-up tax, even where the incentive was linked to substantive investment or economic activity.

The only exceptions were qualified refundable tax credits and marketable transferable tax credits. These credits were treated as an increase to the denominator, rather than as a reduction of covered taxes, resulting in a comparatively less adverse impact on the effective tax rate. The qualification of these credits relied primarily on their accounting treatment as government grants and in particular on specific design features such as their refundability or transferability.

As a result, the Pillar Two treatment of incentives was largely disconnected from their economic purpose, leading to inconsistent outcomes for similar incentives structured in different legal forms.

The side-by-side package fundamentally revises this approach. Starting from fiscal years beginning on or after Jan. 1, 2026, the newly introduced safe harbor allows multinational enterprises to elect to treat certain tax incentives as qualified tax incentives.

Qualified Tax Incentives

The safe harbor applies to two broad categories of tax incentives:

• Expenditure-based incentives: tax benefits calculated directly on a portion of certain qualifying expenditures incurred by the taxpayer, such as deductions or credits tied to research and development, workforce hiring, or capital investment. They must be calculated based on costs already incurred and cannot exceed the underlying expenditure.
• Production-based incentives: tax benefits based on the amount of production or reduction in industrial byproducts during the production by the taxpayer. The tax break must be grounded in measurable production activity within the jurisdiction. They must be calculated based on the volume (not the value) of production, related to the production of tangible property (including manufacturing, electricity generation, and processing activities like extraction and refining), and based on units of production generated within the jurisdiction.

To qualify, these incentives must be generally available to all taxpayers and not tailored to specific companies or granted on a purely discretionary basis.

Safe Harbor in Practice

When a multinational elects to apply the substance-based tax incentives safe harbor for a fiscal year beginning on or after Jan. 1, 2026, qualified tax incentives are treated as additions to covered taxes for purposes of the effective tax rate calculation. As a result, the top-up tax attributable to the qualified tax incentive is deemed to be zero. Unlike qualified refundable tax credits and marketable transferable tax credits, qualified tax incentives aren’t included in GloBE Income.

Accordingly, in terms of effective tax rate, classification as a qualified tax incentive is in principle more favorable for a multinational group than treatment as a qualified refundable tax credit or marketable transferable tax credit. The mechanism is elective at the jurisdiction level, and multinationals also can elect to treat portions of qualified refundable tax credit and marketable transferable tax credits as qualified tax incentives if doing so is more beneficial.

Importantly, the incentive benefit is subject to a “substance cap”: The annual amount that can be recognized is capped at the greater of 5.5% of payroll costs or depreciation of tangible assets in the jurisdiction, or 1% of the carrying value of tangible assets if the multinational group makes a five-year election.

Impact

Given the reliance on payroll costs and tangible assets for the substance-based caps, the safe harbor may have greater effects in economies where investment structures typically involve high levels of employment and fixed assets. Conversely, asset-light or low-payroll sectors may find that the substance cap substantially limits the practical benefit of the election.

The side-by-side agreement also announced that additional clarifications will be provided on the so-called related benefit test. Under that test, in order to recognize a jurisdiction’s domestic rules (chiefly domestic minimum top-up taxes) as qualified, the jurisdiction shouldn’t provide multinational groups with benefits designed in a way that formally increases the effective tax rate under the GloBE Rules but that—based on the facts and circumstances of each case—operate against the principle of ensuring a level playing field.

This is in effect the other important boundary that countries will have to consider when designing their tax incentive regimes.

Conclusion

The introduction of the substance-based tax incentives safe harbor represents a significant policy shift, moving away from a rigid accounting-driven framework towards one that recognizes the legitimacy of substance-based tax incentives. This change grants jurisdictions greater flexibility to design policies that promote genuine economic activity without being automatically undermined by the global minimum tax.

However, this isn’t without limits. The substance cap and the related benefit test will serve as guardrails.

Ultimately, the effectiveness of the safe harbor will depend on how countries modernize their incentive policies and how the new framework is applied in practice, marking a new chapter in the interplay between national tax policy and international tax reform.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Raffaele Russo is a partner with Chiomenti and and a Senior Fellow at the University of Amsterdam Centre for Tax Law.

Nicola Vernola is an associate with Chiomenti.

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