BTAX OnPoint: Pillar Two Safe Harbors and Penalty Relief (1)

The OECD created two safe harbors and a system for penalty relief under an implementation package for the Pillar Two agreement.

The three mechanisms under Pillar Two operate via an Income Inclusion Rule, an Undertaxed Payments Rule, and a Subject to Tax Rule. The relief package provides a transitional reprieve that eliminates the obligation to calculate the GloBE effective tax rate for MNEs in lower-risk jurisdictions in the initial years. It also provides a permanent safe harbor with simplified income and tax calculations, and transitional penalty relief.

Both safe harbors rely on three tests. Although the tests are similar, they ...