Originally published: May 2024
By now, there is quite a bit of market experience of Pillar 2 (P2) and it’s clear that the easiest and least painful way out of the rules is through the Transitional CbCR Safe Harbours (TCSH). Of course, you need to ensure that your CbC Report is Qualified, but after that, it is relatively light compliance exercise that avoids the need to get the hundreds of data points required for the full GloBE rules. After all, MNEs like to keep it simple (https://lnkd.in/eskdfqCK) and many of them are hopeful that TCSH will end up becoming permanent safe harbours in some shape or form.
Of course, if operations in a jurisdiction are reasonably profitable and not small, the only way to qualify for TCSH is to meet the Simplified ETR Test. And that requires paying 15% tax in 2024, 16% in 2025 and 17% in 2027. So there are good reasons why TCSH treats such jurisdiction as low risk. But then again, most MNEs don’t seem to be in the business of racing to the bottom and a 17% tax rate is generally considered acceptable.
The conventional wisdom after the P2 rules came out was that it would push everyone to adopt a QDMTT, so that each country would collect the minimum tax they needed for that jurisdiction to be outside the scope of that rules. And indeed, many countries adopted or are in the process of adopting a QDMTT, including countries with tax rates below 15% (meaning that QDMTT almost always applies for in scope MNEs). But that strategy means that MNEs still have to do full GloBE calculations for your country, creating a lot of compliance burden. So, are those countries really winning? Or would they be better off with a corporate tax regime with a slightly higher rate that means MNEs can benefit from TCSH? In the end, a lower compliance burden could be more appealing than the lowest possible tax burden.
Obvious disclaimers: this is not advice. These views are my own and do not necessarily represent my employer.
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