Direct Tax Alert: 

BACKGROUND
Members of the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), launched Pillar Two framework in October 2021 to enforce 15% minimum tax on large MNEs. After intense negotiations, 147 countries, including India, have agreed on global minimum tax arrangements, and the OECD has released a comprehensive package for a “side-by-side” arrangement (Package). It also covers Simplified Effective Tax Rate (ETR) Safe Harbour, extension of the Transitional Country-by-Country Reporting (CbCR) Safe Harbour, Substance-Based Tax Incentive (SBTI) Safe Harbour, and a Side-by-Side System.

We, at BDO India, have summarised the key aspects of this package and provided our comments on its impact:

KEY HIGHLIGHTS

1. Simplified Effective Tax Rate (ETR) Safe Harbour – An essential calculation base is introduced for ‘Simplified ETR’ calculations, based on the financial accounting data used to prepare the MNE Group’s consolidated Financial Statements (CFS). Top-up Tax is deemed zero if the jurisdiction has a Simplified ETR more than or equal to the Minimum Rate or if the jurisdiction has Simplified Loss. This would be effective for years beginning in 2027 or from 2026 in certain cases.
2. Extension of Transitional Country-by-Country Reporting (CbCR) Safe Harbour – To ensure smooth implementation of simplified ETR Safe Harbour and continued flexibility to MNEs, a transitional window of one year has been allowed to choose between Simplified ETR Safe Harbour and the Transitional CbCR Safe Harbour.
3. Substance-Based Tax Incentive (STBI) Safe Harbour – MNEs are allowed to continue the benefit of qualified tax incentives (QTIs), which are based on real economic substance, as an addition to the Covered Taxes, thus eliminating top-up tax attributable to QTIs. However, a Substance Cap limits the allowance for QTIs based on payroll cost or depreciation of tangible assets.
4. Side-by-Side (SbS) Safe Harbour – MNEs in the Qualified side-by-Side regime would be subjected to a deemed top-up tax of zero under the income inclusion rule (IIR) or the undertaxed payments rule (UTPR) for all controlled domestic and foreign operations of MNEs. At present, only the United States of America is identified as a Qualified side-by-Side Regime.
5. Ultimate Parent Entity (UPE) Safe Harbour – Constituent entities in the Qualified UPE Regime not to be subject to UTPR for profits in the UPE jurisdiction. At present, the United States of America alone is likely to be a Qualified UPE Regime.

BDO India Comments
This Package represents a significant initiative which is aimed at stabilising the international tax system through a common approach, simplicity, and certainty. It is expected to impact large Indian MNEs with global operations, especially those operating in jurisdictions where GloBE Rules have already been implemented.

MNEs would be required to reassess-

• Eligibility for available safe harbours
• Revisit the domestic minimum tax regime
• Whether existing data, systems, and governance frameworks are adequate for this next phase of Pillar Two implementation.

The key elements of these safe harbours contained in this Package would need to be incorporated into domestic legislation or regulations by the respective jurisdictions to implement these new safe harbours.

SbS Safe Harbour reflects the agreement reached by G7 countries for USA entities. MNE Groups in USA would need to elect to apply the benefits of the SbS Safe Harbour. These MNEs would be required to comply with the regulatory requirements in the jurisdictions where GloBE Rules are implemented. All MNE Groups (including those that elect to apply SbS or UPE Safe Harbours) will remain subject to qualified domestic minimum top-up taxes (QDMTT) in all QDMTT jurisdictions in which they operate.

India is yet to adopt Pillar Two framework in the statute, but discussions and preparations are underway. It would be interesting to watch whether Union Budget 2026 unveils the formal legislation on Pillar Two.