Pillar Two: Simplified ETR Safe Harbour - New York Office Snippet

Loyens & Loeff New York regularly posts ‘Snippets' on a range of EU tax and legal topics. This Snippet provides a high-level overview of the recently released Simplified ETR Safe Harbour (SE SH) and its impact on the Pillar Two (P2) position of US multinationals (MNEs).

The SE SH is introduced as part of the Side-by-Side (SbS) package. It offers a permanent, simpler alternative to the full P2 calculations. Unlike the existing temporary CbCR Safe Harbour (CbCR SH), the SE SH does not rely on CbCR data. It instead relies on financial statements, with a reduced set of adjustments to income and taxes when comparing this to the full P2 rules. 

How does it work?

If a jurisdiction's Simplified ETR is at least 15%, or the Simplified Income is negative (a loss), the Top‑up Tax (TuT) is deemed to be zero under the SE SH and no full P2 calculations are required.

The Simplified ETR can be calculated using the following formula: 

Simplified ETR = Simplified Taxes ÷ Simplified Income

To determine Simplified Income, the SE SH requires several targeted modifications:

• Basic Adjustments, such as excluding dividends or equity gains and adding penalties;
• Industry Adjustments for the financial and shipping sectors;
• Certain Conditional Adjustments that may apply in specific situations (e.g., Purchase Price Allocation (PPA) related items, Foreign Exchange (FX) effects or pension elections); and
• Optional Adjustments (e.g., more detailed P2 adjustments that typically increase the ETR).

For the Simplified Taxes, the adjustments are mostly mandatory and known from the full P2 rules. These include removing taxes that are not “Covered Taxes,” excluding tax expense linked to items removed from Simplified Income, and adjusting deferred taxes by recasting them at 15% and disregarding valuation allowances. 

The SE SH is intended to simplify compliance compared to the full P2 rules, but the number of adjustments means it will be significantly more complex than the CbCR SH. The SE SH is generally available from financial year 2027, with an option to apply it in financial year 2026 in specific cases. If a jurisdiction fails the test, it can only re-enter after two consecutive years without TuT liability.

As a transition measure, the SbS package extended the CbCR SH by one year: it is now available for financial years beginning on or before 31 December 2027 (but not ending after 30 June 2029).

Why does this matter for US MNEs?

Even under the SbS Safe Harbour (see Side-by-Side Safe Harbour and impact on US MNEs), US UPE groups may still face QDMTTs in foreign jurisdictions. For these groups, the SE SH mainly offers compliance relief, reducing the need for full P2 modelling in ‘low-risk' jurisdictions. The extent of this relief will ultimately depend on the updated GloBE Information Return, which has not yet been released.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.