Background
On January 5, 2026, a Side-by-Side (SbS) Package released by the Organisation for Economic Co-operation and Development (OECD) detailed the contents of a simplification to the global minimum tax (GMT) contained in the global anti-base erosion (GloBE) rules (also referred to as Pillar Two).1
Among other safe harbors and additional clarifying guidance, the SbS package includes a substance-based tax incentive safe harbor that allows multinational enterprise groups (MNE Groups) to benefit from certain tax incentives, e.g., U.S. research and development credit (R&D credit), that are strongly connected to economic substance in the jurisdiction.
Substance-Based Tax Incentive (SBTI) Safe Harbor
The SBTI allows MNE Groups to add qualified tax incentives (QTIs) to adjusted covered taxes for entities in a jurisdiction, potentially reducing or eliminating the top-up tax. This addition is limited by a substance cap based on payroll and tangible assets in that jurisdiction. MNE Groups can make the SBTI safe harbor election for fiscal years beginning on or after January 1, 2026.
Qualified Tax Incentives
The QTI includes expenditure-based tax incentives as well as certain production-based tax incentives. If the tax incentive is generally available and reduces the liability for a covered tax of the taxpayer, then the definition will generally apply.
Expenditure-Based Incentives
Expenditure-based tax incentives are incentives designed to encourage investments in a jurisdiction; they are typically targeted at expenditures that are expected to have positive impacts in the jurisdiction. They operate to reduce the taxpayer’s costs by a fixed determinable amount and are calculated as a portion of costs incurred, demonstrating the clear connection with the investment they are incentivizing. An example of an expenditure-based tax incentive would be the R&D credit. An expenditure-based tax incentive must be calculated based directly on the related expenses. If the tax allowance only gives rise to timing differences, those do not fall within the definition of QTIs.
Expenditures are incurred when accrued in the financial accounts used to calculate the income or loss or when a payment is made. QTIs may qualify if calculated based on the expenditure incurred in connection with acquisition of an asset and if calculated based on the depreciation expense recognized in the period if the asset was acquired in a previous period. Similarly, an incentive may be calculated from prior expenditures, provided they occurred after the incentive was established.
Production-Based Incentives
If the incentive is designed to support a certain activity, but not based directly on the expenditure, it could fall under a production-based incentive. Production-based incentives can apply based on the units produced or on a reduction in negative externalities such as emissions.
The QTI does include the following limitations in relation to production-based incentives:
- Production-based tax incentives are only eligible when the incentive is calculated based on the volume of production.
- Production-based tax incentives are only included when they are based on the production of tangible property in the jurisdiction. This includes manufacturing activities, the production of electricity, and processing activities such as extraction and refining.
- The incentive is based on the units produced in the jurisdiction providing the incentive.
While expenditure-based tax incentives provide relief in proportion to costs incurred, production-based tax incentives reward production by granting tax relief in proportion to the output generated.
Calculation of QTIs
The incentive must be calculated based on expenditures incurred or output that has been produced by the time that the amount of the incentive is determined. This ensures an incentive is eligible only if it is based on actual activity or prior investment costs. An incentive is not eligible if it is calculated based on expenses or production completed before the incentive was active, or if it’s determined by a promise of future spending or output when no actual costs have been incurred or units produced at the time the incentive amount is set.
Expenditure-based tax incentives are determined by the calculated value of the associated tax benefit. The tax benefit represents the highest possible reduction in tax liability that can be obtained through the incentive. In the case of a tax credit, the benefit is the actual amount of the credit itself. For incentives such as a super deduction, enhanced allowance, or exemption, the value of the tax benefit is computed by multiplying the additional deductible amount or excluded income by the applicable statutory tax rate.
Production-based tax incentives are generally provided in the form of a tax credit and typically calculate the amount of relief based on the amount of a defined output produced by the taxpayer.
When the SBTI Safe Harbor election is made, adjustments in respect of QTIs are made to the effective tax rate calculation for the tested jurisdiction. Since they are made at the jurisdictional level, they are applied after the adjusted covered taxes and GloBE income have been calculated under Chapters 3 and 4 of the GloBE Model Rules; QTIs are treated as an increase to the adjusted covered taxes in the tested jurisdiction.
Since QTIs are not included in GloBE income, unlike qualified refundable tax credits (QRTCs) and marketable transferable tax credits (MTTCs), an MNE Group can make an annual election to treat QRTCs or MTTCs as a QTI, if they meet the definition of a QTI.
Substance Cap in the Jurisdiction
The extent of adjustments for QTIs is limited by the substance cap in the jurisdiction. The cap was designed based on the measure of substance developed in the substance-based income exclusion (SBIE); reliance on the same factors will reduce compliance costs and potential for disputes.
There are two methods to calculate the substance cap for the jurisdiction. The first method is based on the greater of 5.5% of eligible payroll costs (EPCs) or the depreciation on eligible tangible assets (ETAs).
EPCs are expenditures of the employer that give rise to a direct and separate personal benefit of the employee. This first method is the default, unless the MNE Group makes a five-year election to utilize the second method.
The second method is based on the varying values of ETAs. ETAs include the carrying value of property, plant, and equipment; natural resources; and a lessee’s right-of-use assets. If the MNE Group revokes this election, the assets for which carrying value was previously included in the calculation must be excluded from the calculation of the depreciation and depletion expense in method one.
Implications
The SBTI safe harbor comes in direct response to certain concerns shared by the U.S. Department of the Treasury during discussions regarding the SbS package that related to the potential treatment of the U.S. R&D credit as a non-QRTC under Article 4 of the GloBE Rules. Once adopted by Pillar Two implementing jurisdictions, MNE Groups electing the SBTI safe harbor will generally be able to treat their QTIs in non-Pillar Two jurisdictions as adjusted covered taxes prospectively and, thereby, potentially mitigate any top-up taxes under the GloBE Rules.
How Forvis Mazars Can Help
Our experienced professionals can help your organization navigate the complexities of Pillar Two. If you would like to explore how these developments may impact your organization, please reach out to a tax professional at Forvis Mazars.
- 1“Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two), Side-by-Side Package: Inclusive Framework on BEPS,” oecd.org, 2026.