As multinational enterprise (MNE) groups continue to navigate the procedural and compliance challenges associated with the Organisation for Economic Co-operation and Development (OECD) Pillar Two GloBE Information Return (GIR), the Side-by-Side (SbS) Package released on January 5, 2026 introduces meaningful relief by extending the Transitional Country-by-Country Reporting (CbCR) Safe Harbor (TCSH) for an additional year. This extension allows taxpayers, during the transition period, to elect either the Simplified Effective Tax Rate (ETR) Safe Harbor (SESH) or TCSH, providing greater flexibility in managing Pillar Two compliance obligations.
What Is the Transitional CbCR Safe Harbor?
The TCSH was introduced as part of the OECD’s December 2022 guidance. It was intended to reduce the compliance burden on MNE groups operating in high-taxed jurisdictions and provide temporary transitional relief as the GloBE Rules came into effect. As detailed in our previous FORsights™ article, “Deeper Dive Into the OECD’s 2023 July Administrative Guidance for Pillar Two,” this safe harbor allows MNE groups to avoid detailed GloBE calculations in certain jurisdictions when they can demonstrate, based on qualifying CbCR and financial accounting data, that they meet one of the following tests:
- De Minimis Test: satisfied when the tested jurisdiction has CbCR revenue of less than 10 million euro, and the CbCR profit (loss) before income tax is less than 1 million euro.
- Routine Profits Test: satisfied when the tested jurisdiction’s profit or loss before income tax is equal to or less than substance-based income, with a payroll and tangible assets carveout.
- ETR Test: satisfied when the computed ETR is equal to or greater than the global minimum tax transition rate. The transition rate is 17% for fiscal years beginning in 2026 and 2027.
The TCSH was originally made available for a transition period that covered all fiscal years beginning on or before December 31, 2026, but not after June 30, 2028. In December 2025, the Inclusive Framework agreed on the SESH, which is designed as a replacement for the ETR test listed above. The OECD is working on developing a replacement for the de minimis test and routine profits test, but they are not yet ready for approval and adoption into the Inclusive Framework. As such, the SbS package extends the application of the TCSH to fiscal years beginning on or before December 31, 2027, but not after June 30, 2029.
What Is the Simplified ETR Safe Harbor?
To further address the business community’s concerns of compliance burdens associated with the global minimum tax (GMT), the SbS package introduced the permanent SESH. If the simplified ETR for the tested jurisdiction is at least 15% or the tested jurisdiction has a simplified loss, the top-up tax is deemed zero and a full GloBE calculation isn't required. However, reporting is still required. The SESH is notably distinct from the TCSH in its deviation from the “once out always out” approach, as the SESH permits MNE groups with favorable re-entry provisions when certain conditions are met. These re-entry rules are designed to prevent the complexities that would arise from an MNE group routinely bouncing between the safe harbor and the full GloBE calculations.
Calculating the Simplified ETR
The simplified ETR is determined by dividing the simplified taxes by the simplified income from the MNE group’s financial statements with minimal adjustments to each item. The safe harbor calculations rely primarily on the data collected within the existing accounting systems used by the MNE group, with both income and taxes based on the financial data used to prepare the MNE group’s consolidated financial statements (CFS). However, QDMTT jurisdictions that have adopted the local financial accounting standard, by default, require the Simplified ETR calculations to be made in accordance with the local financial accounting standard under the same conditions as the full qualified domestic minimum top-up tax (QDMTT) calculations. Those jurisdictions are encouraged to allow MNE groups to use the financial accounting standard used to prepare the CFS for the safe harbor calculations, although it is not required.
As the SESH is calculated on a jurisdictional basis, it includes eligibility criteria, meaning MNE groups are required to ensure that each GloBE tax attribute is allocated only once to a jurisdiction. For example, an MNE group will not be eligible if its systems produce GloBE accounts in which there is income includible in simplified income that is not allocated to any jurisdiction or a stateless constituent entity.
MNE groups can use intragroup pricing that follows their transfer pricing policy, as stated in their local tax returns, when calculating simplified income and simplified taxes at the jurisdictional level.
Simplified income or loss of a tested jurisdiction is calculated by adjusting the jurisdictional profit (or loss) before income tax (JPBT) by basic adjustments such as removing dividends and equity gains or losses, applying industry-specific adjustments, conditional adjustments, and any optional adjustments elected by the MNE group. The JPBT of a tested jurisdiction is equal to the financial accounting net income or loss (FANIL) of the constituent entities in the tested jurisdiction plus the jurisdictional income tax expense of those constituent entities.
The starting point to determine the simplified taxes for a tested jurisdiction is the jurisdictional income tax expense. This amount is equal to the sum of the current and deferred income tax expense or benefit accrued in the FANIL of the constituent entities located in the tested jurisdiction and any deferred taxes recorded at the consolidated level that are attributable to constituent entities in the tested jurisdiction. This amount is then adjusted by policy-based adjustments, adjustments for uncertain taxes and taxes that are not promptly payable, deferred tax adjustments, any optional adjustments, and an adjustment to remove any tax expense that correlates to items of income that are not included in simplified income.
Mechanics of the Election
This computation is made on a jurisdictional basis and should include all entities that are in the same jurisdiction in line with the GloBE Model rules. A tested jurisdiction comprises constituent entities, permanent establishments, joint ventures, or joint venture subsidiaries for which an individual ETR calculation is mandated under the GloBE Model rules. This new safe harbor differs from the GloBE rules in that investment entities, if certain conditions are met and the MNE group elects to do so, can be treated as residents in the same jurisdiction as other constituent entities for the SESH.
A filing constituent entity can elect the SESH for a tested jurisdiction for a fiscal year that commences on or after December 31, 2026; however, it can apply from December 31, 2025 in certain cases.
If the election is made, the top-up tax is deemed zero and a full GloBE calculation isn’t required; however, it does not eliminate the need for filing. The MNE group will still be required to file a GIR and elect the SESH for each jurisdiction that meets the simplified ETR test.
How Forvis Mazars Can Help
Navigate to our dedicated webpage for more information on Pillar Two compliance for fiscal years 2024 and 2025. If you would like to explore how these developments may impact your organization, please reach out to a tax professional at Forvis Mazars.