111AJ Transitional CbCR safe harbour

Summary

The safe harbour described in this section is designed to provide transitional relief for MNE Groups in the initial years during which the Pillar Two Rules come into effect. This safe harbour seeks to ease the burden of the immediate compliance difficulties that MNEs will face in building systems to collect the data needed for undertaking full Pillar Two calculations by limiting the circumstances in which an MNE will be required to undertake such calculations to a smaller number of higher-risk jurisdictions. The design of the safe harbour is focused on bright-line rules that use readily available and easily verifiable data rather than seeking to achieve a high degree of precision by undertaking the full Pillar Two calculations for a jurisdiction. The transitional safe harbour operates through the use of simplified jurisdictional revenue and income information contained in an MNE’s qualified CbCR report, and jurisdictional tax information contained in an MNE’s qualified financial statements.

Details

Definitions

Introduces definitions relating to the transitional CbCR safe harbour.

“additional tier one capital” means an instrument issued by a constituent entity pursuant to prudential regulatory requirements;

“country-by-country report” has the same meaning as in section 891H and references in this section to ‘CbC report’ shall be construed accordingly;

“deduction without inclusion arrangement”, “duplicate loss arrangement” and “duplicate tax recognition arrangement” have the meaning assigned to them, respectively, in subsection (17);

“hybrid arbitrage arrangement” means a deduction without inclusion arrangement, a duplicate loss arrangement or a duplicate tax recognition arrangement;

“investment entity jurisdiction” means the jurisdiction in which an investment entity is resident for the purposes of a CbC report;

“multi-parented MNE group” has the meaning assigned to it in section 111AP;

“net unrealised fair value loss” means the sum of all losses, as reduced by any gains, which arise from changes in fair value of ownership interests other than portfolio shareholdings included in an MNE group’s profit or loss before income tax in respect of a jurisdiction for a fiscal year as reported in its qualified CbC report;

“OECD Report of 2015” has the same meaning as in section 891H;

“OECD CBCR Guidance” means the document entitled OECD (2024), Guidance on the Implementation of Country-by-Country Reporting: BEPS Action 13, OECD, Paris, published by the OECD in May 2024;

“profit or loss before income tax” means an MNE group’s profit or loss before income tax in respect of a jurisdiction for a fiscal year as reported in its qualified CbC report;

“qualified CbC report” means, in respect of a jurisdiction, a CbC report prepared and provided using qualified financial statements for the jurisdiction;;

“qualified financial statements” means:

1. the accounts used to prepare the consolidated financial statements of the ultimate parent entity before any consolidation adjustments eliminating intra-group transactions,
2. separate financial statements of each constituent entity, joint venture or joint venture affiliate provided they are:
   • prepared in accordance with an acceptable financial accounting standard, or
   • prepared in accordance with an authorised financial accounting standard and the information contained in the financial statements is reliable,
   or
3. in the case of a constituent entity that is not included in an MNE group’s consolidated financial statements on a line-by-line basis solely due to size or materiality grounds, the financial accounts of that constituent entity that are used for preparation of the MNE group’s CbC report;

“qualified person” means:

1. in respect of an ultimate parent entity that is a flow-through entity, an ownership holder described in subsection (1) or (2) of section 111AQ, and
2. in respect of an ultimate parent entity that is subject to a deductible dividend regime, a dividend recipient described in subsection (3) of section 111AR;

“simplified covered taxes” means the aggregate income tax expense of all constituent entities, or joint venture and joint venture affiliates, as the case may be, of an MNE group in a jurisdiction for a fiscal year, as reported in the MNE group’s qualified financial statements, excluding:

1. any tax that is not a covered tax in accordance with section 111T, and
2. uncertain tax positions reported in the MNE group’s qualified financial statements;

“simplified ETR” has the meaning assigned to it in subsection (3);

“total revenue” means an MNE group’s total revenues in respect of a jurisdiction for a fiscal year as reported in its qualified CbC report;

“transitional CbCR safe harbour” shall be construed in accordance with subsection (2);

“transition period” means any fiscal year beginning on, or before, 31 December 2026 but shall not include a fiscal year that ends after 30 June 2028;

“transition rate” means:

1. for fiscal years beginning during the calendar years 2023 and 2024, 15%;
2. for fiscal years beginning during the calendar year 2025, 16%; and
3. for fiscal years beginning during the calendar year 2026, 17%.

Application

(2) Notwithstanding section 111AD(3) (calculation of top-up tax), and subject to subsections (4), (7) to (11), (14) and (18), on the making of an election by the filing constituent entity, the jurisdictional top-up tax for an MNE group in respect of a jurisdiction for a fiscal year during the transition period shall be deemed to be zero (referred to as the ‘transitional CbCR safe harbour’ where, in respect of that fiscal year;

• (2)(a) it has total revenue of less than €10,000,000, and profit or loss before income tax of less than €1,000,000, (the de minimis test),
• (2)(b) it has an effective tax rate as determined under subsection (3), that equals or exceeds the transition rate for the fiscal year, or
• (2)(c) subject to subsection (6), the MNE group reports profit or loss before income tax in the jurisdiction that is equal to or less than the substance-based income exclusion amount (referred to as the routine profits test) as calculated in accordance with section 111AE (SBIE) and 111AX (Transitional relief for SBIE) in respect of constituent entities that are both:
  1. resident in that jurisdiction for the purposes of the qualified CbC report, and
  2. located in that jurisdiction in accordance with section 111D.

(3) The simplified ETR of an MNE group in respect of a jurisdiction for a fiscal year shall be equal to an amount expressed as a percentage calculated in accordance with the formula:

Where-

A is the simplified covered taxes, and

B is the profit or loss before income tax.

(4) A net unrealised fair value loss shall be excluded from profit or loss before income tax if that loss exceeds €50,000,000 in respect of a jurisdiction for a fiscal year.

(5) For the purposes of the de minimis test, where a constituent entity is held for sale, its revenue for a fiscal year shall be aggregated with the revenue of the MNE group reported in its qualified CbC report for that fiscal year in respect of the jurisdiction in which the constituent entity is resident.

(6) For the purposes of subsection (2)(c), the routine profits test shall be deemed to be met in a jurisdiction where the MNE group reports profit or loss before income tax that is zero or less than zero.

(7) The above tests at subsection (2) are applied to a joint venture and joint venture affiliates as if they were constituent entities of a separate MNE group. However, the profit or loss before income tax and total revenue of the joint venture or joint venture affiliates in respect of the fiscal year and the jurisdiction concerned must be those included in their qualified financial statements.

(8) For the purposes of subsection (2),

• (8)(a) subject to subsection (9), where an ultimate parent entity of an MNE is a flow-through entity, e.g. a tax transparent partnership, then the profit or loss before income tax and any associated taxes of the ultimate parent entity are reduced to the extent that such amount is attributable to an ownership interest held by a qualified person.
• (8)(b) where an ultimate parent entity is subject to a deductible dividend regime, then the profit or loss before income tax and any associated taxes of the ultimate parent entity are reduced to the extent that such amount is distributed in respect of an ownership interest held by a qualified person.

(9) Where an ultimate parent entity is a flow-through entity, the transitional CBCR safe harbour will not apply to that MNE group in respect of the jurisdiction where that ultimate parent entity is located unless all the ownership interests in the ultimate parent entity are held by qualified persons.

(10) Where an MNE group has not made an election to apply the transitional CbCR safe harbour in respect of a jurisdiction for a fiscal year and there are constituent entities, joint ventures or joint venture affiliates, as the case may be, of the MNE group located in that jurisdiction for that fiscal year, then that MNE group shall not be permitted to elect to apply the transitional CbCR safe harbour in respect of that jurisdiction in any subsequent fiscal year.

(11) The CbCR safe harbour shall not apply to

• (11)(a) a stateless constituent entity,
• (11)(b) a multi-parented MNE group where a single qualified CbC report does not include the information of the combined groups, or
• (11)(c) a jurisdiction with constituent entities that are subject to an eligible distribution tax system election made in accordance with section 111AS(1).

(12) Where the transitional CbCR Safe Harbour election is made in respect of a jurisdiction for a fiscal year:

• (12)(a) the transition year referred to in section 111AW(2) (regarding transitional deferred tax attributes) shall be the first fiscal year in which the CbCR safe harbour no longer applies to that jurisdiction;
• (12)(b) the transition rule set out in section 111AW(3) (regarding deferred tax attributes relating to items of excluded income or expense) shall continue to apply to a constituent entity, joint venture or joint venture affiliates of an MNE group located in that jurisdiction for that fiscal year;
• (12)(c) the transition year referred to in section 111AW(4) (regarding asset transfers in the transition period) for a transferring entity shall be the first fiscal year in which the CbCR safe harbour no longer applies to the transferring entity.

(13)(a) For the purposes of subsection (2), an MNE group shall exclude from a jurisdiction any investment entity and top-up tax in respect of such entity shall be calculated in accordance with Chapter 7.

(13)(b) However, an investment entity shall not be excluded where:

• no election has been made to treat the investment entity as a tax transparent entity (111AU(1)) or to apply a taxable distribution method (111AV(1)), and
• all the constituent entity owners of that entity are resident in the investment entity jurisdiction.

(13)(c) Where paragraph (a) applies and the investment entity is excluded, an MNE group may apply the transitional CbCR safe harbour in respect of a jurisdiction having regard to constituent entities, joint venture or joint venture affiliates, as the case may be, that are not investment entities.

(13)(d) Where paragraph (a) does not apply:

• the profit or loss before income tax and total revenue of an investment entity, and any associated taxes, shall be reflected only in the jurisdiction of its direct constituent entity-owners in proportion to their ownership interest in such entity, and
• where a portion of the ownership interests of the investment entity is held by owners that are not members of the MNE group, the profit or loss before income tax attributable to such owners shall be excluded.

Reporting

(14) All relevant information concerning the application of the transitional CbCR safe harbour shall be included in the top-up tax information return for the fiscal year in accordance with section 111AAI.

Purchase Price Accounting

(15) Where purchase price accounting adjustments have been included in the financial accounts of a constituent entity that are used in the preparation of the consolidated financial statements of the ultimate parent entity before any consolidation adjustments eliminating intra-group transactions, or the separate financial statements of the constituent entity, those financial accounts or separate financial statements shall not be considered qualified financial statements unless:

• the MNE group of which the constituent entity is a member has not filed a CbC report for a fiscal year beginning after 31 December 2022 that was based on financial information that excluded the purchase price accounting adjustments, except where the constituent entity was required by law or regulation to change its financial information to include purchase price accounting adjustments, and
• any reduction to the constituent entity’s income attributable to an impairment of goodwill related to transactions entered into after 30 November 2021 has been added back to the profit or loss before income tax:
  1. for the purposes of applying the routine profits test, and
  2. for the purposes of calculating the simplified ETR in accordance with subsection (3), but only if the financial accounts do not also have a reversal of deferred tax liability, or recognition or increase of a deferred tax asset, in respect of the impairment of goodwill.

Allocation of taxes

(16) For the purpose of subsection (3):

• the income tax expense in respect of a permanent establishment’s income in the jurisdiction in which the permanent establishment is located must be allocated solely to that jurisdiction and shall not be included in the calculation of the simplified ETR for the main entity’s jurisdiction, and
• taxes paid under a controlled foreign company tax regime or paid by a main entity in relation to the qualifying income or loss of a permanent establishment and that are included in qualified financial statements of the constituent entity-owner or main entity, as the case may be, shall not be allocated for the purposes of determining the simplified ETR for the jurisdiction of the constituent entity-owner or main entity.

Anti-arbitrage provisions

(17)(a) A deduction without inclusion arrangement is an arrangement under which one constituent entity (in this paragraph referred to as the ‘first-mentioned constituent entity’) directly or indirectly provides credit or otherwise makes an investment in another constituent entity that results in an expense or loss in the financial statements of a constituent entity to the extent that:

1. there is no commensurate increase in the revenue or gain in the financial statements of the first-mentioned constituent entity, or
2. the first-mentioned constituent entity is not reasonably expected over the life of the arrangement to have a commensurate increase in its taxable income,

but an arrangement will not be a deduction without inclusion arrangement to the extent that the expense or loss is solely with respect to additional tier one capital.

(17)(b) A duplicate loss arrangement is an arrangement that results in an expense or loss being included in the financial statements of a constituent entity to the extent that:

1. the expense or loss is also being included as an expense or loss in the financial statements of another constituent entity, or
2. the arrangement gives rise to an amount that is deductible for the purposes of determining the taxable income of another constituent entity in another jurisdiction.

An arrangement shall not be a duplicate loss arrangement under subparagraph (i)(I) to the extent that the amount of the expense or loss is offset against revenue or income which is included in the financial statements of both constituent entities

An arrangement shall not be a duplicate loss arrangement under subparagraph (i)(II) to the extent that the amount of the expense or loss is offset against revenue or income which is included in both:

1. the financial statements of the constituent entity that is including the expense or loss in its financial statements, and
2. the taxable income of the constituent entity availing of the deduction against taxable income for the expense or loss.

(17)(c) A duplicate tax recognition arrangement is an arrangement that results in more than one constituent entity including part or all of the same income tax expense in its:

1. adjusted covered taxes, or
2. simplified ETR for the purposes of applying the transitional CbCR safe harbour,

unless such arrangement also results in the income subject to the tax being included in the financial statements of each such constituent entity.

An arrangement shall not be a duplicate tax recognition arrangement if it arises solely because the simplified ETR of a constituent entity (in this subparagraph referred to as ‘the first-mentioned constituent entity’) does not require adjustments for income tax expenses which would be allocated to another constituent entity in determining the first-mentioned constituent entity’s adjusted covered taxes.

(17)(d) Notwithstanding section 111A, a reference to constituent entity in this subsection and subsection (18) shall include:

• a reference to any entity treated as a constituent entity for the purposes of this Part,
• a joint venture or joint venture affiliate, and
• any entity with qualified financial statements that has been taken into account for the purposes of the transitional CbCR safe harbour,

regardless of whether such entities are located in the same jurisdiction.

(17)(e) In this subsection, “financial statements of a constituent entity” means the financial statements used to calculate that constituent entity’s qualifying income or loss or the qualifying financial statements where that constituent entity is subject to the transitional CbCR safe harbour.

(17)(f) For the purposes of this subsection, a constituent entity (in this paragraph referred to as ‘the first-mentioned constituent entity’) shall not be considered to have a commensurate increase in its taxable income to the extent that:

• the amount included in taxable income of the first-mentioned constituent entity is offset by a tax attribute with respect to which a valuation adjustment or accounting recognition adjustment has been made or would have been made if the determination whether to make such a valuation adjustment or accounting recognition adjustment were made without regard to the ability of the first-mentioned constituent entity to use the tax attribute with respect to any hybrid arbitrage arrangement entered into after 15 December 2022, or
• the payment that gives rise to the expense or loss also gives rise to a taxable deduction or loss of a constituent entity that is located in the same jurisdiction as the first-mentioned constituent entity without being included as an expense or loss in determining the profit or loss before income tax for that jurisdiction, including as a result of being an expense or loss in the financial statements of a flow-through entity which is owned by a constituent entity located in the jurisdiction of the first-mentioned constituent entity.

(17)(g) For the purposes of this subsection, an expense or loss shall not be considered to be included in the financial statements of a tax transparent entity to the extent that the expense or loss is included in the financial statements of its constituent-entity owners.

(18)(a) For the purposes of determining whether the transitional CbCR safe harbour applies to an MNE group in respect of a jurisdiction for a fiscal year, in respect of any hybrid arbitrage arrangement entered into after 15 December 2022:

1. any expense or loss arising as a result of a deduction without inclusion arrangement or duplicate loss arrangement shall be excluded from the MNE group’s profit or loss before income tax in respect of the jurisdiction, and
2. any income tax expense arising as a result of a duplicate tax recognition arrangement shall be excluded from the MNE group’s income tax expense in respect of the jurisdiction.

(18)(b) For the purposes of this subsection, a constituent entity shall be considered to have entered into a hybrid arbitrage arrangement after 15 December 2022 if after that date:

1. the arrangement is amended or transferred,
2. the performance of any rights or obligations under the arrangement differs from the performance prior to 15 December 2022 including where payments are reduced or ceased with the effect of increasing the balance of a liability, or
3. there is a change in the accounting treatment with respect to the arrangement.

(18)(c) Where a duplicate loss arrangement arises under paragraph (b)(i)(I) of subsection (17), and all constituent entities that include the relevant expense or loss in their financial statements are located in the same jurisdiction, then an adjustment shall not be made under subparagraph (a)(i) with respect to the expense or loss in the financial statements of one of the constituent entities.

Non-filing of CbC Report

(19) An MNE group or large-scale domestic group that is not required to file a CbC report may apply the provisions of this section for a fiscal year where the top-up tax information return that is filed by the group for that fiscal year is completed using the data from qualified financial statements that would have been reported as total revenue and profit or loss before income tax in a qualified CbC report if the MNE group or large-scale domestic group were required to file a CbC report in accordance with the country-by-country reporting requirements in the jurisdiction where the ultimate parent entity is located, or if that jurisdiction does not have such requirements, the amounts that would have been reported in accordance with the OECD Report of 2015 and the OECD CBCR Guidance.

Relevant Date: Finance Act 2024