OECD Pillar Two safe-harbour rules offer limited relief to Indian MNEs

Multinational enterprises (MNEs) in India are expected to get some room for compliance from the decision of the Organisation for Economic Co-operation and Development (OECD) to extend transitional country-by-country reporting (CbCR) on safe-harbour relief by one year and implement the permanent simplified effective tax rate (ETR) for future years, according to experts. 

This is part of the OECD’s “Side-by-Side Package” under “Pillar Two global minimum tax” rules, announced on Monday. 

A safe harbour offers protection from certain liabilities if some conditions are met. 

However, experts said the new package would have a negligible impact on groups headquartered in India. 

Pillar Two requires multinational groups to calculate whether their effective tax rate in each jurisdiction meets the 15 per cent threshold, failing which a topup tax applies. Given the complexity and data intensity of these calculations, the OECD had earlier introduced a transitional CbCR safe harbour for three years beginning on or before December 31, 2026, thereby covering the period from FY25 to FY27 for Indian-headquartered groups. 

The latest decision extends this relief by another year, allowing Indian companies to rely on transitional CbCR safe harbour for one more year, ie FY28. The latest announcement also brings relief for taxpayers from the compliance burden because it also notifies simplified computations for the permanent safe harbour, applicable for the period’s post-transitional CbCR safe harbour. 

Tax experts say the extension is relevant for Indian MNEs with overseas operations, even though India itself has not yet implemented Pillar Two. More than 50 countries have rolled out the rules, requiring Indian groups with a presence in those jurisdictions to undertake Pillar Two computations and reporting. 

“Even though India has not implemented Pillar Two, Indian MNEs having a presence in countries where Pillar Two is live are required to undertake complex computations and compliances,” said Jitendra Jain, partner at Price Waterhouse & Co LLP.

“The one-year extension of the transitional safe harbour is, therefore, a welcome move.” 

The package introduces new “Side-by-Side” (SbS) and “Ultimate Parent Entity” (UPE) safe harbours. These are designed mainly 

for jurisdictions that already operate domestic minimum taxes and eligible global tax regimes — conditions India does not currently meet. 

“Under the new SbS safe harbour, multinational groups based in qualifying jurisdictions may effectively avoid any additional topup tax, subject to conditions. United States-headquartered multinational groups, which account for roughly 25 per cent of the global groups covered by Pillar Two, are likely to gain the most,” said Aditya Hans, partner, Dhruva Advisors. 

“These side-by-side safe harbours are location-specific rather than universal,” Hans added. “They are unlikely to materially benefit Indian-headquartered groups, though Indian MNEs should still analyse the full range of safe harbours to assess whether they can mitigate compliance and computational burdens.” 

According to Jain, the permanent simplified ETR safe harbour will eventually lead to reduction in compliance costs, but it will still require significant data gathering and calculations. 

“The OECD inclusive framework has recognised that the simplification journey does not stop here and it has committed to a work programme to achieve additional clarifications and simplifications,” added Jain.