Tax News & Views International Weekly: Simplifying Pillar Two

Key Takeaways

The OECD agreement to largely exempt U.S. companies leaves some areas where compliance will still be necessary.
The new “Simplified Effective Tax Rate Safe Harbor” could make reporting under the system easier.
Taxpayers are still waiting for details about how it could work in practice.
New Trump tariff threats could affect OECD deal.
Supreme Court could release tariff ruling in February.

While the Organization for Economic Cooperation and Development’s Jan. 5 announcement revealed a new side-by-side agreement to largely exempt U.S. companies from taxation under the Pillar Two 15% global minimum tax, that’s not the only thing it included.

In fact, the OECD’s release had several safe harbors meant to simplify and ease enforcement of the system, which since it was first revealed in 2021 has been heavily criticized by taxpayers who claim it will create giant, and ever-increasing, compliance burdens. These new shortcuts, in theory, will make Pillar Two easier to administer in the vast majority of cases where there’s not expected to be new payments–in other words, where there isn’t a large amount of previously untaxed income.

U.S.-parented companies, despite the broad new exemption, could still benefit from these safe harbors in cases where Pillar Two may still apply, such as for the countries that have adopted local minimum taxes based on the Pillar Two system. In theory, this could turn the new OECD regime into a silent plumbing system that’s rarely noticed, instead of the daily nuisance companies fear. But as with the side-by-side agreement itself, a lot will come down to decisions the OECD and taxpayers make in the coming months as the details are further fleshed out.

Once it became clear how expansive Pillar Two’s scope had become, the term “safe harbors” has been a buzzword as a potential way to make the system more administrable. Tax authorities around the globe use safe harbors as a kind of shortcut for enforcement, by offering taxpayers a bargain–agree to an outcome that approximates the law, and get some certainty and protection from future audits. In this context, though, it’s a bit tricker–as OECD officials have pointed out, if there was a simpler way to achieve Pillar Two’s goals, that way would have been in the Pillar Two rules in the first place.

The “Simplified Effective Tax Rate Safe Harbor,” as outlined in the recent OECD announcement, is essentially a new, alternative system for calculating a multinational company’s effective tax rate in a jurisdiction. The OECD said that the corporate consortium Business at OECD helped create this new formula, which–like the official Pillar Two system–uses financial accounting statements as a starting point. But through different adjustments, the goal is to make an easier way for companies to show tax authorities that they have paid a 15 percent tax rate, and that further work isn’t necessary.

The devil, as always, is in the details. Already, some practitioners have questioned whether the “simplified” safe harbor is all that simplifying. For countries enforcing a domestic minimum tax, financial statements using local accounting standards may be required, even though they can differ from the standards used for global accounting–just as with the standard Pillar Two calculations. (The OECD says countries will be “encouraged” to allow certain global standards as well.)

How this will work in practice could depend on how these safe harbors are integrated into the overall Pillar Two guidance, which the OECD says will be completed in the first half of 2026. U.S. companies still worried about the costs of Pillar Two compliance will be watching closely.

Noteworthy Items This Week

Venezuela, Greenland, and the Side-by-Side Package – Mindy Herzfeld, Tax Notes ($):

Is international tax cooperation the last bastion of the post-World War II liberal world order? Or should the United States’ actions more generally be taken as an indication that it will now pursue a unilateral policy of “America first” assertiveness, with little regard for other countries’ welfare? And does the side-by-side agreement truly represent a commitment by all countries to the consistent implementation of the global minimum tax in a manner that’s fair to countries of all sizes and stages of development? The picture becomes murkier the deeper one digs.

Quick Tariff Ruling in Doubt as Supreme Court to Take Recess – Greg Stohr, Bloomberg Tax ($):

The justices are set to start a four-week recess next week without having ruled on pending challenges to most of the duties Trump has imposed over the last year. After Wednesday’s hearing on Trump’s effort to fire Federal Reserve Governor Lisa Cook, the justices don’t have another scheduled courtroom session until Feb. 20.

The wait means the disputed tariffs remain in place for now, costing importers more than $16 billion every month, according to federal government data. At that collection rate, the total collected under the law at the center of the case, the 1977 International Emergency Economic Powers Act, will surpass $170 billion by Feb. 20, according to Bloomberg Economics analyst Chris Kennedy.

Compliance Burden to Stay High Under Global Minimum Tax Deal – Somesh Jha and Ryan Hogg, Bloomberg Tax ($):

Simplification measures in the OECD’s new global minimum tax rules are unlikely to reduce the compliance burden for companies as they determine their tax liabilities under the new system, tax professionals said.

The measures are still too complex, requiring companies to make several adjustments to financial statements, run multiple scenarios, and provide significantly more data than under current rules, they said.

The rules, announced by OECD Jan. 5, introduce a permanent safe harbor—known as the simplified effective tax rate safe harbor—to allow companies to demonstrate that they have no tax liability in a jurisdiction without undertaking a series of detailed calculations.

“It’s fair to say that many large corporations will be disappointed by the level of simplification that the package provides,” James Taylor, UK and Ireland tax deputy managing partner at EY, said in an interview, adding that the permanent safe harbor is “a more complex set of rules” and “not a simple carve-out” for companies.

Remittance Tax Arrival Raises Questions and Action Plans – Carrie Brandon Elliot, Tax Notes ($):

The tax has received a mixed reaction. Supporters say it will increase revenue by about $10 billion over 10 years, discourage illegal immigration, improve money tracking, and make it harder for illicit funds to leave the country. Critics predict double taxation, more red tape for taxpayers and financial institutions, and increases in illicit money transfers, all rendering the United States unattractive for work, investment, and tourism.

What is not in dispute is a need for guidance on open questions surrounding the application and collection of the tax. Remittance provider advisers like law firms and trade associations have identified gaps that need to be addressed by Treasury and the IRS and have advised providers on how to proceed in the meantime. In turn, remittance providers have been advising customers on how to structure their remittances to avoid the tax.

Countries to Further Streamline Pillar 2 Reporting Obligations – Stephanie Soong, Tax Notes ($):

Delegates in the OECD inclusive framework on base erosion and profit shifting are developing reporting obligations related to the package, which contains several safe harbors under the global anti-base-erosion rules, according to Félicie Bonnet, adviser at the OECD Centre for Tax Policy and Administration (CTPA). She spoke January 13 during a webcast organized by the CTPA.

The inclusive framework aims to streamline reporting obligations in light of those safe harbors and plans to provide updates and clarifications to the GLOBE information return by mid-2026, Bonnet said.

Public Domain Superhero of the Week

Every week, a new character from the Golden Age of Comics, who’s fallen out of use.

This week’s entry: Lash Lightning

Debut Year:1940

Debut Publication: Sure-Fire Comics #1

Origin Story: Tutored by the ancient "Old Man of the Pyramids," the American student Robert Morgan learned how to harness electricity and lightning, which he uses for good.

Superpowers: Aside from being able to shoot lightning, he has super-strength, super-speed and can fly. But his powers need to be recharged.

Eide Bailly's International Tax Team and our affiliates at HLB, The Global Advisory and Accounting Network, stand ready to assist with your worldwide tax needs.

SchemaSEO

Make a habit of sustained success.