Transitional CBC reporting safe harbour data

Source of data

The transitional country-by-country (CBC) reporting safe harbour tests use amounts, such as profit (loss) before income tax, total revenue and simplified covered taxes, to determine if a multinational enterprise group (MNE group) is eligible to apply the safe harbour in respect of a particular jurisdiction for a fiscal year.

To correctly apply a transitional CBC reporting safe harbour test, the amounts used in the calculations must meet certain requirements. Broadly, the amounts used in the calculation must be:

• sourced directly from qualified data
• adjusted where required.

The specific source and adjustments required depend on which test is being applied, as shown in the table below:

Source of data

Safe harbour test	Data points/amounts	Data source	Thresholds
De minimis test	Total revenue for the jurisdiction Profit (loss) before income tax for the jurisdiction	Qualified CBC report	If a jurisdiction has < €1m profit and < €10m total revenue
Simplified ETR test	Profit (loss) before income tax for the jurisdiction Simplified covered taxes for the jurisdiction	Profit (loss) from qualified CBC report Income tax expense from qualified financial statements	If the jurisdiction’s simplified ETR ≥ transition rate (for fiscal years starting in 2024, this is 15%)
Routine profits test	Profit (loss) before income tax for the jurisdiction Substance-based income exclusion (SBIE) for the jurisdiction	Profit from qualified CBC report SBIE amount calculated under GloBE rules, as modified.	If profit is ≤ SBIE amount

The transitional CBC reporting safe harbour is tested, elected and applied separately to joint venture (JV) groups. For that purpose, a special rule applies to JV groups, which requires data to be sourced from qualified financial statements, instead of qualified CBC reports.

The rules are predominately set out in Division 2 of Part 8-2 of the Taxation (Multinational–Global and Domestic Minimum Tax) Rules 2024 (Australian Minimum Tax Rules).

Adjustments to amounts reported

Where an amount is to be sourced from the qualified CBC report or qualified financial statements, it must directly reflect what is reported in the qualified CBC report or financial statements. No adjustments are permitted unless they are expressly allowed.

Qualified CBC report

The term ‘qualified CBC report’ is defined in section 8-35 of the Australian Minimum Tax Rules as a country-by-country (CBC) report prepared in relation to a jurisdiction and filed using qualified financial statements.

Interaction with existing CBC regime

The CBC report is a key element of the CBC reporting regime, which is a pre-existing regime separate to Pillar Two that requires certain entities to report their financial and tax data for each jurisdiction in which they operate.

Access to the transitional CBC reporting safe harbour depends on whether an MNE group has filed a CBC report as required, or can be treated as having done so under specific assumptions:

Access to transitional CBC reporting safe harbour

Scenario	Assumption required	Treatment under assumption	Access to transitional CBC reporting safe harbour
MNE group files a CBC report as required under a jurisdiction's CBC reporting regime.	None	None	Can access the transitional CBC reporting safe harbour.
MNE group fails to file a CBC report as required under a jurisdiction's CBC reporting regime.	None	None	Cannot access transitional CBC reporting safe harbour.
Ultimate parent entity (UPE) jurisdiction has a CBC reporting regime but the particular MNE group is not required to file a CBC report in relation to a jurisdiction.	Assume that the MNE group filed a CBC report in relation to the jurisdiction in accordance with those requirements.	The data from the MNE group's qualified financial statements that would have been reported as total revenue and profit (loss) before income tax in that CBC report is treated as reported in the group’s qualified CBC report.	Can access the transitional CBC reporting safe harbour.
UPE jurisdiction does not have a CBC reporting regime and the MNE group is not required to file a CBC report in relation to a jurisdiction.	Assume that the MNE group filed a CBC report in accordance with both: the OECD's CBC reporting Guidance on the Implementation of Country-by-Country: BEPS Action 13External Link Transfer Pricing Documentation and Country-by-Country Reporting Action 13 – 2015 Final ReportExternal Link.	The data from the MNE group's qualified financial statements that would have been reported as total revenue and profit (loss) before income tax in that CBC report is treated as reported in the group's qualified CBC report.	Can access the transitional CBC reporting safe harbour.

Careful consideration is required to ensure the CBC report is based on data from qualified financial statements.

Qualified financial statements

The qualified CBC report must be prepared and filed using qualified financial statements. Qualified financial statements are financial accounts or statements that meet certain standards as set out in section 8-70 of the Australian Minimum Tax Rules.

Qualified financial statements

Provision	Qualified financial statements	Requirements
8-70(1)(a)	Financial accounts used to prepare the consolidated financial statements of the UPE of the MNE group.	Generally, the consolidated financial statements of the UPE are required to be prepared under either: an acceptable financial accounting standard an authorised financial accounting standard, adjusted for material competitive distortions. Refer to section 34 of the Taxation - (Multinational—Global and Domestic Minimum Tax) Act 2024 (Minimum Tax Act).
8-70(1)(b)	Separate financial statements of a constituent entity of an MNEgroup.	Where prepared under an acceptable or authorised financial accounting standard, information contained in them is: maintained based on that accounting standard reliable.
8-70(1)(c)	Separate financial accounts of a constituent entity of the MNEgroup not included in the consolidated financial statements on a line-by-line basis on materiality grounds.	The accounts must be used for the preparation of the MNE group's CBC report.
8-70(1)(d)	Separate financial statements prepared by the main entity in respect of a GloBE permanent establishment.	Prepared for financial reporting, regulatory, tax reporting or internal management control purposes.

As set out in section 8-75, all of the relevant data used in the transitional CBC reporting safe harbour tests for each jurisdiction must be sourced from the same type or category of qualified financial statements. The MNE group must apply this type or category of qualified financial statements consistently for all entities in the jurisdictions and for all relevant computations.

The transitional CBC reporting safe harbour is not available where the data for computations is derived from a mixture of types of qualified financial statements or where not all entities in a jurisdiction use same data source. For example, it would not be available where profit (loss) before tax is sourced from financial accounts for a constituent entity used to prepare consolidated financial statements of the UPE and simplified covered tax is sourced from separate financial statements prepared under a different accounting standard. Exceptions to this apply for:

• non-material constituent entities excluded from consolidation
• GloBE permanent establishments
• the deferred tax component of the income tax expense.

Consolidated financial data

In Australia, we allow CBC reports to be prepared using consolidated data at the jurisdictional level if the CBC reporting parent is also the head entity of a tax consolidated group, the consolidated data is reported for each jurisdiction in Table 1 of the CBC report and consolidation is consistently used across the years.

Foreign-headquartered MNEs that file their CBC report in another jurisdiction instead of Australia may also prepare their CBC reports using consolidated data at the jurisdictional level, where the filing jurisdiction permits the use of consolidated data.

In a CBC report prepared using consolidated data, items of income and expense that arise from intra-group transactions between entities that are CBC reporting resident in the same jurisdiction are eliminated.

Where CBC reports are prepared using consolidated data at the jurisdictional level in accordance with the requirements of the CBC regime of the filing jurisdiction, the qualified financial statements for the MNE group for the purposes of the transitional CBC reporting safe harbour are those statements or accounts that are prepared on a consolidated basis for the jurisdiction. This is subject to the requirement that the other conditions in section 8-70 are also satisfied, including:

• that the financial accounts are used in preparing the consolidated financial statements of the UPE (if paragraph 8-70(1)(a) is relied on)
• the accounting standard requirements for financial statements (if paragraph 8-70(1)(b) is relied on)
• the purchase accounting and goodwill impairment adjustments in subsections 8-70(2) to (5).

For the purposes of the transitional CBC reporting safe harbour, and subject to any adjustments specifically required under section 8-70, no further adjustments are required to the data drawn from qualified financial statements or the qualified CBC report where the qualified CBC report is prepared based on:

• financial accounts of constituent entities used in preparing the consolidated financial statements of the UPE, where those accounts eliminate items of income and expense from intra-group transactions between entities located in the same jurisdiction
• the consolidated financial statements of a constituent entity (which may cover a sub-group of entities of the MNE group located in the same jurisdiction) prepared in accordance with acceptable or authorised financial accounting standards.

A group may prepare its consolidated financial statements in various ways, and adjustments may be made at various stages of the consolidation process. This guidance applies regardless of the point at which consolidation adjustments are made in the process of preparing the CBC report.

Accounting standard definitions

The following terms are defined under section 34 of the Minimum Tax Act:

• Acceptable financial accounting standards include Australian accounting standards, IFRS, or the generally accepted accounting principles (GAAP) of certain major economies such as the US, UK, EU member states, China, Japan, Canada, India, and others.
• An authorised accounting standard is a set of GAAPs approved by an authorised accounting body in the jurisdiction where the constituent entity is located.
• A material competitive distortion occurs when applying a specific GAAP principle results in a financial difference exceeding 75 million euros compared to IFRS, unless otherwise defined by regulation.

Profit (loss) before income tax

Profit (loss) before income tax is defined in section 8-30 of the Australian Minimum Tax Rules and refers to the profit or loss before income tax amount reported in the qualified CBC report for a tested jurisdiction.

Certain adjustments to the profit (loss) before income tax amount may be required when performing the 3 transitional CBC reporting safe harbour tests to:

• recognise certain intra-group transactions shown in the qualified financial statements
• neutralise hybrid arbitrage arrangements
• ensure profit or loss of investment entities and insurance investment entities are only reflected in the jurisdiction of its direct parent entities in proportion to their ownership interests under section 8-95
• disregard amounts attributable to direct ownership interest holders in a flow-through UPE but only if all direct ownership interest holders are qualified persons under section 7-5 (a similar adjustment is also required for UPEs that are subject to a deductible dividend regime).
• disregard net unrealised fair value losses on non-portfolio ownership interests in excess of 50 million euros
• disregard losses in the main entity jurisdiction to prevent double counting of losses that relate to its GloBE permanent establishment
• disregard certain goodwill impairment losses that do not have a reversal of a deferred tax liability or recognition of a deferred tax asset. This is explained further below.

Purchase price accounting adjustments

Some MNE groups incorporate purchase price accounting (PPA) adjustments into the financial accounts of a constituent entity used to prepare the CBC report or the separate financial statements of a constituent entity. In these cases, a special consistency reporting condition must be satisfied for those financial accounts or financial statements to be considered qualified financial statements.

If this condition is not met, the MNE group will not be able to access the transitional CBC reporting safe harbour using those financial accounts or statements.

The consistency reporting condition is met if:

• the MNE group has not submitted a CBC report for a fiscal year starting after 31 December 2022 that is based on the constituent entity’s financial accounts or statements without PPA adjustments
• the MNE group has submitted such a CBC report but the constituent entity was required by law or regulation to change its financial accounts or statements to include PPA adjustments.

Where the consistency reporting condition is met, PPA adjustments could include the recognition of goodwill in the qualified financial statements. An MNE group must make an adjustment to its profit (loss) before income tax to add back any reduction in a constituent entity’s income from goodwill impairments related to transactions entered into after 30 November 2021, when applying the:

• routine profits test
• simplified ETR test, but only if the financial accounts or statements do not also have either
  • a reversal of deferred tax liability
  • recognition or increase of a deferred tax asset related to the impairment.

Adjustments for intra-group transactions

In some instances, intra-group payments between group entities of the MNE group may need to be recognised for the purposes of the transitional CBC reporting safe harbour test computations, regardless of their treatment in the CBC report.

If an intra-group payment made between group entities is treated as income in the qualified financial statements of the recipient and as an expense in the qualified financial statements of the payer, the income and expense must be included in the MNE group’s profit or loss before income when performing transitional CBC reporting safe harbour calculations, irrespective of the tax treatment of that payment or its treatment in the CBC report.

This rule applies as follows to intra-group transactions between entities in the same jurisdiction:

• An MNE group whose qualified CBC report is prepared using qualified financial statements that eliminate items of income and expense relating to intra-group transactions between entities in the same jurisdiction, will not need to recognise these amounts in the MNE group's profit or loss before income tax.
• Where an MNE group’s qualified CBC report is prepared using qualified financial statements that do not eliminate items of income and expense relating to intra-group transactions between entities in the same jurisdiction, no adjustments are to be made to those items based on the tax treatment of the transaction (these amounts must be included in the profit or loss before income tax, even if they are not shown in the CBC report).

Profit adjustments for hybrid arrangements

Certain expenses and losses reflected in the profit or loss before income tax amount may need to be excluded if the expense or loss arose as a result of a hybrid arbitrage arrangement entered into after 15 December 2022. This is provided for under section 8-110.

The specific arrangements that need to be neutralised are:

• a deduction/non-inclusion arrangement defined in section 8-120
• a duplicate loss arrangement defined in section 8-125.

Tax adjustments are not required for these 2 arrangements.

Adjustments may not be required where an arrangement does not give rise to an expense or loss in the qualified financial statements of a constituent entity.

The rules on hybrid arrangements contained in Subdivision G of Part 8-2 of the Australian Minimum Tax Rules are complex and require careful consideration.

Intra-group arrangements within tax consolidated groups

The following guidance relates to the issue of whether a deduction/non-inclusion arrangement under section 8-120 can arise with respect to certain transactions occurring within an Australian income tax consolidated group. In these transactions, a constituent entity provides credit or otherwise invests in another constituent entity that is part of the same tax consolidated group. That credit or investment results in an accounting expense in the financial statements of the recipient. There is no corresponding taxable income for the investor due to the application of the income tax consolidation single entity rule. If the hybrid arbitrage arrangement rules were to apply to these arrangements, the effect would be to increase the MNE group’s profit or loss before income tax for the Australian jurisdiction.

As set out above, where the MNE group’s CBC report is prepared using consolidated data at the jurisdictional level, in accordance with the requirements of the CBC regime of the filing jurisdiction, the qualified financial statements are those consolidated statements or accounts. As there would be no expense (or income) relating to the intra-group arrangement between members of the income tax consolidated group reflected in those accounts or statements, those items will not need to be recognised in the MNE group's profit or loss before income tax for the purposes of the transitional CBC reporting safe harbour. Similarly, the hybrid arbitrage arrangement rules could not have any operation because there would not be any expense from the arrangement in the qualified financial statements.

Where the applicable CBC regime does not allow for jurisdictional reporting on a consolidated basis and instead requires data to be reported on an aggregated basis, the qualified financial statements for the MNE group for the purposes of the transitional CBC reporting safe harbour may not eliminate items of income and expense relating to intra-group transactions between entities in the same jurisdiction. In these circumstances, there may be an interest expense in the qualified financial statements and the MNE group may need to consider the potential application of the hybrid arbitrage arrangement rules relating to deduction/non-inclusion arrangements.

However, subject to any further guidance from the OECD, we will not apply compliance resources to test the application of section 8-120 (and, consequently, section 8-110) to an intra-group financing arrangement where:

• the MNE group prepares its qualified CBC report for the Australian jurisdiction on an aggregated basis
• an intra-group arrangement involving the provision of credit or making of an investment by an investor occurs between members of an Australian tax consolidated group (TCG) or multiple entry consolidated (MEC) group of the MNE group, and results in an expense in the qualified financial statements
• the net effect of the intra-group financing arrangement on the profit or loss before income tax for Australia for the fiscal year in the qualified CBC report is the same as it would have been had the qualified CBC report been prepared and filed using consolidated data for the jurisdiction.

We are adopting this compliance approach because in these cases there is no net expense in the jurisdictional profit or loss before income tax from the arrangement. There could be no beneficial impact for an MNE group for the purposes of meeting the transitional CBC reporting safe harbour tests from entering the arrangement. As such, these arrangements do not appear to involve an exploitation of differences between tax and financial accounting treatment.

Net unrealised fair value loss adjustment

Net unrealised fair value losses over 50 million euros must be excluded from profit (loss) before income tax.

Broadly, net unrealised fair value losses are the sum of all losses, as reduced by any gains, which arise from changes in fair value of ownership interests (excluding portfolio shareholdings).

Total revenue

The total revenue of an MNE group is defined in section 8-25 of the Australian Minimum Tax Rules and refers to the revenue amount reported in the qualified CBC report for the tested jurisdiction.

The following adjustments must be made to total revenue:

• adjustments to recognise intragroup transactions (a similar rule that applies to profit (loss) before income applies to total revenue)
• adjustments to ensure total revenue of investment entities and insurance investment entities is only reflected in the jurisdiction of their direct parent entities, in proportion to their ownership interests, under section 8-95.

Simplified covered taxes

The term simplified covered taxes is defined in section 8-50 of the Australian Minimum Tax Rules. It refers to the income tax expense for a jurisdiction that would be reported in the MNE group's qualified financial statements for a fiscal year if certain assumptions were made.

Under those assumptions, the following are disregarded:

• taxes for constituent entities whose income or loss was not included in the CBC report (for example, held-for-sale entities)
• taxes in respect of constituent entities whose profits are reported in a different jurisdiction in the CBC report
• taxes that are not covered taxes (which is defined under section 4-40)
• uncertain tax positions.

Other adjustments can apply to:

• exclude taxes of investment entities to ensure amounts are only reflected in the jurisdiction of their direct parent entities in proportion to their ownership interests under section 8-95
• exclude duplicate taxes arising in respect of a duplicate tax recognition hybrid arbitrage arrangement
• reduce simplified covered taxes by amounts attributable to direct ownership interest holders in a flow-through UPE but only if all direct ownership interest holders are qualified persons under section 7-5 (a similar adjustment is required for UPEs that are subject to a deductible dividend regime).

Taxes that are not covered taxes

Simplified covered taxes only include amounts in respect of covered taxes.

A covered tax is, broadly, a tax recorded in the financial accounts of a constituent entity in respect of its income or profits. Taxes paid by insurance companies in respect of returns to policyholders, goods and services tax, payroll and property tax are excluded from being considered a simplified covered tax.

Tax adjustments for hybrid arrangements

Certain tax expenses reflected in the simplified covered tax amount may need to be excluded if the amount was from a hybrid arbitrage arrangement entered into after 15 December 2022.

The specific arrangements that need to be neutralised in respect of the simplified covered taxes amount are duplicate tax recognition arrangements, as defined under section 8-130.

Tax adjustments for special entities

Broadly, the simplified ETR calculations do not require cross border allocation of taxes for GloBE permanent establishments, CFCs and hybrid entities from qualified financial statements which may be required under the full Australian Minimum Tax Rules. However, there may be adjustments between GloBE permanent establishments and their main entities to prevent double counting.