The Transitional Safe Harbour under Pillar 2 provides multinational enterprise (MNE) groups with a simplified compliance framework during the initial years of implementation. However, eligibility for this relief depends on a critical requirement. The Country-by-Country Report must qualify as a Qualified CbCR. Accordingly, the financial statements underlying the CbCR play a central role.
Differences Between Tax Accounting and TFRS Financial Statements
In Turkey, financial statements prepared under the Tax Procedural Law (TPL) differ materially from those prepared in accordance with Turkish Financial Reporting Standards (TFRS), which is an acceptable accounting standard for Pillar 2 purposes.
Most notably, these differences arise from inflation adjustment. Different CPI–PPI figures and methodologies are applied under tax accounting records and TFRS. As a result, profit before tax, asset values, and equity balances may diverge significantly.
From a financial reporting perspective, TFRS-based inflation adjustment generally provides a more economically meaningful presentation. Importantly, these differences often exceed materiality thresholds in high-inflation environments.
Inflation Adjustment and Its Impact on Effective Tax Rates
Differences between the CPI–PPI figures used in inflation adjustment under tax accounting records and TFRS can create significant permanent differences in financial statements. Depending on the direction and composition of these differences, inflation adjustment may lead to either a lower or a higher effective tax rate (ETR).
For example, a company with a 25% corporate tax burden in its statutory books may report a TFRS-based ETR below 15% where inflation adjustments reduce accounting profit more than taxable profit. Conversely, in other cases, inflation-related adjustments may increase accounting profit relative to tax profit, resulting in a higher TFRS-based ETR.
In Pillar 2 calculations, TFRS figures are used. Therefore, an ETR that appears low in statutory records may translate into a significantly higher ETR under Pillar 2, or vice versa. This outcome depends on the nature of the inflation-driven permanent differences reflected in the qualified financial statements.
Accordingly, companies should carefully analyze the differences between tax accounting records and TFRS as part of their Pillar 2 readiness process.
Qualified Financial Statements Under OECD Guidance
OECD guidance links the Transitional Safe Harbour directly to the use of Qualified Financial Statements.
In principle, Qualified Financial Statements are:
- The accounts used to prepare the UPE’s consolidated financial statements, or
- The separate financial statements of constituent entities prepared in accordance with an Acceptable Financial Accounting Standard.
This framework aims to ensure consistency, reliability, and comparability across jurisdictions.
Use of Alternative Financial Statements Where TFRS Is Not Available
OECD guidance also addresses cases where constituent entities are not consolidated on a line-by-line basis solely due to size or materiality considerations.
In such circumstances, if:
- The entity is not included in consolidation, and
- Separate financial statements prepared under an acceptable or authorised accounting standard do not exist,
the MNE group may use the same financial accounts that are used to prepare the CbCR for that entity.
Accordingly, where standalone TFRS financial statements are not available, tax-based financial statements may still be acceptable, provided that they form the basis of the CbCR. This flexibility is explicitly included in the OECD definition of Qualified Financial Statements.
Practical Implications for Turkish Entities
In practice, Turkish entities are generally consolidated into the UPE’s financial statements using TFRS figures.
TFRS is an acceptable accounting standard and is often broadly aligned with other internationally acceptable standards.
Therefore, where TFRS financial statements exist and are used in consolidation, these figures should also be reflected in the CbCR. This alignment supports the qualification of the CbCR for Transitional Safe Harbour purposes.
Conclusion
In conclusion, eligibility for the Transitional Safe Harbour under Pillar 2 depends on the use of a Qualified CbCR prepared from Qualified Financial Statements.
For Turkish entities, this typically requires:
- Using TFRS-based financial statements where available,
- Relying on tax-based financial statements only where standalone TFRS statements do not exist and the same accounts are used in the CbCR, and
- Carefully assessing inflation adjustment differences, as these differences may either increase or decrease the Pillar 2 ETR, depending on their nature and materiality.
Ultimately, consistency, materiality, and alignment with OECD guidance are essential to securing Safe Harbour benefits during the transition period.
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