MHA | GloBE Model Rules (Pillar 2) – Deferred Tax Requirements

GloBE Model Rules (Pillar 2) – Deferred Tax Requirements

Chris Danes · September 11th 2023 · read

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The GloBE Model Rules (commonly known as Pillar 2) set out a mechanism to address temporary differences arising as a result of differences between the accounting and tax treatment of certain items.

In the Transition Year, a simplified approach is taken where the deferred tax attributes at the beginning of the period, including unrecognised amounts, are valued at the lower of the Minimum Rate and the applicable domestic tax rate.

In subsequent years, the starting point for determining the Total Deferred Tax Adjustment Amount is the deferred tax charge or credit in the Constituent Entity’s financial statements.

Where deferred tax has been calculated at a rate in excess of the Minimum Rate, the Deferred tax adjustments must be recast at the Minimum Rate of 15%. Where a Deferred Tax Asset has been recorded at a lower rate, it should be recast at the Minimum Rate to ensure that no additional Top-Up Tax is incurred when the asset is reversed. The recast must take place in the Fiscal Year in which the GloBE loss or taxable temporary difference is incurred.

There are significant complexities in relation to the Deferred Tax calculations required for the purpose of Pillar 2 rules. For example, the following items are excluded from the Total Deferred Tax Adjustment Amount:

  1. Items which are excluded from the computation of GloBE Income or Loss, for example, Excluded Equity Losses.
  2. Disallowed Accruals and Unclaimed Accruals. Accruals in respect of uncertain tax positions and distributions are excluded due to the speculative nature of whether or when they will be paid. Once paid, they will be taken into account for GloBE purposes.
  3. Valuation adjustments and accounting recognition adjustments. This includes the recognition of tax losses which are often not recognised where financial forecasts suggest that the losses will not be utilised. Under Pillar 2, the deferred tax asset arising on a tax loss should be recorded in the same year as the GloBE loss.
  4. Changes to the domestic tax rate
  5. Generation and utilisation of tax credits.

Also, there are claw back provisions in relation to Deferred tax liabilities which do not reverse within 5 years. Such situations result in a recapture which means the corresponding Top-Up Tax, in respect of the Fiscal Year in which the difference originated, must be recalculated. Thus risking a GloBE Top Up tax return may need to be amended 5 years after it has been submitted!

Under the Recapture Exception Accrual rule, the following items do not need to be monitored and risk a recapture:

  1. Cost recovery allowances on tangible assets, including leased assets.
  2. Cost of licences or similar arrangements.
  3. Research and development expenses.
  4. De-commissioning and remediation expenses.
  5. Fair value accounting on unrealised gains. The exception does not apply, however, where an election to use realisation method in lieu of fair value accounting is made under Article 3.2.5.
  6. Net gains of foreign currency exchange.
  7. Insurance reserves.
  8. Gains from the sale of tangible property that are reinvested in tangible property.
  9. Change in accounting principles in respect of the above categories 1-8.

In order to reduce compliance monitoring and the requirement to recalculate historic Top-Up Tax, where it is not expected that a liability will be paid within 5 years, the model rules provide a simplification option where a Constituent Entity can exclude from the Total Deferred Tax Adjustment Amount items which are almost certain to be recaptured, thus eliminating the risk of a future recapture. 

Overall, there are significant complexities in relation to the GloBE model rules and in particular the Deferred Tax aspects thereof.

Contact our BEPS specialists:

Should there be any questions in relation to Deferred Tax or Pillar 2, please do not hesitate to reach out to:

Chris Denning, Head of Corporate International Tax: [email protected]
Chris Danes, Tax Partner: [email protected]
Jasmine Northeast, Tax Assistant Manager: [email protected]
Alex Lubbock, Tax Assistant Manager: [email protected]

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