Chapter 4
What is the starting point for calculating adjusted covered taxes?
Current tax expense accrued in its Financial Accounting Net Income or Loss
What is the starting point of "Total Deferred Tax Adjustment Amount"?
Deferred tax expense accrued in its financial accounts if the applicable tax rate is below the Minimum Rate or, in any other case, such deferred tax expense recast at the Minimum Rate
How many years can a deferred tax liability not be paid before the amount is recaptured?
5 years
When is GLoBE Loss Election made?
The GloBE Loss Election must be filed with the first GloBE Information Return of the MNE Group that includes the jurisdiction for which the election is made.
EUR 1 million
What is GLoBE Loss Election and how is this computed?
This dispenses with the deferred tax expense and allows the MNE to establish a deemed deferred tax asset where this is a net Pillar Two GloBE loss for that jurisdiction. The deferred tax asset for the loss is equal to the net Pillar Two loss in the jurisdiction for a fiscal year, multiplied by the 15% minimum rate.
Explain the concept of "recasting" Deferred Tax Asset.
A deferred tax asset that has been recorded at a rate lower than the Minimum Rate may be recast at the Minimum Rate in the Fiscal Year such deferred tax asset is recorded, if the taxpayer can demonstrate that the deferred tax asset is attributable to a GloBE Loss
Can GLoBE Loss Election be subsequently revoked?
Compute for Adjusted Covered Taxes based on the following:
ACo (Hungary) received royalties from BCo (USA) amounting to 100, net of 15 withholding taxes. This was recorded in the books of ACo, as follows:
DR - Cash 100
CR - Royalties 100
ACo has current tax expense of 135
Input VAT paid during the year amounted to 50
150 (135 current tax expense + 15 Taxes imposed in lieu of a generally applicable corporate income tax)
What does "Recapture Exception Accrual" mean?
DTL that is not recaptured even if not paid within the five subsequent Fiscal Years
ABC Co. operates in a jurisdiction imposing 15% CIT. In the current FY, ABC Co. had 1 million income and 150,000 CIT, recorded as follows:
a. 90,000 - Current income tax expense
b. 25,000 - Other Comprehensive Loss
c. 15,000 - reduction to Retained Earnings
d. 20,000 - Other Miscellaneous Expenses
Determine Adjusted Covered Taxes of ABC Co.
150,000
FY20X1 - A Constituent Entity incurs a Loss of (100) and a deferred tax asset of (15) is generated. However, financial forecasts indicate that the tax loss will not be used in the future.
FY20X2 - The forecast changes and the accounting recognition adjustment is reversed.
FY20X3 - Income of 100 is generated and the loss deferred tax asset is used and reversed.
Task - Determine adjusted covered taxes for all 3 years.
FY20X1: -15
FY20X2: 0
FY20X3: 15
Year 1 (Fiscal Year 2020): XYZ Corp recognizes a deferred tax liability of EUR 1 million.
Year 2 (Fiscal Year 2021): The liability remains unpaid.
Year 3 (Fiscal Year 2022): The liability remains unpaid.
Year 4 (Fiscal Year 2023): The liability remains unpaid.
Year 5 (Fiscal Year 2024): The liability remains unpaid.
Year 6 (Fiscal Year 2025): The liability is still unpaid.
How will you treat the DTL recognized in Year 1?
The EUR 1 million deferred tax liability will be treated as a reduction to Covered Taxes for the fifth preceding Fiscal Year (2020).
The ETR and Top-up Tax for 2020 will be recalculated based on this adjustment.
Any resulting TuT is added to TuT in the year of recapture (2025)
True of False - It is possible that TuT may be allocated to a CE which operated at a GloBE Loss.
True.
It is possible that a CE is at a GloBE loss but blended jurisdictional ETR is below 15%. In such case, additional current TUT under 4.1.5 is allocated to such CE if its adjusted covered taxes are less than zero and less than the Expected Adjusted Covered Taxes Amount.
2022 GloBE Income: EUR 35 million and Adjusted Covered Taxes of EUR 3.5 million
2024 GloBE Income: EUR 50 million and Adjusted Covered Taxes of EUR 7.5 million
In 2024, XYZ Corp discovers an error in its 2022 tax filings, resulting in additional QDMTT payment of 1.5 million.
Compute for ETR and TUT for both 2022 and 2024
No changes.
Covered Taxes does not include any amount of:
(a) Top-up Tax accrued by a Parent Entity under a Qualified IIR;
(b) Top-up Tax accrued by a Constituent Entity under a Qualified Domestic Minimum Top-Up Tax;
(c) Taxes attributable to an adjustment made by a Constituent Entity as a result of the application of a Qualified UTPR;
What is "Unclaimed Accrual" election?
Provides a compliance simplification option with respect to the recapture rule. This simplification allows for the exclusion of deferred tax liabilities that are almost certain to require recapture, which reduces compliance monitoring such liabilities and recalculating Top-up Tax several years later.
Provides an Annual Election which allows a Constituent Entity to exclude the DTL accrual in a given Fiscal Year if it is not expected to reverse, in its entirety, by the end of the fifth subsequent Fiscal Year.
If the Unclaimed Accrual election is made, the reversal of the unclaimed DTL shall also be excluded from the computation of the Adjusted Covered Taxes.
A Co. is operating in a jurisdiction which imposes CIT of 10% and allows carry-over of losses.
A Co. has Accounting Income / Gains of EUR 3.5 million and Accounting Expenses / Losses of EUR 4.5 million in FY 2024.
Consequently, A Co. recorded -EUR 100,000 as Adjusted Covered Taxes.
What advice would you give A Co.?
Demonstrate that the deferred tax asset is attributable to a GloBE Loss so that the DTA can be recast to 15% minimum rate
What is the proper treatment of "a Qualified Refundable Tax Credit"?
A Qualified Refundable Tax Credit is a refundable tax credit designed in a way such that it is refundable within four years from when a Constituent Entity satisfies the conditions for receiving the credit under domestic law of a jurisdiction in which the Constituent Entity is located.
Qualified Refundable Tax Credits are treated as income items in the computation of GloBE Income or Loss, and not as reduction to covered taxes.
ABC Corp. records DTL that are not expected to be paid within 5 years. However, ABC Corp. does not want to monitor such DTLs for recapture.
What advice would you give ABC Corp.?
Make an Unclaimed Accrual Election.
This provides an Annual Election which allows a Constituent Entity to exclude the DTL accrual in a given Fiscal Year if it is not expected to reverse, in its entirety, by the end of the fifth subsequent Fiscal Year.
If the Unclaimed Accrual election is made, the reversal of the unclaimed DTL shall also be excluded from the computation of the Adjusted Covered Taxes.
A Co is member of an MNE Group that is subject to the GloBE Rules and it is located in Country A, which imposes a 20% corporate income tax.
In a Fiscal Year, A Co receives a dividend of 100 that is excluded from the computation of GloBE Income or Loss. The dividend, however, is included in the computation of the taxable income in Country A.
In the same Fiscal year, A Co earns an additional 100 of Country A taxable income that is also GloBE Income.
Compute for Covered Taxes, ETR and TUT
Covered Taxes - 100
ETR - 20%
TUT - 0
ABC Corp. has the following results of operations:
2022 - GloBE income of EUR 2,000,000 and Adjusted Covered Taxes of EUR 750,000
2024 - GloBE income of EUR 3,500,000 and Adjusted Covered Taxes of EUR325,000
In 2024, it was discovered that the Company Accountant made an error, resulting in reduction to 2022 covered taxes amounting to EUR 200,000.
What advice would you give ABC Corp.?
Treat the prior period reduction in covered taxes as current year adjustment. This is allowed since the reduction (EUR 200,000) falls within the EUR 1,000,000 threshold.
Will present solution.
Consider the following for FY 2021:
ABC Corp. had GloBE Income (Loss) of 2,500,000. The Company operates in a jurisdiction that imposes 10% CIT. ABC Corp. recognized provision for DT expense amounting to 75,000.
Other notes:
- Previous year GloBE Loss amounting to 750,000 was incurred. ABC Corp. availed of GloBE Loss Election.
- Deferred tax expense of 20,000 was recorded for an uncertain tax position
- Current tax expense amounting to 30,000 is expected to be paid in 2025
- In the current year, ABC Corp. received a refund from the Government amounting to 17,500 for completion of public hospital construction in 2020.
Compute for 2021 Adjusted Covered Taxes
387,500
To show solution
A Co is in a jurisdiction imposing 15% CIT.
In Year 1, A Co has income of 120, including 20 income that is excluded from tax under Coutry A and expenditure of (220) under the GloBE Rules, resulting in a total GloBE Loss for the period of (100).
Compute for
(a) Expected Adjusted Covered Taxes Amount
(b) Additional Top up Tax
a. -15 (GloBE loss x 15%)
b. 3 (Adjusted covered taxes of -18 less Expected Adjusted Covered Taxes Amount of -15)
2022 GloBE Income: EUR 20 million and Adjusted Covered Taxes of EUR 3 million
2024 GloBE Income: EUR 30 million and Adjusted Covered Taxes of EUR 2.8 million
In 2024, XYZ Corp discovers an error in its 2022 tax filings, resulting in an adjustment that decreases its Covered Taxes for 2022 by EUR 1.6 million.
Compute for ETR and TUT for both 2022 and 2024
ETR - 7% (2022) and 14% (2024)
TUT - no adjustment for 2022. EUR 1.8 million in 2024