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Accrued Pension Expense

Applies
FY2024 onwards
Reviewed
Rule
P2-PENSION-2024.1
By

How is pension expense treated under Pillar Two?

For a plan run through a pension fund, GloBE Income deducts the contributions paid in the year, not the expense accrued in the accounts.

Per GloBE Model Rules (Pillar Two), December 2021, Article 3.2.1(i), Accrued Pension Expense

A Constituent Entity's Financial Accounting Net Income or Loss is adjusted for Accrued Pension Expense: the difference between the amount of pension liability expense included in the Financial Accounting Net Income or Loss and the amount contributed to a Pension Fund for the Fiscal Year. Under the Commentary, the adjustment is positive where the amount accrued as an expense exceeds the contributions for the year and negative where the contributions exceed it; where the accounts include pension income, the adjustment is the sum of the pension income and the contributions, as a negative amount. The article applies only to plans provided through a Pension Fund.

It lines the GloBE deduction up with the usual tax rule, under which pension costs are deductible when contributed. Without it, an accrual that tax does not yet allow would lower GloBE Income in a year in which no tax relief was given.

Contributions in, accruals out

The adjustment

  • Accrual above contributions — the difference is added to income
  • Contributions above accrual — the difference is deducted
  • Pension income in the accounts — the income is taken out and the contributions are deducted
  • It applies whether the Pension Fund is in surplus or in deficit

Only a plan provided through a Pension Fund

A Pension Fund is an Entity established and operated exclusively or almost exclusively to administer or provide retirement benefits, regulated as such or holding assets through a fiduciary arrangement to secure the obligations — and a Pension Services Entity. Pension expense accrued for direct pension payments to former employees is outside the article and stays as accrued in the accounts.

Why contributions

Two reasons the Commentary gives. Local tax rules commonly deduct pension costs when contributions are made, so the GloBE timing follows the tax. And some accounting standards put part of pension accounting in Other Comprehensive Income only, which would otherwise give different results under different standards.

A surplus paid back

Where a Pension Fund is in surplus and the surplus is distributed to a Constituent Entity, it is included in that entity's GloBE Income or Loss in the Fiscal Year of the distribution.

Deferred tax follows

A deferred tax asset or liability in the accounts on the pension difference is excluded from Adjusted Covered Taxes under Article 4.4.1(a). Deferred tax relating to a distributed surplus is included.

Order of testing

  1. 1

    Inputs requiring your determination

    Whether the plan is provided through a Pension Fund, then the accrual and the contributions — nil entered, not left blank.

  2. 2

    A plan provided through a Pension Fund

    Outside it, the accounting expense stands and nothing is adjusted.

  3. 3

    The accrual against the contributions

    The accrual less the contributions: positive increases income, negative reduces it.

Examples

Illustrative scenarios — ours, not the authority’s — each computed live by this rule. Change any fact and the outcome is the rule’s, not a hand-written answer.

An accrual larger than the year's contributions

A defined benefit plan: the accounts charge EUR 10 million of pension expense and the company pays EUR 6 million into the fund. GloBE Income deducts the EUR 6 million, so EUR 4 million is added back.

Computed

Financial Accounting Net Income or Loss is increased by EUR 4,000,000 for FY2026 as computed: under Article 3.2.1(i) the pension expense accrued of EUR 10,000,000 is replaced by the contributions to the Pension Fund of EUR 6,000,000. Pension liabilities are allowed in GloBE Income or Loss to the extent of contributions to a Pension Fund in the Fiscal Year. Deferred tax in the accounts on the pension difference is left out of Adjusted Covered Taxes under Article 4.4.1(a). Based on the figures you supplied.

Workings

Pension expense accrued in the accountsIncluded in Financial Accounting Net Income or Loss — added back
EUR 10,000,000
Contributions to the Pension FundArticle 3.2.1(i) — the amount allowed as an expense for the Fiscal Year
(EUR 6,000,000)
Adjustment for Accrued Pension ExpensePositive — increases GloBE Income or reduces the GloBE Loss
EUR 4,000,000

Decided by the accrual against the contributions

A one-off deficit contribution

The same plan in a year in which the company pays EUR 25 million to clear a funding deficit, against the same EUR 10 million accrual: a further EUR 15 million is deducted.

Computed

Financial Accounting Net Income or Loss is reduced by EUR 15,000,000 for FY2027 as computed: under Article 3.2.1(i) the pension expense accrued of EUR 10,000,000 is replaced by the contributions to the Pension Fund of EUR 25,000,000. Pension liabilities are allowed in GloBE Income or Loss to the extent of contributions to a Pension Fund in the Fiscal Year. Deferred tax in the accounts on the pension difference is left out of Adjusted Covered Taxes under Article 4.4.1(a). Based on the figures you supplied.

Workings

Pension expense accrued in the accountsIncluded in Financial Accounting Net Income or Loss — added back
EUR 10,000,000
Contributions to the Pension FundArticle 3.2.1(i) — the amount allowed as an expense for the Fiscal Year
(EUR 25,000,000)
Adjustment for Accrued Pension ExpenseNegative — reduces GloBE Income or increases the GloBE Loss
(EUR 15,000,000)

Decided by the accrual against the contributions

A plan in surplus showing pension income

The accounts show pension income of EUR 2 million and the company still contributes EUR 1 million. The income is taken out and the contribution deducted: a reduction of EUR 3 million.

Computed

Financial Accounting Net Income or Loss is reduced by EUR 3,000,000 for FY2026 as computed: under Article 3.2.1(i) pension income of EUR 2,000,000 is taken out and the contributions of EUR 1,000,000 are allowed as the expense. Pension liabilities are allowed in GloBE Income or Loss to the extent of contributions to a Pension Fund in the Fiscal Year. Deferred tax in the accounts on the pension difference is left out of Adjusted Covered Taxes under Article 4.4.1(a). Based on the figures you supplied.

Workings

Pension income accrued in the accountsIncluded in Financial Accounting Net Income or Loss — taken out
EUR 2,000,000
Contributions to the Pension FundArticle 3.2.1(i) — the amount allowed as an expense for the Fiscal Year
(EUR 1,000,000)
Adjustment for Accrued Pension ExpenseNegative — reduces GloBE Income or increases the GloBE Loss
(EUR 3,000,000)

Decided by the accrual against the contributions

End-of-service benefits paid by the employer directly

A provision for gratuities that the employer will pay to leavers itself, with no fund. It is not a plan provided through a Pension Fund, so the accounting expense stands.

Computed

No adjustment is made under Article 3.2.1(i), as determined: the article applies only to the pension expense of plans provided through a Pension Fund. Pension expense accrued for direct pension payments to former employees is taken into account at the same time and in the same amount as it is accrued in the computation of Financial Accounting Net Income or Loss. Based on the determination you supplied.

Decided by the a plan provided through a pension fund

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Not computed yet

1 input still need your determination:

  • Is the pension plan provided through a Pension Fund as defined in Article 10.1 — an Entity established and operated exclusively or almost exclusively to administer or provide retirement benefits, regulated as such or secured by assets held to meet those obligations? Pension expense accrued for direct payments to former employees is not within Article 3.2.1(i).

Computed in your browser from the figures you supply. Nothing is sent anywhere, and the result is a computation against a rule — reference, not tax advice.

Sources

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Reference, not tax advice.

Pankaj Agarwal — Tax Technology Leader