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Adjustments to Covered Taxes

Applies
FY2024 onwards
Reviewed
Rule
P2-ACT-2024.1
By

How are Adjusted Covered Taxes calculated?

Current tax expense on Covered Taxes, plus additions, less reductions, adjusted for deferred tax and for taxes in equity or OCI, with nothing counted twice.

Per GloBE Model Rules (Pillar Two), December 2021, Article 4.1, Adjusted Covered Taxes

The Adjusted Covered Taxes of a Constituent Entity for the Fiscal Year are the current tax expense accrued in its Financial Accounting Net Income or Loss with respect to Covered Taxes, adjusted by the net amount of its Additions to Covered Taxes and Reductions to Covered Taxes, the Total Deferred Tax Adjustment Amount, and any increase or decrease in Covered Taxes recorded in equity or Other Comprehensive Income relating to amounts included in the computation of GloBE Income or Loss that will be subject to tax under local tax rules. No amount of Covered Taxes may be taken into account more than once.

This is the numerator of the Effective Tax Rate, entity by entity. It can be negative.

Four additions, five reductions, and two further adjustments

Additions — Article 4.1.2

  • (a) Covered Taxes expensed in profit before taxation rather than in the tax line
  • (b) GloBE Loss Deferred Tax Asset used
  • (c) Covered Taxes paid on an uncertain tax position that was a Reduction in an earlier year
  • (d) Qualified Refundable or Marketable Transferable Tax Credits recorded as a reduction to current tax

Reductions — Article 4.1.3

  • (a) Current tax on income excluded from GloBE Income or Loss
  • (b) Non-Qualified Refundable Tax Credits not recorded as a reduction to current tax
  • (c) Covered Taxes refunded or credited, not treated as an adjustment to current tax
  • (d) Current tax relating to an uncertain tax position
  • (e) Current tax not expected to be paid within three years of the year end

Tax on excluded income follows the income

The whole withholding tax on an excluded dividend comes out. But tax on a dividend from another Constituent Entity is not lost: it is allocated to the distributing entity under Article 4.3.2(e).

Uncertain tax positions

Taken out when accrued and added back when paid. Interest and penalties on them are never included.

Once only

A levy that fits two categories is taken into account once, and in one Constituent Entity.

Order of testing

  1. 1

    Inputs requiring your determination

    Every input the computation reaches must be supplied; nil is entered, not left blank.

  2. 2

    The sum under Article 4.1.1

    Current tax, plus additions, less reductions, plus the deferred tax adjustment and taxes in equity or OCI.

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.

A straightforward year

Current tax of EUR 20 million, of which EUR 2 million is on excluded dividends, and a deferred tax adjustment of EUR 3 million.

Computed

The Adjusted Covered Taxes are EUR 21,000,000 as computed (Article 4.1.1): current tax expense of EUR 20,000,000, plus Additions of EUR 0, less Reductions of EUR 2,000,000, plus a Total Deferred Tax Adjustment Amount of EUR 3,000,000 and EUR 0 recorded in equity or Other Comprehensive Income. Allocations to or from other Constituent Entities under Article 4.3 are made to this figure. No amount may be counted more than once (Article 4.1.4), which this rule cannot check. Based on the figures you supplied.

Workings

Current tax expense for Covered TaxesArticle 4.1.1 — as accrued in Financial Accounting Net Income or Loss
EUR 20,000,000
Covered Taxes expensed in profit before taxationArticle 4.1.2(a) — an addition
EUR 0
GloBE Loss Deferred Tax Asset usedArticle 4.1.2(b) — an addition
EUR 0
Uncertain tax position paid in the yearArticle 4.1.2(c) — an addition, to the extent previously a Reduction
EUR 0
Qualified credits recorded in current taxArticle 4.1.2(d) — an addition: the credit is income, not a reduction of tax
EUR 0
Current tax on income excluded from GloBE IncomeArticle 4.1.3(a) — a reduction
(EUR 2,000,000)
Non-Qualified Refundable Tax Credits not in current taxArticle 4.1.3(b) — a reduction
EUR 0
Refunds and credits of Covered Taxes not in current taxArticle 4.1.3(c) — a reduction
EUR 0
Current tax on uncertain tax positionsArticle 4.1.3(d) — a reduction
EUR 0
Current tax not expected to be paid within three yearsArticle 4.1.3(e) — a reduction
EUR 0
Total Deferred Tax Adjustment AmountArticle 4.1.1(b) — as determined under Article 4.4
EUR 3,000,000
Covered Taxes recorded in equity or OCIArticle 4.1.1(c) — on amounts in GloBE Income or Loss that are taxed locally
EUR 0
Adjusted Covered TaxesArticle 4.1.1 — current tax, plus additions, less reductions, plus the deferred tax adjustment and taxes in equity or OCI
EUR 21,000,000

Decided by the sum under article 4.1.1

A refundable credit booked against tax

Current tax of EUR 8 million after a EUR 4 million Qualified Refundable Tax Credit was netted against it.

Computed

The Adjusted Covered Taxes are EUR 12,000,000 as computed (Article 4.1.1): current tax expense of EUR 8,000,000, plus Additions of EUR 4,000,000, less Reductions of EUR 0, plus a Total Deferred Tax Adjustment Amount of EUR 0 and EUR 0 recorded in equity or Other Comprehensive Income. Allocations to or from other Constituent Entities under Article 4.3 are made to this figure. No amount may be counted more than once (Article 4.1.4), which this rule cannot check. Based on the figures you supplied.

Workings

Current tax expense for Covered TaxesArticle 4.1.1 — as accrued in Financial Accounting Net Income or Loss
EUR 8,000,000
Covered Taxes expensed in profit before taxationArticle 4.1.2(a) — an addition
EUR 0
GloBE Loss Deferred Tax Asset usedArticle 4.1.2(b) — an addition
EUR 0
Uncertain tax position paid in the yearArticle 4.1.2(c) — an addition, to the extent previously a Reduction
EUR 0
Qualified credits recorded in current taxArticle 4.1.2(d) — an addition: the credit is income, not a reduction of tax
EUR 4,000,000
Current tax on income excluded from GloBE IncomeArticle 4.1.3(a) — a reduction
EUR 0
Non-Qualified Refundable Tax Credits not in current taxArticle 4.1.3(b) — a reduction
EUR 0
Refunds and credits of Covered Taxes not in current taxArticle 4.1.3(c) — a reduction
EUR 0
Current tax on uncertain tax positionsArticle 4.1.3(d) — a reduction
EUR 0
Current tax not expected to be paid within three yearsArticle 4.1.3(e) — a reduction
EUR 0
Total Deferred Tax Adjustment AmountArticle 4.1.1(b) — as determined under Article 4.4
EUR 0
Covered Taxes recorded in equity or OCIArticle 4.1.1(c) — on amounts in GloBE Income or Loss that are taxed locally
EUR 0
Adjusted Covered TaxesArticle 4.1.1 — current tax, plus additions, less reductions, plus the deferred tax adjustment and taxes in equity or OCI
EUR 12,000,000

Decided by the sum under article 4.1.1

A disputed assessment

Current tax of EUR 15 million including EUR 5 million provided for an uncertain tax position.

Computed

The Adjusted Covered Taxes are EUR 10,000,000 as computed (Article 4.1.1): current tax expense of EUR 15,000,000, plus Additions of EUR 0, less Reductions of EUR 5,000,000, plus a Total Deferred Tax Adjustment Amount of EUR 0 and EUR 0 recorded in equity or Other Comprehensive Income. Allocations to or from other Constituent Entities under Article 4.3 are made to this figure. No amount may be counted more than once (Article 4.1.4), which this rule cannot check. Based on the figures you supplied.

Workings

Current tax expense for Covered TaxesArticle 4.1.1 — as accrued in Financial Accounting Net Income or Loss
EUR 15,000,000
Covered Taxes expensed in profit before taxationArticle 4.1.2(a) — an addition
EUR 0
GloBE Loss Deferred Tax Asset usedArticle 4.1.2(b) — an addition
EUR 0
Uncertain tax position paid in the yearArticle 4.1.2(c) — an addition, to the extent previously a Reduction
EUR 0
Qualified credits recorded in current taxArticle 4.1.2(d) — an addition: the credit is income, not a reduction of tax
EUR 0
Current tax on income excluded from GloBE IncomeArticle 4.1.3(a) — a reduction
EUR 0
Non-Qualified Refundable Tax Credits not in current taxArticle 4.1.3(b) — a reduction
EUR 0
Refunds and credits of Covered Taxes not in current taxArticle 4.1.3(c) — a reduction
EUR 0
Current tax on uncertain tax positionsArticle 4.1.3(d) — a reduction
(EUR 5,000,000)
Current tax not expected to be paid within three yearsArticle 4.1.3(e) — a reduction
EUR 0
Total Deferred Tax Adjustment AmountArticle 4.1.1(b) — as determined under Article 4.4
EUR 0
Covered Taxes recorded in equity or OCIArticle 4.1.1(c) — on amounts in GloBE Income or Loss that are taxed locally
EUR 0
Adjusted Covered TaxesArticle 4.1.1 — current tax, plus additions, less reductions, plus the deferred tax adjustment and taxes in equity or OCI
EUR 10,000,000

Decided by the sum under article 4.1.1

A loss year

No current tax and a deferred tax asset of EUR 6 million recognised on the loss.

Computed

The Adjusted Covered Taxes are (EUR 6,000,000) as computed (Article 4.1.1): current tax expense of EUR 0, plus Additions of EUR 0, less Reductions of EUR 0, plus a Total Deferred Tax Adjustment Amount of (EUR 6,000,000) and EUR 0 recorded in equity or Other Comprehensive Income. A negative figure is carried into the jurisdictional computation as it is; where the jurisdiction has no Net GloBE Income it can give rise to Additional Current Top-up Tax under Article 4.1.5. No amount may be counted more than once (Article 4.1.4), which this rule cannot check. Based on the figures you supplied.

Workings

Current tax expense for Covered TaxesArticle 4.1.1 — as accrued in Financial Accounting Net Income or Loss
EUR 0
Covered Taxes expensed in profit before taxationArticle 4.1.2(a) — an addition
EUR 0
GloBE Loss Deferred Tax Asset usedArticle 4.1.2(b) — an addition
EUR 0
Uncertain tax position paid in the yearArticle 4.1.2(c) — an addition, to the extent previously a Reduction
EUR 0
Qualified credits recorded in current taxArticle 4.1.2(d) — an addition: the credit is income, not a reduction of tax
EUR 0
Current tax on income excluded from GloBE IncomeArticle 4.1.3(a) — a reduction
EUR 0
Non-Qualified Refundable Tax Credits not in current taxArticle 4.1.3(b) — a reduction
EUR 0
Refunds and credits of Covered Taxes not in current taxArticle 4.1.3(c) — a reduction
EUR 0
Current tax on uncertain tax positionsArticle 4.1.3(d) — a reduction
EUR 0
Current tax not expected to be paid within three yearsArticle 4.1.3(e) — a reduction
EUR 0
Total Deferred Tax Adjustment AmountArticle 4.1.1(b) — as determined under Article 4.4
(EUR 6,000,000)
Covered Taxes recorded in equity or OCIArticle 4.1.1(c) — on amounts in GloBE Income or Loss that are taxed locally
EUR 0
Adjusted Covered TaxesArticle 4.1.1 — current tax, plus additions, less reductions, plus the deferred tax adjustment and taxes in equity or OCI
(EUR 6,000,000)

Decided by the sum under article 4.1.1

Try it

Supply the facts and this rule computes the outcome in your browser, live. Leave a determination undecided and it blocks the result — it is never read as a no.

Not computed yet

12 inputs still need your determination:

  • What current tax expense was accrued in Financial Accounting Net Income or Loss with respect to Covered Taxes for the Fiscal Year?
  • What Covered Taxes were accrued as an expense in profit before taxation rather than in the tax line? Enter nil if none.
  • What GloBE Loss Deferred Tax Asset was used in the Fiscal Year under Article 4.5.3? Enter nil if no GloBE Loss Election applies.
  • What Covered Taxes were paid in the Fiscal Year on an uncertain tax position that was treated as a Reduction in an earlier Fiscal Year? Leave out interest and penalties; enter nil if none.
  • What Qualified Refundable Tax Credits or Marketable Transferable Tax Credits were recorded as a reduction to current tax expense? Enter nil if none.
  • What current tax expense relates to income excluded from GloBE Income or Loss under Chapter 3 — Excluded Dividends, Excluded Equity Gains, excluded shipping income? Enter nil if none.
  • What credits or refunds in respect of Non-Qualified Refundable Tax Credits were not recorded as a reduction to current tax expense? Enter nil if none.
  • What Covered Taxes were refunded or credited, other than a Qualified Refundable Tax Credit, without being treated as an adjustment to current tax expense in the accounts? Enter nil if none.
  • What current tax expense relates to an uncertain tax position? Enter nil if none.
  • What current tax expense is not expected to be paid within three years of the last day of the Fiscal Year? Enter nil if none.
  • What is the Total Deferred Tax Adjustment Amount for the Fiscal Year under Article 4.4? It may be negative; enter nil where a GloBE Loss Election applies instead.
  • What increase or decrease in Covered Taxes was recorded in equity or Other Comprehensive Income on amounts included in GloBE Income or Loss that will be subject to tax locally? Enter nil if none.

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