Covered Taxes
- Applies
- FY2024 onwards
- Reviewed
- Rule
- P2-COVT-2024.1
Which taxes are Covered Taxes under Pillar Two?
Taxes on income or profits, distribution taxes, taxes in lieu of income tax, and taxes on retained earnings and equity. Top-up taxes are not.
Per GloBE Model Rules (Pillar Two), December 2021, Article 4.2, Definition of Covered Taxes
Covered Taxes means: Taxes recorded in the financial accounts of a Constituent Entity with respect to its income or profits or its share of the income or profits of a Constituent Entity in which it owns an Ownership Interest; Taxes on distributed profits, deemed profit distributions and non-business expenses imposed under an Eligible Distribution Tax System; Taxes imposed in lieu of a generally applicable corporate income tax; and Taxes levied by reference to retained earnings and corporate equity. Covered Taxes do not include Top-up Tax accrued under a Qualified IIR or a Qualified Domestic Minimum Top-up Tax, Taxes attributable to an adjustment under a Qualified UTPR, a Disqualified Refundable Imputation Tax, or Taxes paid by an insurance company in respect of returns to policyholders; nor, under the September 2026 Administrative Guidance, an Explicitly Conditional Tax.
A Covered Tax goes in the numerator of the Effective Tax Rate and is added back to income. A tax that is not one stays a deduction from GloBE Income or Loss.
The character of the tax decides, not its name
First, is it a Tax
A compulsory unrequited payment to General Government. Fees for a privilege, service or property are not Taxes; nor are fines, penalties or interest on late payment.
The four kinds
- (a) On income or profits — net basis, though a simplified or standardised estimate of expenses is enough
- (b) On distributions under an Eligible Distribution Tax System
- (c) In lieu of a generally applicable corporate income tax — withholding taxes on interest, rents and royalties; a tonnage tax
- (d) On retained earnings and corporate equity, including a multi-component tax on income and equity
Taken out whatever the base
- Top-up Tax under a Qualified IIR
- Top-up Tax under a Qualified Domestic Minimum Top-up Tax — credited against the Top-up Tax instead
- Tax from a Qualified UTPR adjustment
- A Disqualified Refundable Imputation Tax
- An insurer's tax on returns to policyholders
- An Explicitly Conditional Tax
Generally not Covered Taxes
Consumption taxes, excise and input taxes, digital services taxes, stamp duties and transaction taxes, payroll taxes and social security contributions, and property taxes. A tax on gross revenue is a Covered Tax only if it stands in for the income tax; one that applies in addition to it does not.
An ordinary domestic minimum tax
One that is not a Qualified Domestic Minimum Top-up Tax is a Covered Tax if it otherwise meets the definition.
Order of testing
- 1
Inputs requiring your determination
Every input the computation reaches must be supplied; nil is entered, not left blank.
- 2
The definition of Tax
A compulsory unrequited payment to General Government.
- 3
Taxes taken out of the definition
Article 4.2.2 and the September 2026 guidance.
- 4
The four kinds of Covered Tax
Article 4.2.1(a) to (d).
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 corporate income tax
The ordinary tax on a company's profits.
Computed
The Tax is a Covered Tax as computed: it is recorded in the financial accounts with respect to the entity's income or profits, or its share of those of a Constituent Entity in which it owns an Ownership Interest (Article 4.2.1(a)), and it is not one of the Taxes Article 4.2.2 takes out. It is added back to income as part of the Net Taxes Expense and counted in Adjusted Covered Taxes, subject to the adjustments of Article 4.1 and to allocation between Constituent Entities under Article 4.3. Based on what you supplied.
Decided by the four kinds of covered tax
A withholding tax on royalties
Imposed on the gross payment in substitution for the income tax.
Computed
The Tax is a Covered Tax as computed: it is imposed in lieu of a generally applicable corporate income tax (Article 4.2.1(c)), and it is not one of the Taxes Article 4.2.2 takes out. It is added back to income as part of the Net Taxes Expense and counted in Adjusted Covered Taxes, subject to the adjustments of Article 4.1 and to allocation between Constituent Entities under Article 4.3. Based on what you supplied.
Decided by the four kinds of covered tax
A digital services tax
A tax on gross revenue that applies in addition to the income tax.
Computed
The Tax is not a Covered Tax as computed: it is not levied on income or profits, on distributions under an Eligible Distribution Tax System, in lieu of a generally applicable corporate income tax, or by reference to retained earnings and corporate equity (Article 4.2.1). Consumption, excise, digital services, transaction, payroll and property taxes are generally of this kind. It remains a deduction in GloBE Income or Loss. Based on what you supplied.
Decided by the four kinds of covered tax
A qualified domestic top-up tax
Top-up tax paid under a Qualified Domestic Minimum Top-up Tax.
Computed
The Tax is not a Covered Tax as computed: it is Top-up Tax accrued under a Qualified Domestic Minimum Top-up Tax (Article 4.2.2(b)); it is instead credited against the Jurisdictional Top-up Tax under Article 5.2.3. It is left out of Adjusted Covered Taxes whatever it is levied on, and where accrued as an expense it is still added back to income as part of the Net Taxes Expense. Based on what you supplied.
Decided by the taxes taken out of the definition
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
1 input still need your determination:
- Is the levy a compulsory unrequited payment to General Government — not a fee or payment for a privilege, service or property, and not a fine, penalty or interest on late payment?
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
GloBE Model Rules (Pillar Two), December 2021 — Article 4.2, Definition of Covered Taxes
The article this rule encodes
https://www.oecd.org/content/dam/oecd/en/publications/reports/2021/12/tax-challenges-arising-from-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pillar-two_eed81a23/782bac33-en.pdfGloBE Model Rules (Pillar Two), December 2021 — Article 10.1, definitions of Tax and General Government
What a Tax is
https://www.oecd.org/content/dam/oecd/en/publications/reports/2021/12/tax-challenges-arising-from-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pillar-two_eed81a23/782bac33-en.pdfConsolidated Commentary to the GloBE Model Rules (May 2026) — Commentary to Article 4.2
Paragraphs 22 to 40: each kind of Covered Tax, the taxes generally outside, and the exclusions
https://www.oecd.org/content/dam/oecd/en/publications/reports/2026/05/tax-challenges-arising-from-the-digitalisation-of-the-economy-consolidated-commentary-to-the-global-anti-base-erosion-model-rules-2026_24289ddf/4377e89f-en.pdfAdministrative Guidance on the GloBE Model Rules, September 2026 — paragraphs 23.1 to 23.6
An Explicitly Conditional Tax is not a Covered Tax
https://www.oecd.org/content/dam/oecd/en/topics/policy-sub-issues/global-minimum-tax/administrative-guidance-on-the-global-anti-base-erosion-model-rules-pillar-two-september-2026.pdf