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Deferred tax expense and the recast at the minimum rate

Applies
FY2024 onwards
Reviewed
Rule
P2-DTE-2024.1
By

How is deferred tax treated in the Pillar Two ETR?

Deferred tax expense counts in Adjusted Covered Taxes, recast at 15% where the local rate is higher, with listed items such as valuation allowances left out.

Per GloBE Model Rules (Pillar Two), December 2021, Article 4.4, Mechanism to address temporary differences

The Total Deferred Tax Adjustment Amount for a Constituent Entity for the Fiscal Year is the deferred tax expense accrued in its financial accounts with respect to Covered Taxes if the applicable tax rate is below the Minimum Rate or, in any other case, that deferred tax expense recast at the Minimum Rate, excluding deferred tax expense on items excluded from GloBE Income or Loss, on Disallowed Accruals and Unclaimed Accruals, the impact of a valuation or accounting recognition adjustment to a deferred tax asset, re-measurement on a change in the domestic tax rate, and the generation and use of tax credits. It is increased by any Disallowed or Unclaimed Accrual paid and any Recaptured Deferred Tax Liability paid during the year, and reduced by the deferred tax asset a current-year tax loss would have produced where none was recognised. A deferred tax asset recorded below the Minimum Rate and attributable to a GloBE Loss may be recast at the Minimum Rate.

A temporary difference is neutralised. A deduction taken early for tax does not create top-up tax, and a loss carried forward shelters the same amount of later income.

One recast down, five exclusions, three adjustments, one recast up

The recast

Deferred tax recorded above the Minimum Rate is scaled down to it: a liability of 20 on 100 of income at a 20% rate counts as 15. It reverses at the amount it was taken in at. Deferred tax recorded at or below the Minimum Rate is taken as it is.

Excluded first

  • (a) Deferred tax on items excluded from GloBE Income or Loss
  • (b) Disallowed Accruals (uncertain tax positions; distributions from a Constituent Entity) and Unclaimed Accruals
  • (c) Valuation and accounting recognition adjustments to a deferred tax asset
  • (d) Re-measurement on a change in the domestic tax rate
  • (e) The generation and use of tax credits

The exclusions, one by one

  • (a) Excluded items: a tax loss of 400 that includes an Excluded Equity Loss of 100 gives a deferred tax asset of 60 at 15%, of which only 45 counts — the 15 on the excluded loss does not
  • (b) Disallowed and Unclaimed Accruals wait until they are paid: an uncertain tax position may never be paid, and tax on a distribution between group entities is paid only when the group chooses
  • (c) Valuation allowances and accounting recognition adjustments are ignored, so a loss gives its deferred tax asset in the year of the loss whether or not the accounts recognise it. A loss that expires unused under local law never reverses, so it never adds to Covered Taxes
  • (d) Re-measurement on a change of tax rate is a change to an amount already counted, not tax on this year's income
  • (e) Tax credits: a credit carried forward does not reduce Adjusted Covered Taxes when it arises, or increase them when used — the same as if no deferred tax asset had been booked. That covers foreign tax credits as well as incentive credits

The Substitute Loss Carry-forward exception to (e)

Where a jurisdiction makes foreign source income — from a Controlled Foreign Company, a foreign branch, or a Hybrid or Reverse Hybrid Entity — absorb a domestic loss before foreign tax credits can be used, the entity ends up with a foreign tax credit carried forward in place of a loss carried forward. The deferred tax asset on that credit is not excluded: it counts when it arises and when it reverses, to the extent the credit is used against tax on income that is in GloBE Income. Its amount is the lesser of the credit carried forward and the domestic loss before the foreign income multiplied by the domestic rate, recast at the Minimum Rate. A loss recapture mechanism that gives an equivalent result is treated in the same way.

Then adjusted

  • + Disallowed or Unclaimed Accruals paid in the year
  • + Recaptured Deferred Tax Liability paid in the year
  • − The deferred tax asset a current-year loss would have produced, where the recognition criteria were not met

A loss shelters its own amount

A deferred tax asset recorded at a rate below the Minimum Rate may be recast up to it where it is attributable to a GloBE Loss — in the year the loss arises. A loss of 100 recorded at 5% becomes an asset of 15, not 5.

The Commentary's example

A company in a 15% jurisdiction earns 100 and buys an asset for 100 that tax lets it deduct at once but the accounts write off over five years. It pays no tax, yet has GloBE Income of 80. A deferred tax liability of 12 is taken into account, sheltering the 80 at the Minimum Rate. At a 30% rate the accounts would show 24; only 12 counts, and it reverses at 12.

Consolidated-level deferred tax

Deferred tax recorded only in the consolidated accounts in respect of the entity is included, other than that attributable to purchase accounting.

Where the GloBE carrying value is not the accounting one

Deferred tax in the accounts is built on accounting carrying values. Where the Rules compute income from a different value — after an acquisition at historical values, a transfer priced at arm's length, a realisation election, a GloBE Reorganisation, the pension or stock-based compensation adjustments — the deferred tax must be recomputed on the GloBE carrying value against the tax basis, and movements in the accounting deferred tax are ignored. The recomputed amount is still recast at the Minimum Rate and still subject to the exclusions and to recapture. The GloBE carrying value is not separately tested for impairment: it is written down only when the accounting value is impaired to below it.

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 applicable tax rate against the Minimum Rate

    Above it: recast. At or below it: taken as it is.

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.

Accelerated depreciation at a 30% rate

A deferred tax liability of EUR 24 million on EUR 80 million of timing difference.

Computed

The Total Deferred Tax Adjustment Amount is EUR 12,000,000 as computed (Article 4.4.1). The deferred tax expense taken into account, EUR 24,000,000 after the exclusions, is recorded at 30%, above the Minimum Rate of 15%, and is recast at the Minimum Rate to EUR 12,000,000; the Article 4.4.2 and 4.4.3 adjustments then add EUR 0 and deduct EUR 0. A deferred tax liability included here that does not reverse in time is recaptured under Article 4.4.4 unless it is a Recapture Exception Accrual. Based on the figures you supplied.

Workings

Deferred tax expense accruedArticle 4.4.1 — as supplied
EUR 24,000,000
Excluded under Article 4.4.1(a) to (e)Removed before the recast
EUR 0
Deferred tax expense taken into accountThe accrued amount less the exclusions
EUR 24,000,000
Applicable tax rateArticle 4.4.1 — as supplied
30%
Minimum RateArticle 4.4.1 — published value for FY2026
15%
After the recastArticle 4.4.1 — recast at the Minimum Rate: multiplied by the Minimum Rate over the applicable rate
EUR 12,000,000
Disallowed and Unclaimed Accruals paidArticle 4.4.2(a) — an increase
EUR 0
Recaptured Deferred Tax Liability paidArticle 4.4.2(b) — an increase
EUR 0
Unrecognised loss deferred tax assetArticle 4.4.2(c) — a reduction
EUR 0
GloBE Loss deferred tax asset recast upwardArticle 4.4.3 — a reduction
EUR 0
Total Deferred Tax Adjustment AmountArticle 4.4.1 — added to Adjusted Covered Taxes under Article 4.1.1(b)
EUR 12,000,000

Decided by the applicable tax rate against the minimum rate

A low-rate jurisdiction

A deferred tax liability of EUR 9 million recorded at 9%.

Computed

The Total Deferred Tax Adjustment Amount is EUR 9,000,000 as computed (Article 4.4.1). The deferred tax expense taken into account, EUR 9,000,000 after the exclusions, is recorded at 9%, not above the Minimum Rate of 15%, and is taken as it is; the Article 4.4.2 and 4.4.3 adjustments then add EUR 0 and deduct EUR 0. A deferred tax liability included here that does not reverse in time is recaptured under Article 4.4.4 unless it is a Recapture Exception Accrual. Based on the figures you supplied.

Workings

Deferred tax expense accruedArticle 4.4.1 — as supplied
EUR 9,000,000
Excluded under Article 4.4.1(a) to (e)Removed before the recast
EUR 0
Deferred tax expense taken into accountThe accrued amount less the exclusions
EUR 9,000,000
Applicable tax rateArticle 4.4.1 — as supplied
9%
Minimum RateArticle 4.4.1 — published value for FY2026
15%
After the recastArticle 4.4.1 — the applicable rate is not above the Minimum Rate, so no recast
EUR 9,000,000
Disallowed and Unclaimed Accruals paidArticle 4.4.2(a) — an increase
EUR 0
Recaptured Deferred Tax Liability paidArticle 4.4.2(b) — an increase
EUR 0
Unrecognised loss deferred tax assetArticle 4.4.2(c) — a reduction
EUR 0
GloBE Loss deferred tax asset recast upwardArticle 4.4.3 — a reduction
EUR 0
Total Deferred Tax Adjustment AmountArticle 4.4.1 — added to Adjusted Covered Taxes under Article 4.1.1(b)
EUR 9,000,000

Decided by the applicable tax rate against the minimum rate

Immediate expensing at a 15% rate

The Commentary's Company A: an asset bought for EUR 100 million is deducted at once for tax and written off over five years in the accounts, leaving a EUR 80 million timing difference and a deferred tax liability of EUR 12 million recorded at 15%. It is taken as recorded.

Computed

The Total Deferred Tax Adjustment Amount is EUR 12,000,000 as computed (Article 4.4.1). The deferred tax expense taken into account, EUR 12,000,000 after the exclusions, is recorded at 15%, not above the Minimum Rate of 15%, and is taken as it is; the Article 4.4.2 and 4.4.3 adjustments then add EUR 0 and deduct EUR 0. A deferred tax liability included here that does not reverse in time is recaptured under Article 4.4.4 unless it is a Recapture Exception Accrual. Based on the figures you supplied.

Workings

Deferred tax expense accruedArticle 4.4.1 — as supplied
EUR 12,000,000
Excluded under Article 4.4.1(a) to (e)Removed before the recast
EUR 0
Deferred tax expense taken into accountThe accrued amount less the exclusions
EUR 12,000,000
Applicable tax rateArticle 4.4.1 — as supplied
15%
Minimum RateArticle 4.4.1 — published value for FY2026
15%
After the recastArticle 4.4.1 — the applicable rate is not above the Minimum Rate, so no recast
EUR 12,000,000
Disallowed and Unclaimed Accruals paidArticle 4.4.2(a) — an increase
EUR 0
Recaptured Deferred Tax Liability paidArticle 4.4.2(b) — an increase
EUR 0
Unrecognised loss deferred tax assetArticle 4.4.2(c) — a reduction
EUR 0
GloBE Loss deferred tax asset recast upwardArticle 4.4.3 — a reduction
EUR 0
Total Deferred Tax Adjustment AmountArticle 4.4.1 — added to Adjusted Covered Taxes under Article 4.1.1(b)
EUR 12,000,000

Decided by the applicable tax rate against the minimum rate

A tax loss that includes an excluded loss

The Commentary's M Co: a GloBE Loss of EUR 300 and an Excluded Equity Loss of EUR 100, both deductible locally at 15%. The accounts record a deferred tax asset of EUR 60 on the tax loss of EUR 400; the EUR 15 on the excluded loss is taken out, leaving EUR 45.

Computed

The Total Deferred Tax Adjustment Amount is (EUR 45) as computed (Article 4.4.1). The deferred tax expense taken into account, (EUR 45) after the exclusions, is recorded at 15%, not above the Minimum Rate of 15%, and is taken as it is; the Article 4.4.2 and 4.4.3 adjustments then add EUR 0 and deduct EUR 0. A deferred tax liability included here that does not reverse in time is recaptured under Article 4.4.4 unless it is a Recapture Exception Accrual. Based on the figures you supplied.

Workings

Deferred tax expense accruedArticle 4.4.1 — as supplied
(EUR 60)
Excluded under Article 4.4.1(a) to (e)Removed before the recast
EUR 15
Deferred tax expense taken into accountThe accrued amount less the exclusions
(EUR 45)
Applicable tax rateArticle 4.4.1 — as supplied
15%
Minimum RateArticle 4.4.1 — published value for FY2026
15%
After the recastArticle 4.4.1 — the applicable rate is not above the Minimum Rate, so no recast
(EUR 45)
Disallowed and Unclaimed Accruals paidArticle 4.4.2(a) — an increase
EUR 0
Recaptured Deferred Tax Liability paidArticle 4.4.2(b) — an increase
EUR 0
Unrecognised loss deferred tax assetArticle 4.4.2(c) — a reduction
EUR 0
GloBE Loss deferred tax asset recast upwardArticle 4.4.3 — a reduction
EUR 0
Total Deferred Tax Adjustment AmountArticle 4.4.1 — added to Adjusted Covered Taxes under Article 4.1.1(b)
(EUR 45)

Decided by the applicable tax rate against the minimum rate

A loss with no asset recognised

No deferred tax in the accounts, and a EUR 100 million loss that would have given an asset of EUR 15 million.

Computed

The Total Deferred Tax Adjustment Amount is (EUR 15,000,000) as computed (Article 4.4.1). The deferred tax expense taken into account, EUR 0 after the exclusions, is recorded at 25%, above the Minimum Rate of 15%, and is recast at the Minimum Rate to EUR 0; the Article 4.4.2 and 4.4.3 adjustments then add EUR 0 and deduct EUR 15,000,000. A deferred tax liability included here that does not reverse in time is recaptured under Article 4.4.4 unless it is a Recapture Exception Accrual. Based on the figures you supplied.

Workings

Deferred tax expense accruedArticle 4.4.1 — as supplied
EUR 0
Excluded under Article 4.4.1(a) to (e)Removed before the recast
EUR 0
Deferred tax expense taken into accountThe accrued amount less the exclusions
EUR 0
Applicable tax rateArticle 4.4.1 — as supplied
25%
Minimum RateArticle 4.4.1 — published value for FY2026
15%
After the recastArticle 4.4.1 — recast at the Minimum Rate: multiplied by the Minimum Rate over the applicable rate
EUR 0
Disallowed and Unclaimed Accruals paidArticle 4.4.2(a) — an increase
EUR 0
Recaptured Deferred Tax Liability paidArticle 4.4.2(b) — an increase
EUR 0
Unrecognised loss deferred tax assetArticle 4.4.2(c) — a reduction
(EUR 15,000,000)
GloBE Loss deferred tax asset recast upwardArticle 4.4.3 — a reduction
EUR 0
Total Deferred Tax Adjustment AmountArticle 4.4.1 — added to Adjusted Covered Taxes under Article 4.1.1(b)
(EUR 15,000,000)

Decided by the applicable tax rate against the minimum rate

A GloBE Loss recorded at 5%

A loss asset of EUR 5 million on a EUR 100 million loss, recast up by EUR 10 million.

Computed

The Total Deferred Tax Adjustment Amount is (EUR 15,000,000) as computed (Article 4.4.1). The deferred tax expense taken into account, (EUR 5,000,000) after the exclusions, is recorded at 5%, not above the Minimum Rate of 15%, and is taken as it is; the Article 4.4.2 and 4.4.3 adjustments then add EUR 0 and deduct EUR 10,000,000. A deferred tax liability included here that does not reverse in time is recaptured under Article 4.4.4 unless it is a Recapture Exception Accrual. Based on the figures you supplied.

Workings

Deferred tax expense accruedArticle 4.4.1 — as supplied
(EUR 5,000,000)
Excluded under Article 4.4.1(a) to (e)Removed before the recast
EUR 0
Deferred tax expense taken into accountThe accrued amount less the exclusions
(EUR 5,000,000)
Applicable tax rateArticle 4.4.1 — as supplied
5%
Minimum RateArticle 4.4.1 — published value for FY2026
15%
After the recastArticle 4.4.1 — the applicable rate is not above the Minimum Rate, so no recast
(EUR 5,000,000)
Disallowed and Unclaimed Accruals paidArticle 4.4.2(a) — an increase
EUR 0
Recaptured Deferred Tax Liability paidArticle 4.4.2(b) — an increase
EUR 0
Unrecognised loss deferred tax assetArticle 4.4.2(c) — a reduction
EUR 0
GloBE Loss deferred tax asset recast upwardArticle 4.4.3 — a reduction
(EUR 10,000,000)
Total Deferred Tax Adjustment AmountArticle 4.4.1 — added to Adjusted Covered Taxes under Article 4.1.1(b)
(EUR 15,000,000)

Decided by the applicable tax rate against the minimum rate

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

7 inputs still need your determination:

  • What deferred tax expense was accrued in the financial accounts with respect to Covered Taxes for the Fiscal Year? Enter a net deferred tax benefit as a negative.
  • How much of that relates to the five exclusions: items excluded from GloBE Income or Loss, Disallowed and Unclaimed Accruals, valuation or recognition adjustments to a deferred tax asset, re-measurement on a change of tax rate, and tax credits? Use the sign it has in the accounts; enter nil if none.
  • What Disallowed Accruals or Unclaimed Accruals were paid during the Fiscal Year? Enter nil if none.
  • What Recaptured Deferred Tax Liability, determined in a preceding Fiscal Year, was paid during the Fiscal Year? Enter nil if none.
  • For a current-year tax loss where no deferred tax asset was recognised because the recognition criteria were not met, what deferred tax asset would have been recorded, at the lower of the applicable rate and the Minimum Rate? Enter nil if none.
  • By how much is a deferred tax asset attributable to a GloBE Loss increased in the Fiscal Year by recasting it from a lower rate to the Minimum Rate? Enter nil if none.
  • At what applicable tax rate are the remaining deferred tax items recorded, as a percentage? Where items are recorded at different rates, run the rule once for each rate.

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.

Thresholds

pillar_two.minimum_rate
15% · reviewed 2026-10-04 · source

Threshold values are published separately from the rule and carried with a citation. Where none has been published for the period being computed, the rule reports that rather than applying a default.

Sources

Share this rule

Reference, not tax advice.

Pankaj Agarwal — Tax Technology Leader