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Eligible payroll costs

Applies
FY2024 onwards
Reviewed
Rule
P2-PAYROLL-2024.1
By

Which payroll costs count for the Pillar Two SBIE?

Pay, benefits, payroll taxes and employer social security for employees and contractors working in the jurisdiction, less costs capitalised into assets.

Per GloBE Model Rules (Pillar Two), December 2021, Article 5.3.3, payroll carve-out

An Eligible Payroll Cost is employee compensation expenditure, including salaries, wages and other expenditure giving the employee a direct and separate personal benefit such as health insurance and pension contributions, payroll and employment taxes, and employer social security contributions, paid to an Eligible Employee who performs activities for the MNE Group in the jurisdiction. An Eligible Employee is an employee of a Constituent Entity, including a part-time employee, or an independent contractor participating in the ordinary operating activities of the MNE Group under its direction and control. Costs capitalised and included in the carrying value of Eligible Tangible Assets, and costs attributable to excluded International Shipping Income and Qualified Ancillary International Shipping Income, are not counted toward the payroll carve-out.

It decides which costs are added up as the payroll base of substance-based-income-exclusion. A capitalised cost is not lost: it is counted in the carrying value of the asset it was capitalised into.

Five questions, in this order

The order matters, because the first to fail is the reason given

  • Is it employee compensation of the kind Article 10.1 lists?
  • Is it paid to an Eligible Employee — an employee, part-time included, or an independent contractor under the group's direction and control?
  • Does that person perform activities for the group in THIS jurisdiction?
  • Has it been capitalised and included in the carrying value of Eligible Tangible Assets?
  • Is it attributable to excluded international shipping income?

What counts as payroll, and whose

  • Salaries and wages, bonuses and allowances, medical insurance, payments to a pension fund and other retirement benefits
  • Stock-based compensation, at the amount in the financial accounts — an Article 3.2.2 election does not change it
  • Payroll taxes, fringe benefit taxes and the employer's social security contributions
  • An independent contractor counts only if a natural person working under the group's direction and control, which includes agency staff; the employees of a company supplying goods or services do not
  • Payroll capitalised into inventory or any asset other than an Eligible Tangible Asset stays in payroll
  • Payroll attributable to shipping income above the cap for Qualified Ancillary International Shipping Income counts; payroll for the excluded shipping income does not

Capitalised payroll is carried across, not dropped

Article 5.3.3(a) takes capitalised payroll out of the payroll carve-out because Article 5.3.5 already counts it inside the carrying value of the asset. Reading "excluded" as "disregarded" would understate the exclusion, so the result says where the cost goes.

An employee who works in more than one jurisdiction

Where the employee performs more than half of their activities for the group in the employer's jurisdiction, the employer counts the whole cost. Where it is half or less, the employer counts only the proportion of working time spent there: an employee who spends 30% of their time in the employer's jurisdiction brings 30% of the cost into its carve-out.

Where an amount is supplied

An eligible cost is carried into the working, so a list of items can be classified one at a time and the eligible ones added up for the Substance-based Income Exclusion.

Order of testing

  1. 1

    Inputs requiring your determination

    All five questions must be answered. An unanswered question is never read as a no.

  2. 2

    Employee compensation expenditure

    A cost that is not employee compensation of the kind Article 10.1 lists does not count.

  3. 3

    Eligible Employees

    A cost not paid to an Eligible Employee does not count.

  4. 4

    Activities performed in the jurisdiction

    An employee working elsewhere counts in the jurisdiction where the work is done.

  5. 5

    Capitalised payroll

    A capitalised cost is counted in the tangible asset carve-out instead.

  6. 6

    International Shipping Income

    A cost attributable to excluded shipping income does not count.

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.

Salaries of a local employee

EUR 1 million of salary and employer social security for an employee working in the jurisdiction.

Computed

The cost of EUR 1,000,000 is an Eligible Payroll Cost as computed: it is employee compensation of the kind Article 10.1 lists, paid to an Eligible Employee who performs activities for the MNE Group in the jurisdiction, and it is neither capitalised into Eligible Tangible Assets nor attributable to excluded international shipping income. It counts toward the payroll carve-out under Article 5.3.3. Based on what you supplied.

Workings

Cost assessedAs supplied
EUR 1,000,000
Counts toward the payroll carve-outCounts — Article 5.3.3
EUR 1,000,000

Decided by the eligible payroll costs

Payroll capitalised into a plant

Wages of EUR 2 million capitalised into the cost of a factory.

Computed

The cost of EUR 2,000,000 is excluded from the payroll carve-out as computed, and is not lost: Article 5.3.3(a) leaves out Eligible Payroll Costs capitalised and included in the carrying value of Eligible Tangible Assets, and Article 5.3.5 counts that carrying value, including any amount attributable to capitalised payroll, in the tangible asset carve-out instead. Based on what you supplied.

Workings

Cost assessedAs supplied
EUR 2,000,000
Counts toward the payroll carve-outCapitalised into an Eligible Tangible Asset — counted there, not here (Article 5.3.3(a))
EUR 0

Decided by the capitalised payroll

An employee working abroad

A secondee employed by this entity all of whose activities are performed in another jurisdiction, so none of the cost counts here. Had the secondee spent more than half of the year working here, the whole cost would.

Computed

The cost of EUR 500,000 does not count toward this jurisdiction's payroll carve-out as computed: Article 5.3.3 takes the costs of Eligible Employees that perform activities for the MNE Group in the jurisdiction, and you have indicated this employee does not. It may count in the jurisdiction where the activities are performed. Based on what you supplied.

Workings

Cost assessedAs supplied
EUR 500,000
Counts toward the payroll carve-outThe employee's activities are not performed in this jurisdiction
EUR 0

Decided by the activities performed in the jurisdiction

Agency staff working under the group's direction

EUR 800,000 paid to a staffing company for individuals who work day to day in the group's warehouse under its supervision. They are natural persons under the group's direction and control, so the cost counts.

Computed

The cost of EUR 800,000 is an Eligible Payroll Cost as computed: it is employee compensation of the kind Article 10.1 lists, paid to an Eligible Employee who performs activities for the MNE Group in the jurisdiction, and it is neither capitalised into Eligible Tangible Assets nor attributable to excluded international shipping income. It counts toward the payroll carve-out under Article 5.3.3. Based on what you supplied.

Workings

Cost assessedAs supplied
EUR 800,000
Counts toward the payroll carve-outCounts — Article 5.3.3
EUR 800,000

Decided by the eligible payroll costs

A cost that is not compensation

A fee paid to a consultancy firm for a project its own employees carry out. Employees of a corporate contractor are not Eligible Employees.

Computed

The cost of EUR 300,000 is not an Eligible Payroll Cost as computed: the definition in Article 10.1 covers employee compensation expenditure, payroll and employment taxes and employer social security contributions, and you have indicated this is none of those. Based on what you supplied.

Workings

Cost assessedAs supplied
EUR 300,000
Counts toward the payroll carve-outNot employee compensation of the kind Article 10.1 lists
EUR 0

Decided by the employee compensation expenditure

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

5 inputs still need your determination:

  • Is the cost employee compensation expenditure — salaries, wages, and other expenditure giving the employee a direct and separate personal benefit such as health insurance and pension contributions — or payroll and employment taxes, or employer social security contributions (Article 10.1)?
  • Is it paid to an Eligible Employee: an employee of a Constituent Entity, part-time employees included, or an independent contractor participating in the ordinary operating activities of the MNE Group under its direction and control (Article 10.1)?
  • Does that person perform activities for the MNE Group in the jurisdiction being computed (Article 5.3.3)?
  • Has the cost been capitalised and included in the carrying value of Eligible Tangible Assets (Article 5.3.3(a))?
  • Is the cost attributable to International Shipping Income or Qualified Ancillary International Shipping Income that is excluded from the computation of GloBE Income or Loss for the Fiscal Year (Article 5.3.3(b))?

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