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Jurisdictional Effective Tax Rate

Applies
FY2024 onwards
Reviewed
Rule
P2-ETR-2024.1
By

How is the Pillar Two jurisdictional ETR calculated?

The Adjusted Covered Taxes of every entity in the jurisdiction divided by its Net GloBE Income, with Investment Entities left out.

Per GloBE Model Rules (Pillar Two), December 2021, Article 5.1, Determination of Effective Tax Rate

The Effective Tax Rate of the MNE Group for a jurisdiction with Net GloBE Income is the sum of the Adjusted Covered Taxes of each Constituent Entity located in the jurisdiction divided by the Net GloBE Income of the jurisdiction for the Fiscal Year. The Net GloBE Income is the positive amount, if any, of the GloBE Income of all Constituent Entities located in the jurisdiction less their GloBE Losses. Each Stateless Constituent Entity is treated as a single Constituent Entity in a separate jurisdiction, and the figures of Investment Entities are excluded.

The rate the Minimum Rate is measured against. It is computed per jurisdiction, blending every Constituent Entity located there, which is why a low-taxed entity can be offset by a high-taxed one in the same country but not by one elsewhere.

Two formulas, and what they leave out

The sequence

  • 5.1.2 — Net GloBE Income = GloBE Income of all Constituent Entities less their GloBE Losses, as the positive amount if any
  • 5.1.1 — Effective Tax Rate = Adjusted Covered Taxes divided by Net GloBE Income

Net GloBE Income floors at zero

Article 5.1.2 defines it as "the positive amount, if any". Losses that exceed income give nil, not a negative denominator.

No Net GloBE Income is not a rate of zero

Article 5.1.1 calculates the rate for a jurisdiction with Net GloBE Income. Dividing by zero is not a rate, and reading it as nil would make the whole Minimum Rate look like a shortfall. That case is reported on its own, and Additional Current Top-up Tax can still arise on it (Article 5.2.5).

Rounded to the fourth decimal place

The rate is expressed as a percentage rounded to the fourth decimal place — 14.12346% is 14.1235% — and that is the rate for the purposes of the Rules. It is the figure compared with the Minimum Rate.

One jurisdiction can have three rates

The ordinary Constituent Entities are blended together, including the income and taxes attributable to minority shareholders in them. Investment Entities and Insurance Investment Entities in the jurisdiction have a rate of their own, and so does each Minority-Owned Subgroup. The rate is the whole group's for the jurisdiction — a lower parent applying the Income Inclusion Rule does not compute it on its own subsidiaries alone — so an entity that would be low-taxed on its own may not be, and the reverse.

Negative Adjusted Covered Taxes give a rate of nil, and a carry-forward

The division can give a rate below zero, and the working shows it. But where Adjusted Covered Taxes are negative in a year with GloBE Income, the Commentary to Article 5.2.1 makes the Excess Negative Tax Expense administrative procedure mandatory: the negative amount is excluded from the year's Adjusted Covered Taxes and carried forward to reduce them in later years. The rate for the year is therefore nil, and the Top-up Tax Percentage cannot exceed the Minimum Rate.

Blending is by jurisdiction, never by entity and never worldwide

All Constituent Entities located in one jurisdiction are added together, so a low-taxed entity can be sheltered by a high-taxed one in the same jurisdiction. Nothing is carried between jurisdictions: a 30% rate in one does not offset a 5% rate in another.

Left out of both figures

  • Investment Entities — their Adjusted Covered Taxes and their GloBE Income or Loss (Article 5.1.3)
  • Minority-Owned Constituent Entities, which Article 5.6 computes as if a separate MNE Group
  • A Stateless Constituent Entity is not blended with anything: it is its own jurisdiction

Order of testing

  1. 1

    Inputs requiring your determination

    The GloBE Income, the GloBE Losses and the Adjusted Covered Taxes must all be supplied, in one currency. An unanswered figure is never read as nil.

  2. 2

    Net GloBE Income of the jurisdiction

    Where the losses are not less than the income, the Net GloBE Income is nil and no Effective Tax Rate is computed.

  3. 3

    Adjusted Covered Taxes over Net GloBE Income

    Otherwise the rate is the taxes divided by the Net GloBE Income, as a percentage rounded to the fourth decimal place.

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 ordinary jurisdiction

Constituent Entities with GloBE Income of EUR 500 million, GloBE Losses of EUR 100 million and Adjusted Covered Taxes of EUR 40 million.

Computed

The Effective Tax Rate of the jurisdiction is 10% for FY2026 as computed: Adjusted Covered Taxes of EUR 40,000,000 divided by Net GloBE Income of EUR 400,000,000. Whether it falls below the Minimum Rate, and what Top-up Tax follows, are separate rules. Based on the figures you supplied.

Workings

GloBE Income of all Constituent EntitiesArticle 5.1.2(a) — as supplied
EUR 500,000,000
GloBE Losses of all Constituent EntitiesArticle 5.1.2(b) — as supplied
(EUR 100,000,000)
Net GloBE Income of the jurisdictionArticle 5.1.2
EUR 400,000,000
Adjusted Covered TaxesArticle 5.1.1 — as supplied
EUR 40,000,000
Effective Tax RateArticle 5.1.1 — Adjusted Covered Taxes divided by Net GloBE Income, to the fourth decimal place
10%

Decided by the adjusted covered taxes over net globe income

Losses exceed income

A loss-making year: the Net GloBE Income is nil, so there is no rate to compute.

Computed

No Effective Tax Rate is computed: Article 5.1.1 calculates the Effective Tax Rate of an MNE Group for a jurisdiction with Net GloBE Income, and the Net GloBE Income here is nil — Article 5.1.2 defines it as the positive amount if any, and the losses of EUR 120,000,000 are not less than the income of EUR 80,000,000. That is not an Effective Tax Rate of zero. Additional Current Top-up Tax can still arise in such a year (Article 5.2.5). Based on the figures you supplied.

Workings

GloBE Income of all Constituent EntitiesArticle 5.1.2(a) — as supplied
EUR 80,000,000
GloBE Losses of all Constituent EntitiesArticle 5.1.2(b) — as supplied
(EUR 120,000,000)
Net GloBE Income of the jurisdictionArticle 5.1.2 — nil, being defined as the positive amount if any; the losses exceed the income
EUR 0

Decided by the net globe income of the jurisdiction

A high-taxed and a low-taxed entity in one country

Two subsidiaries in the same jurisdiction: one with GloBE Income of EUR 60 million and EUR 15 million of tax, the other — a holding of intellectual property under a preferential regime — with EUR 40 million and EUR 2 million. Blended, the jurisdiction is at 17%, above the Minimum Rate, although the second entity alone is at 5%.

Computed

The Effective Tax Rate of the jurisdiction is 17% for FY2026 as computed: Adjusted Covered Taxes of EUR 17,000,000 divided by Net GloBE Income of EUR 100,000,000. Whether it falls below the Minimum Rate, and what Top-up Tax follows, are separate rules. Based on the figures you supplied.

Workings

GloBE Income of all Constituent EntitiesArticle 5.1.2(a) — as supplied
EUR 100,000,000
GloBE Losses of all Constituent EntitiesArticle 5.1.2(b) — as supplied
EUR 0
Net GloBE Income of the jurisdictionArticle 5.1.2
EUR 100,000,000
Adjusted Covered TaxesArticle 5.1.1 — as supplied
EUR 17,000,000
Effective Tax RateArticle 5.1.1 — Adjusted Covered Taxes divided by Net GloBE Income, to the fourth decimal place
17%

Decided by the adjusted covered taxes over net globe income

A free-zone entity at a nil rate beside a taxed one

A jurisdiction with a 9% headline rate where one entity pays it on EUR 50 million and another benefits from a 0% regime on EUR 150 million: taxes of EUR 4.5 million on EUR 200 million.

Computed

The Effective Tax Rate of the jurisdiction is 2.25% for FY2026 as computed: Adjusted Covered Taxes of EUR 4,500,000 divided by Net GloBE Income of EUR 200,000,000. Whether it falls below the Minimum Rate, and what Top-up Tax follows, are separate rules. Based on the figures you supplied.

Workings

GloBE Income of all Constituent EntitiesArticle 5.1.2(a) — as supplied
EUR 200,000,000
GloBE Losses of all Constituent EntitiesArticle 5.1.2(b) — as supplied
EUR 0
Net GloBE Income of the jurisdictionArticle 5.1.2
EUR 200,000,000
Adjusted Covered TaxesArticle 5.1.1 — as supplied
EUR 4,500,000
Effective Tax RateArticle 5.1.1 — Adjusted Covered Taxes divided by Net GloBE Income, to the fourth decimal place
2.25%

Decided by the adjusted covered taxes over net globe income

A net tax credit

A profitable jurisdiction whose Adjusted Covered Taxes are negative. The division gives minus 5%, but the negative amount is excluded and carried forward, so the rate for the year is nil.

Computed

The Effective Tax Rate of the jurisdiction is nil for FY2026 as computed. Adjusted Covered Taxes of (EUR 20,000,000) over Net GloBE Income of EUR 400,000,000 would be -5%, but the Commentary to Article 5.2.1 requires the Excess Negative Tax Expense administrative procedure where the taxes are negative in a year with GloBE Income: EUR 20,000,000 is excluded from the year's Adjusted Covered Taxes and carried forward to reduce them in later years, so that the Top-up Tax Percentage does not exceed the Minimum Rate. Based on the figures you supplied.

Workings

GloBE Income of all Constituent EntitiesArticle 5.1.2(a) — as supplied
EUR 500,000,000
GloBE Losses of all Constituent EntitiesArticle 5.1.2(b) — as supplied
(EUR 100,000,000)
Net GloBE Income of the jurisdictionArticle 5.1.2
EUR 400,000,000
Adjusted Covered TaxesArticle 5.1.1 — as supplied
(EUR 20,000,000)
Effective Tax Rate before the Excess Negative Tax Expense procedureArticle 5.1.1 — Adjusted Covered Taxes divided by Net GloBE Income
-5%
Excess Negative Tax Expense excluded and carried forwardCommentary to Article 5.2.1, paragraph 15.3 — equal to the negative Adjusted Covered Taxes
EUR 20,000,000
Effective Tax RateAfter the procedure, which is mandatory where there is GloBE Income
0%

Decided by the negative adjusted covered taxes

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

3 inputs still need your determination:

  • What is the sum of the GloBE Income of all Constituent Entities located in the jurisdiction for the Fiscal Year, determined under Chapter 3 — leaving out Investment Entities, which Article 5.1.3 excludes?
  • What is the sum of the GloBE Losses of all Constituent Entities located in the jurisdiction for the Fiscal Year, as a positive amount, leaving out Investment Entities (Article 5.1.3)?
  • What is the sum of the Adjusted Covered Taxes of each Constituent Entity located in the jurisdiction, determined under Chapter 4, leaving out Investment Entities (Article 5.1.3)? It may be negative.

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