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Net Taxes Expense

Applies
FY2024 onwards
Reviewed
Rule
P2-NTE-2024.1
By

What is Net Taxes Expense under Pillar Two?

Covered Taxes, QDMTT and GloBE taxes expensed in the accounts. They are added back so the rate is measured on income before tax.

Per GloBE Model Rules (Pillar Two), December 2021, Article 3.2.1(a), Net Taxes Expense

A Constituent Entity's Financial Accounting Net Income or Loss is adjusted for its Net Taxes Expense, which is the net amount of: Covered Taxes accrued as an expense and current and deferred Covered Taxes included in the income tax expense, including Covered Taxes on income excluded from the GloBE Income or Loss computation; any deferred tax asset attributable to a loss for the Fiscal Year; any Qualified Domestic Minimum Top-up Tax accrued as an expense; any taxes arising under the GloBE Rules accrued as an expense; and any Disqualified Refundable Imputation Tax accrued as an expense.

Without it the Effective Tax Rate would be tax over after-tax income: 20 of tax on 100 of income would read as 25%, not 20%.

A net of five items, one of them negative

The five items

  • (a) Covered Taxes accrued as an expense, current and deferred — including those on income excluded from GloBE Income or Loss
  • (b) A deferred tax asset attributable to a loss for the Fiscal Year
  • (c) Qualified Domestic Minimum Top-up Tax accrued as an expense
  • (d) Taxes arising under the GloBE Rules accrued as an expense
  • (e) Disqualified Refundable Imputation Tax accrued as an expense

Tax on excluded income is added back too

If only the tax on GloBE Income were added back, the tax on excluded income would in effect be deducted. The Commentary's example: 12 of tax on 120 of income, of which 20 is excluded, gives GloBE Income of 100 only if all 12 is added back.

The deferred tax asset on a loss runs the other way

It made the accounting loss smaller than the economic loss — a loss of 100 shows as 85 after a deferred tax asset of 15 — so it is a negative amount in the adjustment. To the extent it is already in the deferred tax in (a), it is not counted again in (b).

What is not added back

Tax withheld on a payment to someone else is that person's tax and remains an expense. An Explicitly Conditional Tax is not a Covered Tax and is not part of the adjustment.

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 net of the five items

    Positive: added back. Negative: reduces income or increases the loss.

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 profitable year

EUR 12 million of Covered Taxes in the tax line, EUR 2 million of it on excluded dividends.

Computed

A Net Taxes Expense of EUR 12,000,000 is added back to Financial Accounting Net Income or Loss as computed (Article 3.2.1(a)): the taxes that reduced the accounting result do not reduce the base the Effective Tax Rate is measured on. Covered Taxes on income excluded from GloBE Income or Loss are added back with the rest. Based on the figures you supplied.

Workings

Covered Taxes accrued as an expenseNet Taxes Expense, paragraph (a) — as supplied, including Covered Taxes on excluded income
EUR 12,000,000
Deferred tax asset on the loss for the yearParagraph (b) — a negative amount in the adjustment, to the extent not already in (a)
EUR 0
Qualified Domestic Minimum Top-up Tax accruedParagraph (c) — as supplied
EUR 0
Taxes under the GloBE Rules accruedParagraph (d) — as supplied
EUR 0
Disqualified Refundable Imputation Tax accruedParagraph (e) — as supplied
EUR 0
Net Taxes ExpenseArticle 3.2.1(a) — the net of the five, added to Financial Accounting Net Income or Loss
EUR 12,000,000

Decided by the net of the five items

A loss year with a deferred tax asset

No current tax, and a deferred tax asset of EUR 15 million recognised on the year's loss.

Computed

The Net Taxes Expense is (EUR 15,000,000) as computed, a negative adjustment that reduces Financial Accounting Net Income or increases the loss (Article 3.2.1(a)): the tax credits to the accounting result — typically a deferred tax asset on the year's loss — exceed the tax expense added back. Based on the figures you supplied.

Workings

Covered Taxes accrued as an expenseNet Taxes Expense, paragraph (a) — as supplied, including Covered Taxes on excluded income
EUR 0
Deferred tax asset on the loss for the yearParagraph (b) — a negative amount in the adjustment, to the extent not already in (a)
(EUR 15,000,000)
Qualified Domestic Minimum Top-up Tax accruedParagraph (c) — as supplied
EUR 0
Taxes under the GloBE Rules accruedParagraph (d) — as supplied
EUR 0
Disqualified Refundable Imputation Tax accruedParagraph (e) — as supplied
EUR 0
Net Taxes ExpenseArticle 3.2.1(a) — the net of the five, added to Financial Accounting Net Income or Loss
(EUR 15,000,000)

Decided by the net of the five items

A year with top-up tax accrued

Covered Taxes of EUR 8 million, a Qualified Domestic Minimum Top-up Tax of EUR 3 million and an Income Inclusion Rule charge of EUR 1 million.

Computed

A Net Taxes Expense of EUR 12,000,000 is added back to Financial Accounting Net Income or Loss as computed (Article 3.2.1(a)): the taxes that reduced the accounting result do not reduce the base the Effective Tax Rate is measured on. Covered Taxes on income excluded from GloBE Income or Loss are added back with the rest. Based on the figures you supplied.

Workings

Covered Taxes accrued as an expenseNet Taxes Expense, paragraph (a) — as supplied, including Covered Taxes on excluded income
EUR 8,000,000
Deferred tax asset on the loss for the yearParagraph (b) — a negative amount in the adjustment, to the extent not already in (a)
EUR 0
Qualified Domestic Minimum Top-up Tax accruedParagraph (c) — as supplied
EUR 3,000,000
Taxes under the GloBE Rules accruedParagraph (d) — as supplied
EUR 1,000,000
Disqualified Refundable Imputation Tax accruedParagraph (e) — as supplied
EUR 0
Net Taxes ExpenseArticle 3.2.1(a) — the net of the five, added to Financial Accounting Net Income or Loss
EUR 12,000,000

Decided by the net of the five items

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:

  • What Covered Taxes were accrued as an expense, including current and deferred Covered Taxes in the income tax expense and those on income excluded from GloBE Income or Loss? Enter a net credit as a negative, and nil if there are none.
  • What deferred tax asset attributable to a loss for the Fiscal Year was recognised, as a positive amount, to the extent it is not already in the deferred tax above? Enter nil if there is none.
  • What Qualified Domestic Minimum Top-up Tax was accrued as an expense? Enter nil if there is none.
  • What taxes arising under the GloBE Rules — an Income Inclusion Rule or Undertaxed Profits Rule charge — were accrued as an expense? Enter nil if there are none.
  • What Disqualified Refundable Imputation Tax was accrued as an expense? Enter an amount refunded and booked as income as a negative, and nil if there is 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