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Territorial Tax Systems and Pillar Two

 
Jurisdictions that apply a territorial basis of taxation do not tax foreign source income. This could be a blanket exemption for all foreign source income, or it could be more targeted, for instance, they could apply a foreign participation and branch exemption to exempt foreign dividends and foreign trading income. 
 
Under Article 3.1 of the Pillar Two GloBE Rules, the GloBE income or loss of each constituent entity is the financial accounting net income or loss of the entity, subject to number of specified adjustments.  The accounting treatment is generally driven by the accounting standard of the ultimate parent entity (‘UPE’).
 
Therefore, in a simple case, if the accounting standard employed by the UPE recognised the foreign income received by an entity in a territorial jurisdiction in the calculation of the financial accounting net income or loss, this would form the basis of GloBE income. 
 
However, for domestic tax purposes, the income wouldn’t be taxed. This could therefore lead to a low GloBE ETR if the foreign income was substantial when compared to domestic income. 
 
However, the application of the GloBE Rules is not this straightforward. The rules include a number of provisions that would change this analysis. 
 
In this report we look at the specific features of the Pillar Two GloBE Rules that would impact on the calculation of the GloBE ETR where an in-scope entity is located in a jurisdiction that applies a territorial basis. 

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Picture of Lee Hadnum

Lee Hadnum

Lee is a qualified Chartered Accountant and Chartered Tax Adviser. A former Senior Tax Analyst at Bloomberg Tax, Lee began his career in Ernst & Young's Entrepreneurial Services department and has 20 years of international tax planning experience. Lee's books have been recommended by The Times, The Guardian and The Telegraph.

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