Section 1 of the Fourth Set of OECD Administrative Guidance (issued on June 17, 2024) provides further details on the deferred tax liability recapture rule.

Article 4.4.4 of the OECD Model Rules implements a recapture rule for deferred tax liabilities (DTLs). This applies when a DTL has not reversed within five years of the fiscal year in which it was originally recognized.

When this recapture applies, the MNE group is required to recompute its effective tax rate (ETR) for the year the DTL was originally recognized. If there is then any top-up tax, this top-up is added to the top-up tax for the current year. See our interactive deferred tax recapture tool to simulate the application of this rule.

Certain DTLs are excluded from the recapture rule, so they do not need to be adjusted for, even if they take more than five years for the deferred tax liability to release. These are referred to as ‘recapture exception accruals’.

Determining when DTLs have reversed would not be an issue if an entity determined its DTLs based on an item-by-item basis (eg based on single general ledger (GL) items). However, this is generally not the case.

Much of the new guidance for tracking and measuring reversed DTLs arises from the fact that MNEs often aggregate DTLs related to assets and liabilities in different GL accounts.

Aggregated DTL amounts could undermine the application of the recapture rules (as, for instance, the netting off of deferred tax assets (DTAs) against DTLs would prevent the recapture rule applying to the amount of the DTL offset by the DTA or the aggregated DTL amount could include some DTLs that fully reverse within five Fiscal Years and some DTLs that do not fully reverse within five Fiscal Years).

The June OECD Administrative Guidance therefore includes further guidance addressing the application of the recapture rule to aggregated DTL amounts.

Note that unlike other changes introduced in OECD Administrative Guidance which actually amend the application of the OECD Model Rules, the changes relating to tracking DTLs for the DTL recapture rule are to assist MNEs in how to apply the model rules and commentary (with the exception of the new 5 year Unclaimed Accrual election). 

The key areas of the new guidance cover:

-Tracking DTLs

-Aggregating DTLs under GloBE Rules

-Determining when a DTL reverses/amount of reversal

-Simplification for Short-term DTLs

-A new Unclaimed Accrual Five-Year election

-Impact on QDMTTs