As the Pillar Two GloBE Rules broadly follow the treatment in the financial accounts (with a number of GloBE-specific adjustments), bonus depreciation falls under the ambit of the deferred tax provisions.
However, investments in capital assets benefit from the substance-based income exclusion under Article 5.3 of the OECD Model Rules. The interaction between the substance-based income exclusion and the impact of deferred tax is interesting.
Many jurisdictions offer some form of accelerated tax relief for tangible assets. The UK for instance currently offers a 100% bonus depreciation deduction for qualifying assets.
This is in contrast to the financial accounting treatment. Under IAS 16.5, the depreciable amount (cost less residual value) is allocated on a systematic basis over the asset’s useful life.
There would therefore be a mismatch between the tax and the accounting treatment. For tax purposes in the first year there would be a significant reduction in taxable profits when compared to accounting profits. After the first year accounting profits would be lower than taxable profits until the depreciable cost is fully utilised.
Company A incurs costs of 1,000 euros on a tangible fixed asset. The jurisdiction allows for 100% bonus depreciation/first year allowance for tax purposes. The asset has a useful economic life of 5 years with no residual value. For financial accounting purposes, there would therefore be an annual depreciation deduction of 200 euros. Accounting/Taxable Profits before this adjustment are 10,000 euros.
|Financial Accounting Profits
If the tax rate was 10%, tax payable and the effective tax rate would be:
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This allows you to adjust key variables including profits, the tax rate (including the GloBE recast to 15%), tangible asset investment and the useful economic life of the asset.