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Bonus Depreciation and the Pillar Two Global Minimum Tax

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.

Many jurisdictions offer some form of accelerated tax relief for tangible assets. The USA for instance currently offers a 100% bonus depreciation deduction for assets with useful lives of 20 years or less. 

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.

YearTaxable ProfitsFinancial Accounting Profits

If the tax rate was 10%, tax payable and the effective tax rate would be:

YearTax Payable Current Tax - AccountsETR - TaxETR - Financial Accounts

The bonus depreciation therefore creates a mismatch between tax payable and the current tax in the accounts. 

As this is a timing difference, deferred tax would need to be considered. A deferred tax liability would be created in year 1:

Dr Deferred Tax P&L – 80 euros

Cr Deferred Tax Liability Balance Sheet – 80 euros

This would increase the accounting tax figure in the P&L in year 1. 

As it unwinds each year (Dr Deferred Tax Liability Balance Sheet 20 euros, Cr Deferred Tax P&L 20 euros), it would reduce the tax figure in the accounts. The table below shows this:

YearTaxFinancial Accounting - Current TaxDeferred Tax P&L Tax

Therefore, bonus depreciation wouldn’t necessarily lead to a top-up tax liability under the Pillar Two Rules given the tax relief given would be ‘spread’ under the deferred tax rules. Of course, even in spite of tax relief being reflected over a number of years there could still be a top-up tax obligation if the tax relief given was significant enough to reduce the GloBE effective tax rate below 15%. The initial debit to the P&L on the creation of the deferred tax liability could even push the ETR above 15% where the tangible asset investment is significant (see below).

Substance-Based Income Exclusion

The other aspect that needs to be considered when there is any investment in tangible fixed assets, is the substance-based income exclusion

This is separate to the calculation of Pillar Two GloBE income which is used for determining the GloBE ETR. However, it is taken into account in calculating the amount of top-up tax payable, as the substance-based income exclusion is deducted from Pillar Two GloBE income before applying the top-up tax percentage. 

Article 5.3.4 of the OECD Model Rules provides that the tangible asset carve-out is equal to 5% (subject to transitional rules) of the carrying value of eligible tangible assets of a constituent entity located in a jurisdiction.

Therefore, in the example above the top-up tax calculation would be:

YearGloBE IncomeSubstance-Based Income ExclusionExcess ProfitsTop-Up Tax %Top-Up Tax


In this case, the impact of the substance-based income exclusion is minimal. What if the amount of the tangible asset investment was 10,000 euros?  In this case the interaction between the deferred tax liability is interesting:

YearGloBE IncomeSubstance-Based Income ExclusionExcess ProfitsTop-Up Tax %Top-Up Tax

As the investment in tangible assets is large compared to profits, this increases the benefit of the substance-based income exclusion but also results in the deferred tax liability due to the bonus depreciation having a significant impact on the GloBE ETR (and therefore the top-up tax payable) in the year of creation. 

In this case, the large debit to the P&L on the creation of the deferred tax asset results in an ETR above 15% in year 1. The ETR is increased when compared to the example above, but the larger substance-based income exclusion does not achieve any savings as the ETR is above 15% anyway. 

If you’re a member you can use our modelling tool below to model the impact of bonus depreciation and the substance based income exclusion.

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.