Interaction Between Bonus Depreciation and the Substance-Based Income Exclusion

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.

YearTaxable ProfitsFinancial Accounting Profits

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

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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.