A Qualified Refundable Tax Credit is a refundable tax credit paid as cash or available as cash equivalents within four years from the date when a constituent entity satisfies the conditions for receiving the credit. A common example of this could be an R&D refundable tax credit.
For the purposes of the Pillar Two GloBE rules, they are treated as GloBE income and not a reduction in covered taxes.
This generally follows the accounting treatment which treats them akin to government grants (for example under IAS 20.) As such, if the tax credit is treated as income in the financial accounts, no adjustment is required.
However, if the tax credit is reflected in the current tax expense in the financial accounts, an adjustment is required. Under the GloBE rules the adjustment is made by adding the amount to covered taxes and including it in GloBE income to reverse the accounting treatment.
Conversely, a tax credit that isn’t a Qualified Refundable Tax Credit is not treated as GloBE income, but as a reduction to covered taxes. Therefore, if it was treated as income in the financial accounts, an adjustment to covered taxes must be made to reduce GloBE income and reduce covered taxes.
If a tax credit is partially refundable and partially non-refundable, the above rules apply separately to the refundable and non-refundable elements.
Treating a tax credit as a qualified refundable tax credit as opposed to a non-refundable tax credit can have a significant impact on the GloBE ETR.
As stated above, in order to be a Qualified Refundable Tax Credit, the tax credit needs to be paid as cash or available as a cash equivalent within four years from the date when the entity satisfies the conditions for receiving the credit.
In order to be refundable, any amount of the tax credit that has not been used to reduce covered taxes (eg corporate income tax) is either payable as cash or cash equivalent.
Cash equivalent includes checks, as well as the ability to use the credit to discharge liabilities other than a Covered Tax liability. If the credit is only available to reduce Covered Taxes, i.e. it cannot be refunded in cash or credited against another tax, it is not a qualified refundable tax credit.
In addition, the refund amount must not be limited to any ‘tax liability’. It may therefore be that a refund limited by the amount of payroll taxes would not be a qualified refundable tax credit.
Our Interactive Global R&D Map analyses key international R&D tax regimes to consider their treatment for Pillar Two purposes.