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Post-Filing Adjustments

Post-Filing Adjustments

Contents

General

The treatment under the Pillar Two GloBE rules depends on whether there is an increase or decrease in the covered taxes and the amount of the adjustment.

Prior year increases in covered taxes are treated as an adjustment to the current year’s covered taxes under Article 4.6.1 of the OECD Model Rules.

Prior year decreases in covered taxes require a recalculation of the ETR and top-up tax in the previous year that the adjustment relates to. However, where a reduction is less than 1 million euros the MNE can elect for this to be adjusted in the current year.

The carryback of a local tax loss that gave rise to a refund of tax or other reduction in tax payable in the previous year would also be treated as a decrease in covered taxes.

However, there are special provisions for deferred tax that apply to loss carrybacks, for more information, see Deferred Tax.

These rules mirror the treatment for prior year adjustments to Pillar Two GloBE income and ensure that both the income and tax are aligned in the same fiscal year for the ETR calculation.

Reduction in Domestic Rate

A change in domestic tax rates is not taken into account in the current year but could have deferred tax implications.

Where there is a reduction to the domestic tax rate below the 15% global minimum rate, deferred tax in a previous year may need to be recomputed under Article 4.6.2 of the OECD Model Rules.

For instance, if a deferred tax liability of 1 million euros is created in year 1 at a corporate income tax rate of 20%, this would result in adjusted covered tax of 200,000 euros. In year 2, the domestic tax rate is reduced to 10%.

The deferred tax liability in year 1 would need to be recomputed based on the 10% rate, with the adjusted covered tax being 100,000 euros. Additional top-up tax of 100,000 euros would therefore be due.

In this case, the amount is not material and would be due in year 2. If it was material, the ETR and top-up tax in year 1 would be amended.

Increase in Domestic Rate

Where there is an increase in the domestic tax rate, this could require an adjustment to the deferred tax expense in a previous year under Article 4.6.3 of the OECD Model Rules. In general, an increase in the rate that applies to a deferred tax liability is disregarded until the liability is unwound and the tax is paid.

The additional tax payable is then treated as an increase in covered taxes in the previous year.

Recaptured Current Tax

Just as for deferred tax that is not unwound, a recapture rule applies to a current tax expense that is claimed as adjusted covered tax and is not paid under Article 4.6.4 of the OECD Model Rules. This applies where the unpaid tax is more than 1 million euros.

Unlike deferred tax, a three-year recapture rule applies (it is five-years for deferred tax).

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