Instead of applying the deferred tax rules (or for instance in jurisdictions where there is a very low rate of corporate income tax), a filing entity can make a Pillar Two GloBE loss election under Article 4.5 of the OECD Model Rules. For more information on deferred tax under Pillar Two, see Deferred Tax.
This dispenses with the deferred tax expense and allows the MNE to establish a deemed deferred tax asset where this is a net Pillar Two GloBE loss for that jurisdiction. The deferred tax asset for the loss is equal to the net Pillar Two loss in the jurisdiction for a fiscal year, multiplied by the 15% minimum rate.
It operates in a similar way to the standard loss treatment for deferred tax purposes, and any amount of loss utilized in future years is treated as an addition to covered taxes for that year.
The Pillar Two GloBE loss deferred tax asset must be used in any subsequent fiscal year in which there is Pillar Two income for the jurisdiction at an amount equal to the lower of the net Pillar Two GloBE income, multiplied by the 15% minimum rate or the available amount of the Pillar Two GloBE loss deferred tax asset.
It is a jurisdictional election and is made in the first Pillar Two information return for the jurisdiction. It should be noted that although the ETR of investment entities is calculated separately from other constituent entities in a jurisdiction, the Model Rules do not provide for a separate GloBE loss election.
There are a number of cases when making a Pillar Two loss election would be beneficial. The most obvious case is when there the jurisdiction does not levy a corporate income tax.
Company A is a member of an MNE group subject to Pillar Two. It is tax resident in the Bahamas, a jurisdiction that levies no corporate income tax.
It has estimated results as follows:
Year 1 – Trading Loss of (10,000,000 euros)
Year 2 – Trading Loss of (15,000,000 euros)
Year 3 – Trading Loss of (20,000,000 euros)
Year 4 – Trading Profit of 25,000,000 euros
Year 5 – Trading Profit of 10,000,000 euros
The financial accounts show no deferred tax asset for the loss given the jurisdiction does not levy corporate income tax.