Instead of applying the deferred tax rules (or for instance in jurisdictions where an MNE would not benefit from a system based on deferred tax), an entity can make a Pillar Two GloBE loss election.
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.
This 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, just at the release of a standard deferred tax asset would be a debit to deferred tax expense in the P&L (ie an increase in the tax expense)
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.
There are a number of cases when making a Pillar Two loss election would be beneficial. The most obvious case is when the jurisdiction does not levy a corporate income tax. Let’s look at a few examples to illustrate the key points.
Company A is a member of an MNE group subject to Pillar Two. It is tax resident in 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.
In the absence of a Pillar Two GloBE loss election, in years 1-3, it would suffer no top-up tax liability given it is loss-making. In years 4 and 5, the top-up tax percentage would be 15%, as again the jurisdiction levies no corporate income tax. As such, top-up tax of 3,750,000 euros arises in year 4 and 1,500,000 euros in year 5.
Note that in this case there is no relief for the losses. This is because the Pillar Two GloBE rules do not adopt a general loss carry forward regime, but apply deferred tax from the financial statements, which would ordinarily pick up trading losses that were available for future offset and provide for a deferred tax asset which would adjust the tax expense in the financial accounts. In this case, there is no deferred tax given there is no corporate income tax.
If a Pillar Two Loss deferred tax asset election was made, in year 1 a deemed deferred tax asset is created at the 15% global minimum rate (ie 1,500,000 euros).
This also applies to years 2 and 3. At the end of year 3, the deemed deferred tax asset is 6,750,000 euros.
In year 4, there is Pillar Two income of 25,000,000 euros. The deemed deferred tax asset is offset against this at the lower of:
The amount of the deemed deferred tax asset = 6,750,000 euros
Pillar Two GloBE income * 15% rate = 3,750,000 euros
As such, in year 4, Net Pillar Two GloBE Income is 25,000,000 euros.
Covered taxes are increased by the amount of deemed deferred tax asset used.
Therefore, covered taxes are 3,750,000 euros.
The Pillar Two GloBE ETR is 3,750,000/25,000,000 = 15%
In year 5, Pillar Two GloBE income is 10,000,000 euros. The deemed deferred tax asset used is 1,500,000 euros.
The Pillar Two GloBE ETR is 15%.
In years 4 and 5, making a Pillar Two GloBE loss deferred tax asset election has eliminated the top-up tax of 3,750,000 euros in year 4 and 1,500,000 euros in year 5.
Let’s assume that the jurisdiction levied a corporate income tax rate of 10%. The facts are the same as above. The jurisdiction permits losses to be carried forward and offset against future taxable income.
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