The Pillar Two GloBE Rules include special provisions that apply where there is a prior year adjustment that effects the amount of GloBE tax in a jurisdiction for a previous year.
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 always treated as an adjustment to the current year’s covered taxes under Article 4.6.1 of the OECD Model Rules. This means that there is no refund of excess top-up tax from a previous year.
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.
Simply adjusting this in the current year would not always be effective as it may well be that the inflated covered taxes in the previous year avoided any top-up tax liability. A current year adjustment to take into account the increased tax from a previous year may not result in extra top-up tax depending on the jurisdictions GloBE effective tax rate.
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.