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R&D - Practical Examples of the Treatment of R&D Expenditure under the Pillar Two GloBE Rules

R&D is a common tax incentive provided by jurisdictions. The question for the purposes of Pillar Two is to what extent it will lead to a reduction in the GloBE effective tax rate, and potentially lead to additional top-up tax.

In this article we look at the financial accounting, domestic tax and Pillar Two treatment of some of the key incentives offered including a deduction, capitalized treatment, a super deduction, tax credits and patent boxes or other similar arrangements.

Standard Deduction

In some jurisdictions, a company is just permitted an immediate write-off of the full amount of R&D expenditure.

On the assumption that this is mirrored for financial accounting purposes, there would be no additional impact under the GloBE rules.

GloBE income is based on financial accounting income, and therefore the accounting expense would flow through into the GloBE income base.

This would reduce income for GloBE purposes (when compared to if no deduction had been given) and (other things being equal) would lead to an increase in the GloBE ETR and a potential reduction in any top-up tax payable.

If for financial reporting purposes the R&D was amortized over a number of years then there would be deferred tax implications due to the timing difference between the accounting and tax treatment – see below.