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Tracking Deferred Tax Adjustments for Pillar Two

Contents
  1. Tracking Deferred Tax Adjustments for Pillar Two
    1. General
    2. Summary
    3. Brought Forward Adjustments
      1. General Rule
      2. Losses Arising from Permanent Differences
    4. Tax Rate Used in The Accounts
    5. Deferred Tax Related to Pillar Two Exclusions
    6. Valuation and Accounting Recognition Adjustments
    7. Disallowed and Unclaimed Accruals
    8. Change in Domestic CIT Rate
    9. Tax Credits
    10. Recaptured Deferred Tax Liabilities
    11. Excess Losses
General

The application of the Pillar Two global minimum tax hinges on the calculation of the effective tax rate (ETR). Only when the jurisdictional ETR is below 15% will this apply. 

The ETR is based on adjusted covered taxes and Pillar Two GloBE income, both calculated under the Pillar Two rules. Adjusted covered taxes takes the current and deferred tax figures from the financial accounts and adjusts them for Pillar Two purposes. 

Multinationals will therefore need to be able to track the underlying adjustments to ensure that they are able to correctly calculate deferred tax for Pillar Two.

Some of the tracking adjustments will be relatively straightforward to apply given the information will already be in their financial accounting or ERP system. However, others will require significant adjustments to existing systems, particularly where the Pillar Two requirements differ from the treatment under current accounting standards such that the specific adjustments have not historically been tracked. 

In this article, we take a comprehensive look at what adjustments will need to be tracked and how difficult this will be. 

Summary

Before looking at the detailed rules, its useful to summarise all of the deferred tax tracking adjustments MNEs will need to have in place. 

The complete list is:

  • Domestic tax rate used for deferred tax
  • Deferred tax assets from December 1, 2o21
  • Intra-group asset transfers from December 1, 2021
  • Deferred tax related to income excluded from Pillar Two
  • Deferred tax valuation and accounting recognition adjustments
  • Disallowed and unclaimed accruals
  • Deferred tax arising from changes in the domestic corporate income tax rate
  • Deferred tax arising from tax credits
  • Deferred tax liabilities not fully reversed within five years
  • Excess losses
Brought Forward Adjustments

The first key point relates to the first year that a multinational is within the scope of the Pillar Two rules (eg when the jurisdiction enacts relevant legislation or when the turnover of the group exceeds 750 million euros and brings it within scope). 

General Rule

Article 9.1 of the OECD Model Rules provides that the MNE group can take into account all the deferred tax assets and deferred tax liabilities in the financial accounts for relevant entities in a jurisdiction for that year.

However, this is subject to the restriction that the deferred tax assets and liabilities of the entity are recognised at the lower of:

  • the domestic tax rate used in the accounts;  and
  • the 15% global minimum rate.