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.
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:
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).
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: