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When is a Qualifying Refundable Tax Credit Not Beneficial?

Qualifying Refundable Tax Credits are treated differently to Non-Qualifying Refundable Tax Credits. Under Article 10 of the OECD Model Rules they are treated as GloBE income, as opposed to covered taxes. 

In most cases, this will be beneficial for an MNE. Whilst both Qualifying Refundable Tax Credits and Non-Qualifying Refundable Tax Credits will reduce the Pillar Two effective tax rate (ETR), Qualifying Refundable Tax Credits will reduce the ETR by less. 

However, this does not always equate to a lower top-up tax liability. 

One example of this is where there is a very high substance-based income exclusion as a proportion of GloBE income. In this case as the Qualifying Refundable Tax Credit is added to income, the additional income can create a top-up tax liability where there wouldn’t be one if the tax credit was non-refundable. 


An MNE has Pillar Two GloBE income of 10 million euros in Country X. Covered tax is 200,000 euros. 

It has assets and payroll of 200 million euros which equate to a substance-based income exclusion of 10 million euros. 

No Tax Credit

If there was no tax credit the ETR would be 2%. The top-up tax percentage would be 13%. However, as the substance-based income exclusion is 10 million euros, this reduces excess profits to nil such that there is no top-up tax payable. 

Qualifying Refundable Tax Credit

If we assume there was a Qualifying Refundable Tax Credit of 100,000 euros, this would change the calculation. 

GloBE income would be 10,100,000 euros. The ETR would be 1.9802% and the top-up tax percentage would be 13.0198%. Whilst the 10 million euros substance-based income exclusion covers most of the GloBE income, 100,000 euros remains. As such top-up tax of 13,020 euros is payable. 

Non-Qualifying Refundable Tax Credit

If the tax credit was non-qualifying the tax credit would be deducted from covered tax. Therefore, covered tax would be 100,000 euros and the Globe ETR would be 1%. The top-up tax percentage is 14%. 

However, even though the top-up percentage is higher than the Qualifying Refundable Tax Credit there is no top-up tax to pay as the GloBE income of 10 million euros is fully covered by the substance-based income exclusion.  The table below summarises the results. 

 No Tax CreditQRTCNon-QRTC
Covered Tax200,000200,000100,000
Pillar Two Income 10,000,00010,100,00010,000,000
Tangible Fixed Assets100,000,000100,000,000100,000,000
Payroll Costs100,000,000100,000,000100,000,000
Globe ETR2.0000%1.9802%1.0000%
Top-Up Tax %13.0000%13.0198%14.0000%
Substance-Based Income Exclusion 10,000,00010,000,00010,000,000
Top-Up TaxNil13,020Nil