F.3 Frequently Asked Questions and Answers

We believe that there are two acceptable approaches. Under the first approach, the entity would assess the realizability of its DTAs solely on the basis of the regular tax system without taking into consideration amounts due under a Pillar Two AMT system (i.e., any incremental impact of the Pillar Two taxes would be accounted for in the period in which the Pillar Two tax is incurred).

Under the second approach, the entity would assess the realizability of its DTAs on the basis of all available information. If, for example, the expected tax benefit of a DTA is less than the reported amount because the utilization of the DTA will result in incremental Pillar Two taxes (e.g., if the DTA is more likely than not to be disregarded under the GloBE rules),6 the DTA would be reduced by a valuation allowance to reflect the actual amount of tax benefit that will be realized with respect to the DTA.

These approaches are the same as those used to assess the realizability of DTAs in the regular tax system that interact with the corporate AMT, as addressed in Section 5.7.1.

If it is assumed that the QDMTT qualifies as an AMT, both the QDMTT and corporate AMT would function as AMTs that are due in the same jurisdiction as the regular tax. Accordingly, if an entity has already adopted an accounting policy for the corporate AMT, we believe that the entity should apply a consistent policy for any QDMTTs that qualify as AMTs.

However, we believe that the nature of the IIR and UTPR is different from that of the QDMTT and corporate AMT because the IIR and UTPR are AMTs that are due in jurisdictions that are different from those in which the regular tax is due. Accordingly, if an entity operates in a low-taxed jurisdiction and the regular deferred taxes in that jurisdiction will reverse and affect the amount of top-up tax paid under an IIR or UTPR (or both) in a different jurisdiction, the entity could make a separate policy choice for the IIR and UTPR. While an entity does not need to elect the same accounting policy for the UTPR and IIR as it elects for the corporate AMT and any QDMTTs that qualify as AMTs (i.e., the entity could choose the second approach for the corporate AMT and QDMTT and the first approach for the UTPR and IIR), if it elects to assess the realizability of its DTAs under the second approach for the IIR and UTPR, it will also need to choose the second approach for any QDMTTs that factor into the calculation of the IIR and UTPR (e.g., a QDMTT that does not qualify for the QDMTT safe harbor7 would reduce the amount of the tax due under an IIR or UTPR). In various circumstances, complexities may arise. Consultation with an entity’s accounting advisers is encouraged.

The top-up tax expense to be paid by the entity in the loss jurisdiction should not be excluded from the overall AETR if such tax is “related to” ordinary income (or loss) of an entity that is not excluded from the overall (worldwide) AETR. ASC 740-270-30-36(a) states, in part, that when a loss jurisdiction is excluded from the AETR, “the entity shall exclude ordinary income (or loss) in that jurisdiction and the related tax (or benefit) from the overall computations of the estimated annual effective tax rate and interim period tax (or benefit)” (emphasis added). In this case, the top-up tax is not “related to” the ordinary income (or loss) of the excluded entity.

Top-up taxes should be allocated among the components of comprehensive income in accordance with the intraperiod allocation with-and-without approach under ASC 740-20.

Uncertain tax positions taken in the computation of top-up taxes within the scope of ASC 740 are subject to the same two-step recognition and measurement principles in ASC 740-10 as other taxes within the scope of ASC 740, including any uncertain tax positions taken with respect to assertions related to meeting any applicable safe harbor requirements. See Chapter 4 for additional information about the two-step process.

No. As noted above, under Articles 4.1.2(c) and 4.4.2(a) of the GloBE rules, tax expense related to an uncertain tax position can only be included in adjusted covered taxes when paid, resulting in both lower adjusted covered taxes in the period in which the effect of the UTB is recorded in the financial statements and the potential for higher adjusted covered taxes in a future period. Whether the taxes paid related to the uncertain tax position will actually result in a reduction in top-up taxes, however, will depend on various factors (e.g., future GloBE income, permanent items). Accordingly, we do not believe that the entity should record an asset with respect to the potential future increase in adjusted covered taxes. Instead, it would reflect the benefit related to the potential future increase in adjusted covered taxes, if any, in the fiscal year the taxes are paid.

When a DTL arises, the corresponding deferred tax expense increases the adjusted covered tax amount used to calculate the GloBE ETR,8 which could reduce the amount of top-up tax paid in that year. However, if the DTL has not been paid within the five subsequent fiscal years and is not a recapture exception accrual, the GloBE rules require the entity to recompute its GloBE ETR for the year in which the DTL arose to determine whether additional top-up tax is due. The entity would do so by excluding from covered taxes the amount of deferred tax expense associated with the DTL that was previously taken into account in adjusted covered taxes but is not paid within the five subsequent fiscal years. If the recaptured DTL is paid in a subsequent year, adjusted covered tax in that year is increased by the amount of the recaptured DTL (referred to below as the reversal of the recaptured DTL).

When an entity recomputes its GloBE ETR for an LTCE for the year in which the DTL arose and pays additional top-up tax, the tax law may permit the entity to amend its U.S. tax return for the year in which the DTL arose and claim additional FTCs, which may result in a refund of taxes paid for such year.

We believe that a company’s decision to include the deferred tax expense in adjusted covered taxes postpones payment of the incremental top-up tax but does not absolve the entity of its obligation to make such a payment on the basis of its expected manner of recovery (i.e., it is expected to be due upon the mere passage of time). We note that recognition of a liability in the year in which the DTL arises is consistent with the requirement in the GloBE rules that in the event of recapture, the entity will have to recompute its GloBE ETR for the year in which the DTL arose rather than including it in adjusted covered taxes when the recapture is triggered in the fifth subsequent year. While we acknowledge that the liability is contingent on the DTL’s not being paid during the five subsequent fiscal years, we believe that if a DTL is expected to be recaptured, the entity should record a noncurrent tax liability in the year in which the DTL arises equal to the additional current top-up tax that it expects to pay upon recapture. Consultation with an entity’s accounting advisers is encouraged.

Although ASC 740-10-30-8 clearly prohibits the discounting of DTAs and DTLs, it does not address income tax liabilities payable over an extended period. In the absence of explicit guidance in ASC 740, we believe that an entity would need to consider ASC 835-30. Specifically, we note the following:

• ASC 835-30 generally applies to “exchange transactions” rather than nonreciprocal transactions.
• ASC 835-30-15-3(e) notes that the guidance in ASC 835-30 does not apply to “[t]ransactions where interest rates are affected by the tax attributes or legal restrictions prescribed by a governmental agency (for example, industrial revenue bonds, tax exempt obligations, government guaranteed obligations, income tax settlements).”
• While not expected, because certain transactions could occur that would result in the DTL’s being “paid” and hence the DTL recapture event’s being avoided, the amount of the top-up tax represents a contingent obligation rather than a contractual obligation to pay money on fixed or determinable dates that is consistent with the types of instruments described in ASC 835-30-15-2.

Accordingly, we do not believe that the top-up tax that is expected to be due upon a DTL recapture event should be discounted.

We believe that this position is consistent with that taken by the FASB staff in its Q&A stating that the deemed repatriation transition tax liability that resulted from the Tax Cuts and Jobs Act of 2017 would not be discounted.

An entity may realize a future benefit associated with the reversal of the recaptured DTL when the DTL eventually reverses (e.g., upon the sale of the intangible asset). However, in a manner similar to the discussion in Question 5.2, whether the corresponding increase will result in a reduction in top-up taxes paid in the future period depends on various factors (e.g., future GloBE income, permanent items). Unlike the scenario in Question 6.1, in which the effects of the recapture result in the recalculation of the year 1 tax, the potential top-up tax impacts of the eventual reversal of the recaptured DTL will not be known until the reversal actually occurs in a future period. Accordingly, we believe that even though a company may record a liability associated with the DTL recapture in year 1, it should not record a corresponding asset. Instead, it would reflect the impact to the top-up tax in the fiscal year in which it pays the previously recaptured DTL.

If, as a result of the DTL recapture provision, an entity records a noncurrent tax liability in accordance with the discussion in Question 6.1 and has the intent and ability to amend its U.S. tax return for the year in which the DTL arose to claim additional FTCs, should the entity record an asset equal to the refund it expects to receive?

ASC 740 addresses the recognition and measurement of tax positions taken or expected to be taken in a tax return. Consequently, if an entity expects to file an amended tax return to claim a refund, the entity should account for the associated tax effects in the period in which it concludes that it expects to amend the return. Therefore, assuming that the statute of limitations for the year the DTL arose will not close before the year the additional top-up tax is paid, we believe that an asset (i.e., a noncurrent receivable) should be recorded for the expected future refund of U.S. taxes paid. Further, we believe that recognition of a noncurrent receivable is appropriate even if the FTCs will be in the GILTI basket and the entity has elected to account for taxes related to GILTI as a period cost (i.e., the noncurrent receivable does not constitute a GILTI DTA).

As defined in the GloBE rules, an excess negative tax expense (ENTE) carryforward can arise in situations in which Article 4.1.59 of the GloBE rules applies as well as in cases in which the top-up tax percentages are in excess of the minimum rate under Article 5.2.1.

Article 4.1.5 applies when (1) there is no net GloBE income in a jurisdiction and (2) the adjusted covered taxes are less than zero and less than the amount of expected adjusted covered taxes. For example, if an MNE group had a GloBE loss of $100 in Jurisdiction A in year 1 and adjusted covered taxes of negative $45, the MNE group would compare the adjusted covered taxes of negative $45 with the expected adjusted covered tax amount of negative $15, resulting in a top-up tax of $30. In this instance, the MNE group may elect to apply the ENTE administrative procedure,10 to create an ENTE carryforward of $30, as described further below.

An ENTE can also arise in situations in which the top-up tax percentage exceeds the minimum rate (Article 5.2.1), which would arise in jurisdictions that have a negative GloBE ETR. For example, if CEs in Jurisdiction B had GloBE income of $100 and adjusted covered taxes of negative $5, the GloBE ETR would be negative 5 percent, resulting in a top-up tax percentage of 20 percent. Application of the ENTE administrative procedure is mandatory in this instance.

An MNE group that elects or is required to apply the ENTE administrative procedure must exclude the ENTE from its aggregate adjusted covered taxes computed for the fiscal year and establish an ENTE carryforward. The ENTE for a fiscal year in which the MNE group realizes no GloBE income for the jurisdiction is equal to the amount computed under Article 4.1.5 for that fiscal year. The ENTE for a fiscal year in which the MNE group realizes positive GloBE income for the jurisdiction is equal to the negative adjusted covered taxes for that fiscal year. In the examples above, the ENTE carryforward related to Jurisdiction A (if it is assumed that the election was made) and Jurisdiction B would be $30 and $5, respectively.

In each subsequent fiscal year in which the MNE group has positive GloBE income and adjusted covered taxes for the jurisdiction, the MNE group must decrease (but not below zero) the aggregate adjusted covered taxes by the remaining balance of the ENTE carryforward. The MNE group must then reduce the balance of the ENTE carryforward by the same amount.

Although an entity may have an ENTE, the ENTE’s effects when it reduces future adjusted covered taxes may not result in a future tax obligation. This is because the ENTE, in the year in which it actually reduces covered taxes, may still not reduce the GloBE ETR below the minimum rate. Therefore, we do not believe that the establishment of an ENTE creates a present obligation or the need to record a noncurrent tax liability in the year in which the ENTE is generated. Rather, the entity would record the impact of the ENTE if or when the ENTE results in an increase in top-up tax.

While ASC 740 does not explicitly require entities to disclose new tax laws, disclosure may be appropriate in certain circumstances. For example, ASC 740-10-50-14 requires entities to disclose the nature and effect of any significant matters affecting comparability of information for all periods, if not otherwise evident.

SEC Regulation S-K, Item 303(a), requires entities to provide certain forward-looking information related to “material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be necessarily indicative of future operating results or of future financial condition.” Accordingly, entities should consider disclosing, when material, the anticipated future impact of newly enacted laws, as well as those expected to be enacted (e.g., laws conforming with the Pillar Two framework), on their results of operations, financial position, liquidity, and capital resources. Such impacts include, but are not limited to, expected increases in income tax expense as a result of newly enacted tax laws, any corresponding increase in cash outflows related to increases in income taxes, and the anticipated results of any restructuring activities initiated as a result of the newly enacted legislation.

Yes, the IIR is within the scope of ASC 740 in separate financial statements that include both the payor of the top-up tax and the LTCE subsidiary. In a manner similar to the discussion in Question 1.1, because the IIR is based on a measure of income included in the separate financial statements, the IIR is within the scope of ASC 740.

In this case, the taxes due under the UTPR would generally be outside the scope of ASC 740 for the purposes of separate financial statements because the top-up tax is not based on income included in the separate financial statements.

In a manner similar to the discussions in Questions 1.2 and 8.1, if both the LTCE and the entity obligated to pay the UTPR are included in the same set of separate financial statements, the UTPR is within the scope of ASC 740 for the purposes of separate financial statements.

If a tax due under a UTPR is outside the scope of ASC 740 in the separate financial statements, we believe that the payment is deemed to be made on behalf of the parent because the tax due under the UTPR is a result of the parent entity’s organizational structure (i.e., if not for the parent’s investment in affiliated entities, the reporting entity would have no liability). As a result, we believe that this amount, although paid by an entity included in the separate financial statements, does not represent a cost of the separate financial statement group’s business and may be reflected as an equity transaction.

No. In this case, the amounts due under the intercompany arrangements should not be accounted for as an income tax expense within the scope of ASC 740 in the separate financial statements. The entity in the low-tax jurisdiction has no liability for the top-up tax because the top-up tax is levied on an entity that is excluded from such separate financial statements. Therefore, any amounts due as a result of an agreement between the LTCE and entities not included in the separate financial statements should not be considered an income tax in the separate financial statements.

If an entity included in separate financial statements is responsible for paying tax under a UTPR related to income of an LTCE that is not included in the separate financial statements, how should the entity account for uncertain tax positions associated with the UTPR in the separate financial statements?

Because the entity is responsible for the UTPR as a result of its affiliation with the UPE, any UTBs related to uncertain tax positions associated with the UTPR should be recorded within equity, in the separate financial statements, in the same period and for the same amount recorded by the UPE in the consolidated financial statements on the basis of the UPE’s analysis (if both entities are reporting under U.S. GAAP).