Frequently Asked Questions About “Pillar Two”
This publication was updated on November 8,
2024, to address additional questions related to (1)
the
DTL recapture provision included in the Pillar Two model
rules and (2) the treatment of unrecognized tax
benefits related to the undertaxed profits rule in
separate financial statements. Dates on which
substantive changes were made since this publication’s
initial issuance are marked in red boldface
italic.
Introduction
In October 2021, more than 135 countries and jurisdictions agreed to
participate in a “two-pillar” international tax approach developed by the
Organisation for Economic Co-operation and Development (OECD), which includes
establishing a global minimum corporate tax rate of 15 percent. The OECD published
Tax Challenges Arising From the Digitalisation of the Economy — Global
Anti-Base Erosion Model Rules (Pillar Two)1 in December 2021 and subsequently issued additional commentary and
administrative guidance2 clarifying several aspects of the model rules (collectively the “GloBE”
rules).
Since that time, certain countries have enacted Pillar Two–related
laws, some of which became effective January 1, 2024, and we anticipate that many
more will follow suit. Accordingly, this alert provides responses to some frequently
asked questions (FAQs) about how an entity should account for the tax effects of the
GloBE rules in accordance with ASC 7403 in interim and annual periods. It also incorporates guidance from certain
previously issued Deloitte publications. While the answers to the FAQs reflect our
current positions, these views are subject to change (e.g., on the basis of
additional guidance, new information, or changes in practice). Consultation with an
entity’s accounting advisers is encouraged.
We plan to continue to update this publication as developments occur or additional
questions arise.
Background
The GloBE rules apply to constituent entities (CEs), which are
members of a multinational enterprise (MNE) group that has annual revenue of EUR 750
million or more in the consolidated financial statements of the ultimate parent
entity (UPE) in at least two of the four fiscal years immediately preceding the
tested fiscal year. The objective of the rules is to ensure that large MNEs pay a
minimum level of tax on the income arising in each jurisdiction in which they
operate. To achieve this goal, the rules impose a top-up tax on excess profits
arising in a jurisdiction whenever the GloBE effective tax rate (ETR), determined on
a jurisdictional basis, is below the 15 percent minimum rate.
Whether a top-up tax is due under the rules is assessed on the basis
of a jurisdictional GloBE ETR calculation in which the numerator is the sum of
adjusted covered taxes for each CE located in the jurisdiction. The denominator is
the net GloBE income of the jurisdiction. If the jurisdictional GloBE ETR is less
than the 15 percent minimum rate, the difference is the top-up tax percentage, which
an entity applies to the excess profits in determining the jurisdictional top-up
tax. Adjusted covered taxes are generally equal to the current tax expense and
deferred tax expense of each CE accrued in the UPE’s financial statements, adjusted
for certain items described in the GloBE rules. GloBE income is the financial
accounting net income or loss determined for the CE, adjusted for certain items
described in the GloBE rules. Financial accounting net income or loss is the net
income or loss determined for the CE (before any consolidation adjustments
eliminating intragroup transactions) in the preparation of consolidated financial
statements of the UPE.
The rules also provide additions to, reductions to, and exclusions from the
jurisdictional top-up tax such as:
- Additional current top-up tax, which includes but is not limited to amounts due as a result of the deferred tax liability (DTL) recapture rule (see further discussion in Topic 6).
- A reduction for a domestic minimum top-up tax under a qualified domestic minimum top-up tax (QDMTT).4
- Safe harbors (e.g., the QDMTT safe harbor5), which, at the election of the filing CE,6 deem the top-up tax for a jurisdiction to be zero for a fiscal year when the CEs located in the jurisdiction are eligible for the safe harbor.
The GloBE rules include:
- An income inclusion rule (IIR), which imposes top-up tax on a parent entity that owns an ownership interest in a low-taxed CE (LTCE) with respect to the CE’s low-taxed income.
- An undertaxed profits rule (UTPR), which denies deductions (or requires an equivalent adjustment to be made under domestic law) in an amount resulting in a cash tax expense equal to the top-up tax amount on the low-taxed income of any CE in the MNE group to the extent that such low-taxed income is not subject to tax under an IIR.
The IIR is applied by a parent entity in an MNE group by using an
ordering rule that generally gives priority of the rule’s application to the entity
or entities closest to the top in the chain of ownership. The UTPR is applied by
other entities in the MNE group when the income of low-tax entities is not subject
to tax under an IIR and serves as a backstop to the IIR. Finally, the QDMTT is
applied in the jurisdiction in which the income is generated. Taxes paid under the
GloBE rules do not affect the jurisdictional GloBE ETR calculations described above
nor do they create a tax credit carryforward to be applied against taxes due under
the regular tax system in future years.
Frequently Asked Questions and Answers
Topic 1: Scope
Question 1.1
Is the top-up tax imposed under an IIR regime within the scope of ASC 740 in
the consolidated financial statements of the UPE?
Answer
Yes, the IIR is within the scope of ASC 740 in the UPE’s
consolidated financial statements. ASC 740-10-20 defines income taxes as
“[d]omestic and foreign federal (national), state, and local (including
franchise) taxes based on income,” and it defines taxable income as “[t]he
excess of taxable revenues over tax deductible expenses and exemptions for
the year as defined by the governmental taxing authority.” Although ASC 740
provides no further guidance on this matter, the term “taxes based on
income” implies a tax system in which the tax payable is calculated on the
basis of the entity’s revenue minus the expenses allowed by the jurisdiction
being considered. The IIR is based on GloBE income, which is determined by
taking into account taxable revenues over tax deductible expenses. In
addition, the starting point for calculating GloBE income is the financial
accounting net income or loss reported in the consolidated financial
statements.
Question 1.2
Is the top-up tax imposed under a UTPR within the scope of ASC 740 in the
consolidated financial statements of the UPE?
Answer
Yes, the UTPR is within the scope of ASC 740 in the UPE’s
consolidated financial statements. In a manner consistent with the
discussion above related to the IIR, the revenue and expenses on which the
UTPR is determined, which are calculated according to an income metric, are
included in the consolidated financial statements of the UPE.
Question 1.3
Is the domestic minimum top-up tax imposed under a QDMTT within the scope of
ASC 740 in the consolidated financial statements of the UPE?
Answer
Unlike the IIR and UTPR, there is no mathematical formula prescribed under
the GloBE rules for calculating a QDMTT; therefore, there may be variations
between an enacted QDMTT and the GloBE rules. However, if (1) the QDMTT is
consistent with the GloBE rules and is based on a measure of taxable
revenues less tax-deductible expenses and (2) the income on which the tax is
calculated is included in the consolidated financial statements of the UPE,
the QDMTT is within the scope of ASC 740.
Question 1.4
Is deferred tax accounting required for the IIR, UTPR, or QDMTT?
Answer
IIR and UTPR
At the FASB’s February 1, 2023, meeting, the FASB staff
responded to a technical inquiry related to the deferred tax accounting
for a minimum tax that is consistent with the GloBE rules. The staff
stated that “the GloBE minimum tax
as illustrated in the inquiry is an alternative minimum tax (AMT)” and
that deferred tax assets (DTAs) and DTLs “would not be recognized or
adjusted for the estimated future effects of the minimum tax.” In
addition, the staff noted that “[t]he GloBE minimum tax should be viewed
as a separate but parallel tax system that is imposed to ensure that
certain taxpayers pay at least a minimum amount of income tax.” In
support of its conclusion, the FASB staff cited the guidance in ASC
740-10-30-10 through 30-12 as well as ASC 740-10-55-31 and 55-32
regarding AMT systems. The staff observed that “the potential obligation
for GloBE taxes in future years is dependent on the generation of future
adjusted net income.” Accordingly, deferred taxes for temporary
differences that will reverse in the regular tax system should continue
to be recorded at the regular statutory tax rate.
The staff did note, however, that its view was based on the specific
details outlined in the inquiry and that an entity would therefore need
to evaluate any enacted tax law to determine whether the facts and
circumstances were consistent with those addressed in the inquiry (i.e.,
are consistent with the GloBE rules).
QDMTT
While domestic top-up taxes under a QDMTT were not
addressed in detail in the technical inquiry submitted to the FASB
staff, we believe that in circumstances in which a QDMTT is consistent
with the GloBE rules, the QDMTT may qualify as an AMT and be accounted
for as such. This is consistent with the staff’s response to the
technical inquiry at the February 1, 2023, FASB meeting. We believe that
a question continues to exist, however, related to whether a QDMTT could
still be considered an AMT in situations in which the jurisdiction does
not have an existing domestic income tax aside from a QDMTT (e.g., there
is no parallel tax system). In these scenarios, if it is determined that
the QDMTT does not qualify as an AMT, deferred tax accounting may be
appropriate. Consultation with an entity’s accounting advisers is
encouraged.
Question 1.5
Must a QDMTT qualify for the QDMTT safe harbor to be accounted for as an
AMT?
Answer
No. It is not necessary for a QDMTT to qualify for the QDMTT
safe harbor to be accounted for as an AMT; however, it must function as an
AMT within the jurisdiction to be accounted for as such.
Topic 2: Valuation Allowance
Question 2.1
If an entity expects to be subject to a top-up tax (e.g.,
IIR, UTPR, QDMTT) and, as a result, the incremental economic benefit it
expects to realize for certain DTAs is less than the recorded amount of the
DTAs, should the entity factor in the effects of the top-up tax when
evaluating the realizability of its DTAs?
Answer
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),7 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 (CAMT),
as addressed in Section 5.7.1 of Deloitte’s Roadmap Income
Taxes.
Example
Assume the following:
-
Company A operates in Jurisdiction A, which has a 20 percent tax rate.
-
Jurisdiction A has enacted a QDMTT.
-
Forecasted GloBE income is equal to pretax book income of $5,000.
-
Company A has a DTA of $900 (deductible temporary difference of $4,500) that is disregarded for GloBE purposes. The DTA reverses in year 2 when the QDMTT is effective.
-
Company A has no other permanent or temporary differences.
-
On the basis of projections, utilization of the DTA in year 2 would result in incremental top-up tax of $650 as follows:
Approach 1
The incremental top-up tax would be
accounted for in the period in which it arises, and
no valuation allowance would be recorded against the
$900 DTA because sufficient regular taxable income
is expected in future years.
Approach 2
The reversal of the temporary
difference reduces the regular tax to $100 but
results in $650 of top-up tax. Accordingly, the
temporary difference only results in a reduction of
future cash outflows of $250, necessitating a $650
valuation allowance against the $900 DTA.
Question 2.2
If an entity has already adopted a valuation allowance accounting policy for
the CAMT, must the entity apply a consistent policy for the QDMTT, IIR, and
UTPR?
Answer
If it is assumed that the QDMTT qualifies as an AMT, both
the QDMTT and CAMT 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 CAMT, 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 CAMT 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 CAMT and any
QDMTTs that qualify as AMTs (i.e., the entity could choose the second
approach for the CAMT 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 harbor8 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.
Question 2.3
[Added April
15, 2024]
If an entity applies the second approach described in
Question 2.1 for assessing the
realizability of its DTAs in a jurisdiction with a QDMTT, will it need to
determine whether the QDMTT meets the QDMTT safe harbor criteria?
Answer
Generally, yes. If the QDMTT does not (or is not expected to) meet the QDMTT
safe harbor criteria, an entity would need to consider the incremental
impact of any tax due under an IIR or UTPR, in addition to the QDMTT, to
determine whether the expected tax benefit of a DTA is less than the
reported amount.
Topic 3: Interim Reporting
Question 3.1
How should top-up taxes incurred under Pillar Two be treated on an interim
basis in the consolidated financial statements?
Answer
Top-up taxes on ordinary income that an entity expects to
incur should be included in the numerator of the entity’s estimated annual
ETR (AETR) computation in the same manner as other taxes within the scope of
ASC 740.
Question 3.2
If an entity in a jurisdiction that would normally be excluded from the
overall AETR under ASC 740-270-30-36(a) (i.e., a loss jurisdiction for which
no benefit can be recognized) is required to pay a top-up tax (e.g., an IIR
or UTPR within the scope of ASC 740) related to the ordinary income of
another entity in the reporting group that is not excluded from the overall
AETR, should the top-up tax expense to be paid by the entity in the loss
jurisdiction be excluded from the overall AETR?
Answer
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.
Example
Assume the following:
-
Parent’s jurisdiction has enacted an IIR. Parent has two consolidated subsidiaries, Sub A (in Jurisdiction A) and Sub B (in Jurisdiction B).
-
There are no differences between forecasted pretax ordinary income, taxable income, GloBE income, and excess profit.
-
Parent is a loss entity with a full valuation allowance. Therefore, no tax benefit can be recognized related to Parent’s forecasted ordinary loss.
-
Parent is excluded from the worldwide AETR.
-
A separate AETR is computed for Parent under ASC 740-270-30-36(a).
-
Jurisdiction B has a 0 percent statutory rate. Regular tax and top-up tax are calculated as follows:
The estimated overall AETR would include the $15
top-up tax due in Parent’s jurisdiction related to
the income in Jurisdiction B, resulting in an
overall AETR of 20 percent ($25 Jurisdiction A tax +
$15 top-up tax related to Jurisdiction B ÷ $200
pretax ordinary income for Jurisdictions A and
B).
Question 3.3
If a significant unusual or infrequently occurring (“SUI”) item that is
excluded from the AETR affects the amount of top-up tax due under an IIR,
UTPR, or QDMTT within the scope of ASC 740, should the incremental effect on
the top-up tax also be excluded from the AETR and accounted for discretely
in the quarter in which the SUI item is reported?
Answer
ASC 740-270-30-8 states, in part, that in the determination of the estimated
AETR, “no effect shall be included for the tax related to . . . significant
unusual or infrequently occurring items that will be reported separately.”
Therefore, all tax effects of the SUI item should be reported separately
from the AETR. Questions exist, however, related to what constitutes “all
tax effects.” One acceptable approach to computing the discrete tax effects
of the SUI item would be to perform a full ASC 740 “with-and-without”
computation. Under this approach, the total forecasted tax expense
(including top-up tax expense) for the year would be computed both with and
without the SUI item. The difference between the two computations would be
the amount of tax associated with the SUI item to be recorded discretely in
the quarter in which the transaction or event occurs. Other approaches may
be acceptable.
Topic 4: Intraperiod Allocation
Question 4.1
How should top-up taxes be allocated among the components of comprehensive
income?
Answer
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.
Example
Assume the following:
-
Parent is a UPE and operates in a jurisdiction with an IIR.
-
Parent consolidates Entity A, which is presented as discontinued operations and operates in a 0 percent tax rate jurisdiction (Jurisdiction A).
-
There are no differences between pretax book income, taxable income, GloBE income, and excess profit.
-
Top-up tax will be paid in Parent’s jurisdiction with respect to income in Jurisdiction A, as follows:
The $150 incremental tax (i.e.,
difference between the results under the “with”
calculation and the “without” calculation) is
allocated to discontinued operations notwithstanding
the fact that the tax is paid by Parent to Parent’s
jurisdiction and not by Entity A (the entity
classified as a discontinued operation).
Topic 5: Uncertain Tax Positions
[Added April 15,
2024]
Under U.S. GAAP, an entity must analyze all uncertain tax
positions (UTPs) by using a two-step approach (recognition and measurement) that
is based on a more-likely-than-not threshold. It must accrue an unrecognized tax
benefit (UTB) for the portion of the UTP that does not meet the
more-likely-than-not threshold. Often, the accrual of the UTB and subsequent
changes are recorded to income tax expense. While the accrual for a UTB would
often result in an increase in the entity’s ETR, current and deferred tax
expense related to UTBs are excluded from adjusted covered taxes under Articles
4.1.3(d) and 4.4.1(b) of the GloBE rules. However, under Articles 4.1.2(c) and
4.4.2(a), such amounts can be included in adjusted covered taxes in the year in
which they are paid.
Question 5.1
Is an entity required to apply the two-step model
(recognition and measurement) to UTPs taken in the computation of top-up
taxes in the consolidated financial statements?
Answer
UTPs 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 UTPs taken with respect to assertions related to meeting
any applicable safe harbor requirements. See Chapter 4 of Deloitte’s Roadmap
Income
Taxes for additional information about the two-step
process.
Example
Assume the following:
-
Company A operates in Jurisdiction A, which has a 15 percent tax rate.
-
Jurisdiction A has enacted a QDMTT.
-
GloBE income is equal to pretax book income of $5,000.
-
At the start of the year, Company A had a DTA of $675 (deductible temporary difference of $4,500), which reverses during the current year, resulting in the inclusion of $675 of deferred tax expense in the calculation of the GloBE ETR. However, Company A believes that it is more likely than not that the DTA and the corresponding deferred tax expense should be disregarded for GloBE purposes.
-
Company A has no other permanent or temporary differences.
Because it is more likely than not
that the deferred tax expense should have been
disregarded for Pillar Two purposes, a UTB liability
of $675 should be recorded to reflect the difference
between the amount paid and the amount due on a
more-likely-than-not basis.
Question 5.2
[Added April
15, 2024]
If an entity takes a UTP and records in the consolidated financial statements
the impact of a UTB (e.g., by recording a liability, reducing a DTA, or
increasing a DTL) that is expected to increase adjusted covered taxes when
paid, should the entity record an asset in the consolidated financial
statements before settling the UTB for the impact of such payment on future
top-up taxes?
Answer
No. As noted above, under Articles 4.1.2(c) and 4.4.2(a) of
the GloBE rules, tax expense related to a UTP 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 UTP 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.
Example
Assume the following:
-
Company A operates in Jurisdiction A, which has a 15 percent regular statutory tax rate.
-
Jurisdiction A has also enacted a QDMTT that is consistent with the GloBE rules.
-
Company A has annual pretax book income, taxable income, and GloBE income of $5,000.
-
Company A has no permanent or temporary differences.
-
In year 1, Company A generated and utilized $500 of R&D tax credits. On a more-likely-than-not basis, Company A expects only $300 of the R&D tax credits to be accepted by the taxing authority. There is no carryover from the prior year.
-
In the year in which the credit is generated, the GAAP tax expense is $450, consisting of $250 of tax expense due with the tax return ($5,000 × 15% = $750 – $500) and $200 of tax expense related to the UTB.
-
The UTB would result in the following top-up tax in year 1:
As shown above, a top-up tax of $500
($5,000 × 10%) is due in the year in which the UTB
is recorded in the financial statements. Assume,
then, that in year 5, a payment of $200 was made to
the taxing authorities to settle the UTP. Top-up tax
in year 5 is computed as follows:
As shown above, the payment of the
UTB did not reduce the top-up tax due when paid.
Topic 6: Other Tax Impacts
DTL Recapture Rule
[Updated
November 8, 2024]
When a DTL arises, the corresponding deferred tax expense
increases the adjusted covered tax amount used to calculate the GloBE
ETR,9 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 foreign tax credits (FTCs), which may result in a
refund of taxes paid for such year.
Question 6.1
If an entity takes into account a DTL (i.e., includes the
deferred tax expense) that is not a recapture accrual exception in
determining adjusted covered taxes but does not have the intent and ability
to avoid the DTL recapture and, accordingly, ultimately expects to pay
additional current top-up tax upon recapture, should the entity accrue a
liability equal to the additional top-up tax it expects to pay?
Answer
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.
Example
Assume the following:
-
Company A has $1,000 of pretax book income.
-
Company A purchases an indefinite-lived intangible asset and records $100 of tax amortization in year 1.
-
Company A’s local tax rate in Jurisdiction A is 15 percent.
-
With the exception of the originating DTL, there are no other differences between pretax income, taxable income, GloBE income, and excess profit.
-
Company A does not have the intent and ability to avoid the DTL recapture and expects to pay additional top-up tax in the year in which the DTL is recaptured.
Company A records a DTL of $15 with
respect to the tax amortization taken in year 1 and
includes the corresponding $15 deferred tax expense
related to the DTL in its adjusted covered taxes for
Jurisdiction A. In year 1, there is a 15 percent
GloBE ETR in Jurisdiction A and no top-up tax was
paid. Under the recapture rule, if the DTL has not
been paid within the five subsequent fiscal years,
Company A would be required to recompute its year 1
GloBE ETR. Because the GloBE ETR for year 1 was 15
percent, the recapture of the DTL would result in a
recomputed year 1 GloBE ETR of less than 15 percent.
In this case, because Company A does not have the
intent and ability to avoid the recapture
provisions, a noncurrent tax liability of $15 should
be recorded in year 1.
Question 6.2
If an entity records a noncurrent tax liability as a result of the DTL
recapture provision, should that noncurrent tax liability be discounted?
Answer
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 835-30.10 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.
Question 6.3
[Added April
15, 2024]
If an entity records a noncurrent tax liability as a result of the DTL
recapture provision, should it record a corresponding asset for the future
increase in adjusted covered taxes upon the eventual reversal of the
recaptured DTL?
Answer
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.
Question 6.4
[Added
November 8, 2024]
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?
Answer
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 global intangible low-taxed income (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).
Excessive Negative Tax Expense Carryforward
[Added April
15, 2024]
As defined in the GloBE rules, an excess negative tax
expense (ENTE) carryforward can arise in situations in which Article
4.1.511 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,12 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.
Question 6.5
If an entity has an ENTE carryforward, should it record a noncurrent tax
liability in the year in which the ENTE is created for the potential future
top-up tax expected to be due as a result of the future decrease in adjusted
covered taxes related to the ENTE?
Answer
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.
Topic 7: Disclosure Considerations
Question 7.1
Are there incremental footnote disclosure requirements specific to Pillar Two
taxes?
Answer
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.
Question 7.2
Are there required MD&A disclosures specific to Pillar Two?
Answer
SEC Regulation S-K, Item 303(a),13 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.
Topic 8: Separate Financial Statements
[Added April 15,
2024]
Within this topic, the “separate financial statements” refer to both separate
company financial statements as well as the consolidated financial statements of
a subgroup of an MNE. Because the income on which a top-up tax is calculated may
be outside the subgroup or the separate company, the accounting for the top-up
tax may be different from the accounting reflected in the consolidated financial
statements.
Question 8.1
If an entity included in separate financial statements pays a top-up tax
under an IIR related to the income of an LTCE subsidiary that is also
included in such separate financial statements, is the top-up tax within the
scope of ASC 740 for the purposes of separate financial statements?
Answer
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.
Example
Sub 1 issues separate financial
statements and consolidates Sub 2, which is an LTCE.
The dotted lines below delineate the scope of the
separate financial statements.
Because the income of Sub 2 is
reported in Sub 1’s separate financial statements,
the tax due under Country X’s IIR is accounted for
in accordance with ASC 740 for the purposes of
separate financial statements.
Question 8.2
If an entity included in separate financial statements pays a top-up tax
under a UTPR related to income of an LTCE that is not included in the
separate financial statements, is the top-up tax within the scope of ASC 740
for the purposes of separate financial statements?
Answer
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.
Example
Sub 3 issues separate financial
statements. Country Z has enacted a UTPR. Country A
and Country Y have not enacted an IIR or a QDMTT,
respectively. Accordingly, Sub 2’s income is subject
to tax under Country Z’s UTPR (Sub 3 is not required
to pay a top-up tax on Country A’s income because
Jurisdiction A’s GloBE ETR exceeds the minimum
rate). The dotted lines below delineate the scope of
the separate financial statements.
Because the income of Sub 2 is not reported in Sub
3’s separate financial statements, the top-up tax
that Sub 3 pays under Country Z’s UTPR is accounted
for outside the scope of ASC 740 for the purposes of
separate financial statements.
Question 8.3
If the LTCE and the entity required to pay the UTPR are both
included in the same set of separate financial statements, would the tax due
under the UTPR be within the scope of ASC 740 for the purposes of separate
financial statements?
Answer
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.
Example
Sub 2 issues separate financial
statements and consolidates Subs 3 and 4. Country A
and Country Y have not implemented an IIR or QDMT,
respectively; however, Country Z has enacted a UTPR
under which Sub 4 is required to pay a top-up tax on
Sub 3’s income. (Sub 4 is not required to pay a
top-up tax on Country A’s income because
Jurisdiction A’s GloBE ETR exceeds the minimum
rate.) The dotted lines below delineate the scope of
the separate financial statements.
Because Sub 2 consolidates Subs 3
and 4, both the income and the tax are reported in
the separate financial statements of Sub 2. As a
result, in this scenario, Sub 2 would account for
the tax paid under Country Z’s UTPR within the scope
of ASC 740 in the separate financial statement in
the same manner as a UPE would report the taxes due
under the UTPR as tax expense in the consolidated
financial statements.
Question 8.4
If a UTPR is not within the scope of ASC 740, as discussed
in Question 8.2, how should an entity
account for the tax due under a UTPR in the separate financial
statements?
Answer
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.
Example
Sub 3 issues separate financial
statements and consolidates Sub 4. Country A and
Country Y have not implemented an IIR or QDMTT,
respectively; however, Country Z has enacted a UTPR
under which Sub 4 is required to pay a top-up tax on
Sub 2’s income (Sub 4 is not required to pay a
top-up tax on Country A’s income because
Jurisdiction A’s GloBE ETR exceeds the minimum
rate.) The dotted lines below delineate the scope of
the separate financial statements.
Because the income on which the UTPR
is calculated is outside the scope of Sub 3’s
separate financial statements, the UTPR is outside
the scope of ASC 740 in the separate financial
statements. Accordingly, we believe that the payment
is made on behalf of the parent and may be reflected
through equity in Sub 3’s separate financial
statements.
Question 8.5
If a top-up tax due under an IIR, a UTPR, or a QDMTT is
determined to be within the scope of ASC 740 in the separate financial
statements, is deferred tax accounting required in the separate financial
statements?
Answer
IIR/UTPR
In a manner consistent with the discussion in Question 1.4, a tax due
under an IIR or a UTPR is an AMT, and DTAs and DTLs would not be
recognized or adjusted for the estimated future effects of the minimum
tax.
QDMTT
In a manner similar to the discussion in Question 1.4, in
circumstances in which a QDMTT is consistent with the GloBE rules, the
QDMTT may qualify as an AMT and be accounted for as such (i.e., no
deferred tax accounting). We believe that a question continues to exist,
however, related to whether a QDMTT could still be considered an AMT in
situations in which the jurisdiction does not have an existing domestic
income tax aside from a QDMTT (e.g., there is no parallel tax system).
If it is determined that the QDMTT does not qualify as an AMT, deferred
tax accounting may be appropriate. Consultation with an entity’s
accounting advisers is encouraged.
Question 8.6
An LTCE may be included in separate financial statements and
have an agreement to reimburse, for taxes due under an IIR or a UTPR related
to the income of the LTCE, a parent or brother/sister entity that is not
included in the separate financial statements. Should the LTCE record the
amount due to the parent or brother/sister entity as income tax expense in
the separate financial statements?
Answer
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.
Question 8.7
[Added
November 8, 2024]
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 UTPs associated with the UTPR in the separate financial
statements?
Answer
Because the entity is responsible for the UTPR as a result of its
affiliation with the UPE, any unrecognized tax benefits related to UTPs
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).
Contacts
|
Matt Himmelman
Audit &
Assurance
Partner
Deloitte & Touche
LLP
+1 714 436 7277
|
|
Patrice Mano
Partner
Deloitte Tax LLP
Washington National
Tax
+1 415 783 6079
| |
|
Krystle Kort
Partner
Deloitte Tax LLP
Washington National
Tax
+1 415 783 6917
|
|
Marla Lewis
Audit &
Assurance
Partner
Deloitte & Touche
LLP
+1 203 708 4245
| |
|
Tim Burns
Audit &
Assurance
Senior Manager
Deloitte & Touche
LLP
+1 862 505 9673
|
Footnotes
2
The OECD periodically publishes commentary, administrative guidance, and
information about the GloBE rules on
its Web site.
3
FASB Accounting Standards Codification (ASC) Topic 740,
Income Taxes.
4
Article 10.1 of the GloBE rules defines a QDMTT as
follows:
A “Qualified Domestic Minimum
Top-up Tax means a minimum tax that is included in the domestic law
of a jurisdiction and that:
(a) determines the Excess Profits of the Constituent
Entities located in the jurisdiction (domestic Excess
Profits) in a manner that is equivalent to the GloBE
Rules;
(b) operates to increase domestic tax liability with
respect to domestic Excess Profits to the Minimum Rate for
the jurisdiction and Constituent Entities for a Fiscal Year;
and
(c) is implemented and administered in a way that is
consistent with the outcomes provided for under the GloBE
Rules and the Commentary, provided that such jurisdiction
does not provide any benefits that are related to such
rules.
A Qualified Domestic Minimum
Top-up Tax may compute domestic Excess Profits based on an
Acceptable Financial Accounting Standard permitted by the Authorised
Accounting Body or an Authorised Financial Accounting Standard
adjusted to prevent any Material Competitive Distortions, rather
than the financial accounting standard used in the Consolidated
Financial Statements.”
5
In accordance with the OECD’s administrative guidance on the
GloBE rules, “a QDMTT must meet an additional set of standards to
qualify for the safe harbour. In particular, and given the ability
of a QDMTT to depart from the design of the GloBE Rules, a QDMTT
that qualifies for a safe harbour must meet following three
standards:
- the QDMTT Accounting Standard which requires a QDMTT to be computed based on the UPE’s Financial Accounting Standard or a Local Financial Accounting Standard subject to certain conditions;
- the Consistency Standard which requires the QDMTT computations to be the same as the computations required under the GloBE Rules except where the Commentary to the QDMTT definition in Article 10.1 as modified by the Administrative Guidance (hereafter the QDMTT Commentary) explicitly requires a QDMTT to depart from the GloBE Rules or where the Inclusive Framework decides that an optional variation that departs from the GloBE Rules still meets the standard; and
- the Administration Standard which requires the QDMTT jurisdiction to meet the requirements of an on-going monitoring process similar to the one applicable to jurisdictions implementing the GloBE Rules.“
6
Entity filing the GloBE information return.
7
Certain DTAs are disregarded for GloBE purposes,
including but not limited to those subject to Articles 9.1.2 and
9.1.3 of the GloBE rules. Article 9.1.2 states, “Deferred tax assets
arising from items excluded from the computation of GloBE Income or
Loss under Chapter 3 must be excluded from the Article 9.1.1
computation when such deferred tax assets are generated in a
transaction that takes place after 30 November 2021.” Article 9.1.3
states, “In the case of a transfer of assets between Constituent
Entities after 30 November 2021 and before the commencement of a
Transition Year, the basis in the acquired assets (other than
inventory) shall be based upon the disposing Entity’s carrying value
of the transferred assets upon disposition with the deferred tax
assets and liabilities brought into GloBE determined on that
basis.”
8
An entity must apply judgment in determining whether
it is more likely than not that the QDMTT qualifies for the QDMTT
safe harbor.
9
Alternatively, an entity could make an annual
election not to include the deferred tax
expense related to the increase in the DTL in adjusted covered taxes
for such fiscal year.
10
FASB Accounting Standards Codification Subtopic
835-30, Interest: Imputation of Interest.
11
Article 4.1.5 states, “In a Fiscal Year in which
there is no Net GloBE Income for a jurisdiction, if the Adjusted
Covered Taxes for a jurisdiction are less than zero and less than
the Expected Adjusted Covered Taxes Amount the Constituent Entities
in that jurisdiction shall be treated as having Additional Current
Top-up Tax for the jurisdiction under Article 5.4 arising in the
current Fiscal Year equal to the difference between these amounts.
The Expected Adjusted Covered Taxes Amount is equal to the GloBE
Income or Loss for a jurisdiction multiplied by the Minimum
Rate.”
12
See Section 2.7 of the February 2, 2023,
administrative guidance on the
GloBE rules.
13
SEC Regulation S-K, Item 303(a), “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations: Objective.”