Article 4.6.1

120. Article 4.6.1 permits the MNE Group to treat increases to liabilities for Covered Taxes in previous Fiscal Years as current year tax increases for purposes of the GloBE Rules. Similarly, an immaterial decrease for Covered Taxes may be treated as a reduction to Covered Taxes in the current Fiscal Year. While treating such post-filing adjustments to a tax liability in the current year is not as accurate as recalculating the GloBE tax liability or potential GloBE tax liability with respect to the relevant Fiscal Years, it significantly simplifies the computation of Top-up Tax under the GloBE Rules. And these adjustments generally are not the types of adjustments that avoid Top-up Tax liabilities that might have arisen in previous years. Increases to Covered Taxes are only taken into account in the current Fiscal Year. This has the effect that refunds of Top-up Tax paid with respect to prior Fiscal Years will not occur under the operation of Article 4.6.1.

121. In contrast, Article 4.6.1 generally requires a re-computation of the ETR and Top-up Tax for the Fiscal Year to which the tax adjustment relates in the case of a decrease in Covered Taxes. However, a taxpayer may elect to include an immaterial decrease in the current Fiscal Year. An immaterial decrease in Covered Taxes is an aggregate reduction that is less than EUR 1 million in the Adjusted Covered Taxes determined for the jurisdiction for a Fiscal Year. The immateriality of an adjustment is determined for each Fiscal Year by reference to the aggregate increase or decrease in Covered Taxes for each Fiscal Year.  Adjustments for material decreases must be made in respect of the relevant previous Fiscal Year to which the tax adjustment relates because the over-statement of Covered Taxes may have avoided Top-up Tax in that year and simply reducing Covered Taxes in the current year may not effectively recapture the avoided Top-up Tax.

122. This rule is linked to Article 3.2.1(h) which generally provides that a correction of an error in the computation of GloBE Income or Loss for a previous Fiscal Year is taken into account in the current year as additional income or expense. However, under Article 4.6.1, if the error affected taxable income for a jurisdiction and results in a material decrease in Covered Taxes for a previous Fiscal Year, the correction is taken into account in the relevant prior year, subject to the limitations described above. These rules ensure that the GloBE Income or Loss and the Covered Taxes associated with such amount are taken into account in the ETR and Top-up Tax computations for the same Fiscal Year to avoid a distorted result.

123. Thus, when the correction of an error in the determination of a liability for Taxes in a particular jurisdiction results in a material decrease in the tax liability, the MNE Group must do two things to properly apply Article 3.2.1(h) and Article 4.6.1. First, the MNE Group must determine if the error in the tax computation was due to an error in the computation of taxable income and whether there was a corresponding error in the computation of the relevant Constituent Entity’s Financial Accounting Net Income or Loss. If so, both the Taxes and the GloBE Income or Loss for the prior year are re-determined. Second, the ETR and Top-up Tax for the prior year must be re-determined based on the re-determined Taxes and GloBE Income or Loss (if also adjusted) in order to determine if there is any Additional Top-up Tax for the jurisdiction pursuant to Article 5.4.1. If that re-determination results in Additional Top-up Tax, such tax is included in the jurisdictional Top-up Tax computation pursuant to Article 5.2 in the Fiscal Year of the re-determination; the MNE Group does not amend its GloBE Information Return or any tax returns filed in association with the GloBE Rules for the year to which the adjustment relates. Corrections that do not arise from a material decrease in tax liability are taken into account in the computation of the ETR and Top-up Tax prospectively pursuant to Article 4.6.1 and Article 3.2.1(h). As discussed in the previous paragraphs, a re-determination may only be carried back to the extent it does not result in a refund of Topup Tax. To the extent a re-determination would otherwise result in a refund of Top-up Tax, such redetermination is taken into account in the re-determination year (i.e., the current Fiscal Year). Note that under Article 4.6.1 a Filing Constituent Entity may make an Annual Election to treat immaterial decreases in Covered Taxes as an adjustment to Covered Taxes in the re-determination year (i.e., the Fiscal Year in which the adjustment is made).

124. Article 4.6.1 also applies when a domestic tax loss is carried-back to a prior Fiscal Year. When a tax loss is carried-back, a refund of tax for a prior Fiscal Year is issued in the current Fiscal Year. This refund is a decrease to Covered Taxes for a prior Fiscal Year and therefore falls within the scope of Article 4.6.1 as an adjustment to a Constituent Entity’s liability for Covered Taxes for a previous Fiscal Year.

125. The refund of Covered Taxes relating to the prior year must be matched with a corresponding adjustment to reflect a carry back of the domestic tax loss that results in outcomes that are consistent with the treatment of carry-forward losses. IF members have agreed that, in the case of a loss carry-back under local law, the domestic tax loss shall be treated as giving rise to a deferred tax asset in the same manner in which it would have under the GloBE Rules had the loss been set up as a carry-forward. Accordingly, unless the refund is immaterial as defined in Article 4.6.1 and the Filing Constituent Entity has elected to take such amount into account in the current Fiscal Year, a deemed deferred tax asset shall be established in the year the domestic tax loss is incurred. The amount of this deferred tax asset shall be the amount that would otherwise have been recognised in the financial accounts had the deferred tax asset been eligible to be carried-forward and capped at an amount equal to the domestic tax loss multiplied by the Minimum Rate. Through the operation of Article 4.4, this recognition of this deferred tax asset will reduce Adjusted Covered Taxes in the Fiscal Year in which the loss is generated. This deferred tax asset shall be treated as reversed, thereby increasing Adjusted Covered Taxes, in the Fiscal Year that the domestic tax loss has been carriedback to, simultaneous with the carry-back of the refund under Article 4.6.1. To the extent the sum of the deferred tax asset reversal and the tax refund result in a net increase to Covered Taxes for the prior Fiscal Year, the net increase shall be taken into account in the current Fiscal Year under Article 4.6.1. Note to the extent a loss-carry back is taken into account, the rule set forth in Article 4.1.5 continues to apply in the current Fiscal Year. This creation and reversal of the deemed deferred tax asset is the preferred mechanism for recognising the appropriate and necessary adjustments to be made in the recognition of GloBE Income or Loss as it preserves the overall integrity of the deferred tax accounting approach.

126. For example, ABC Co is the only Constituent Entity of a MNE Group in Country A which has a 20% tax rate and permits loss carry-backs. In Year 1, ABC Co reports GloBE Income of 100 and domestic taxable income of the same amount. As a result, in Year 1 Covered Taxes are 20 and the ETR for GloBE purposes is 20%. In Year 2, ABC Co incurs a GloBE Loss and domestic tax loss of (100) and carries it back to Year 1 for Country A tax purposes. A refund of (20) is issued in Year 2 with respect to the Year 1 tax liability. Under Article 4.6.1, the loss results in a deferred tax asset of 15 (the loss of 100 multiplied by the Minimum Rate). Because generation of a deferred tax asset results in a decrease to Adjusted Covered Taxes, in Year 2 Covered Taxes equal (15) and no Top-up Tax arises under Article 4.1.5 since (15) is also the Expected Adjusted Covered Taxes Amount. The refund of (20) is carried back to Year 1 under Article 4.6.1, as is the deferred tax asset of 15. For Year 1 the revised Adjusted Covered Taxes amount for ABC Co is 15 given the refund of (20) and the use of the tax-loss attribute of 15. No additional Top-up Tax results in Year 1 as a result of the carry-back since the GloBE ETR is 15%.

127. Finally, it should be noted that Article 4.6.1 applies when there is a change in the amount of a Taxes determined for a jurisdiction. It does not apply to an adjustment to an MNE Group’s liability for Topup Tax liability as a result of the examination of a tax return that includes Top-up Tax attributable to the charging provisions in Article 2 of the GloBE Rules.

Article 4.6.2

128. Article 4.6.2 provides that when there is a reduction to the applicable domestic tax rate to a rate below the Minimum Rate, such reduction must be taken into account under the rules of Article 4.6.1. This rule ensures that when a domestic tax rate is subsequently reduced the deferred tax expense previously claimed as a Covered Tax is adjusted to the correct value, which is the amount of such tax that will actually be paid upon reversal of the deferred tax liability.

129. For example, in Fiscal Year 1, a Constituent Entity claims 15 of Covered Taxes resulting from a deferred tax liability on 100 of GloBE Income at 15%. In Fiscal Year 2, the jurisdiction reduces its domestic tax rate to 10%. Thus, when the deferred tax liability is ultimately paid, only 10 of tax will be paid (10% ETR). Article 4.6.1 requires when such reduction is material, that the Fiscal Year 1 Top-up Tax must be recomputed. In this case, 5 of Top-up Tax would be due in Fiscal Year 2 owing to the re-computation.

Article 4.6.3

130. Article 4.6.3 provides the rule that is applicable when a deferred tax expense has been taken into account at a rate lower than the Minimum Rate and the applicable tax rate is subsequently increased. In such case, the amount of deferred tax expense that has resulted from the increase is treated as an adjustment to a Constituent Entity’s liability for Covered Taxes for a previous Fiscal Year.

131. For example, assume in Fiscal Year 1, a Constituent Entity has 100 of GloBE Income and records a deferred tax liability of 10 (10% ETR) and claims such amount as a Covered Tax. In Fiscal Year 2, the jurisdiction increases its tax rate to 15%. An additional deferred tax liability of 5 is recorded for financial accounting purposes. However, this increase of 5 is disregarded under Article 4.4.1(d) in Fiscal Year 2 and deferred until payment of the tax. In Fiscal Year 3, the tax of 15 is paid and the full deferred tax liability reverses. The incremental 5 of deferred tax liability that reverses, which has not previously been claimed as a Covered Tax because it was disregarded, is taken into account under this Article in Fiscal Year 3 upon payment and is treated as an increase to Covered Taxes through the operation of Article 4.6.1. Note that had the tax rate in this example been 20%, an incremental 10 of Covered Tax would arise upon payment in Year 3, which would consist of the 5 of deferred tax liability that was previously disregarded which is taken into account under this Article, and the incremental 5 of tax liability that reflects tax in excess of the Minimum Rate, which is only taken into account when paid under Article 4.4.1.

Article 4.6.4

132. Article 4.6.4 provides that the ETR and Top-up Tax for a jurisdiction must be recalculated to exclude an amount of current tax expense (i.e., not deferred tax expense) that is more than EUR 1 million, was claimed as Adjusted Covered Tax, and is not paid within three years of the last day of the Fiscal Year in which such amount was claimed as Adjusted Covered Tax.

133. For example in Fiscal Year 1, a Constituent Entity claims 10 of current tax expense as an Adjusted Covered Tax. The Constituent Entity files a local tax return reporting the 10 of tax due, but does not pay such Tax by the end of Fiscal Year 4. The Fiscal Year 1 Top-up Tax must be re-computed under Article 5.4.1 without such 10 of Tax included in the calculation as a result of the non-payment of such Tax.