Revenue Note for Guidance

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Revenue Note for Guidance

CHAPTER 5

Calculation of the effective tax rate and the top-up tax

Overview

Chapter 5 of Part 4A sets out the computational rules for determining the ETR of jurisdictions in which the MNE or large-scale domestic group operates and for determining the top-up tax arising in respect of a low-tax jurisdiction. The calculation of top-up tax for a low tax jurisdiction also includes rules for determining the amount of income that is excluded from the GloBE Rules by virtue of the Substance-based Income Exclusion. Chapter 5 of Part 4A also includes a De Minimis Exclusion for the Constituent Entities located in the same jurisdiction when their aggregated revenue and income does not exceed certain thresholds.

111AC Determination of effective tax rate

Summary

The ETR computation is a central element of the Pillar Two Rules. It is used both to determine whether in a fiscal year, the group is subject to a minimum level of tax on its income arising in a particular jurisdiction and, if the jurisdiction’s ETR is below the Minimum Rate (i.e. the jurisdiction is a low-tax jurisdiction in respect of the group in that fiscal year) the amount of top-up tax that arises.

Details

(1) The effective tax rate of an MNE group or large-scale domestic group shall be calculated for each fiscal year, and each jurisdiction, provided that there is net qualifying income in the jurisdiction, as calculated pursuant to subsection (3).

(2) For the purpose of this Part, the effective tax rate of an MNE group or large-scale domestic group for a jurisdiction for a fiscal year, shall be calculated as:

ACJ / NQI

where-

ACJ is the aggregate adjusted covered taxes of all the constituent entities located in the jurisdiction, and

NQI is the positive amount, if any, of the net qualifying income of all the constituent entities located in the jurisdiction determined in accordance with subsection (3).

(3) The net qualifying income or loss of the constituent entities located in a jurisdiction for a fiscal year shall be calculated as follows:

AQI-AQL

Where-

AQI is the positive sum, if any, of the qualifying income of all constituent entities located in the jurisdiction for a fiscal year, and

AQL is the sum of the qualifying losses of all constituent entities located in the jurisdiction for a fiscal year.

(4) For the purposes of subsections (2) and (3), the adjusted covered taxes and net qualifying income or loss of constituent entities, that are investment entities, are excluded from the calculation of the effective tax rate in accordance with subsection (2) and the calculation of the net qualifying income in accordance with subsection (3).

(5) The effective tax rate of each stateless constituent entity shall be calculated, for each fiscal year, separately from the effective tax rate of all other constituent entities.

Relevant Date: Finance Act 2024