Pilíř 2 iniciativy BEPS 2.0. – jak se počítá zisk?

Pillar 2 of BEPS 2.0 - how is the profit calculated?

Continuing the series on the BEPS 2.0 - Pillar 2 initiative, this time we will focus on the calculation of profit or loss under the GloBE rules (Global Anti-Base Erosion rules) - the EU directive speaks of the qualifying income or loss. The aim of this article is not to give you a detailed procedure for calculating the gain under the GloBE rules, as the rules are extremely complex (hence the use of the word e.g. or in particular so many times in this article), but rather to highlight the basic significant items and rules.

The starting point is the entity's accounting profit (or loss) for the accounting period before consolidation adjustments, as reported under the accounting standard under which the ultimate parent entity consolidates. In practice, this will most often be International Financial Reporting Standards (IFRS). Under certain conditions, the accounting profit (or loss) reported under another acceptable accounting standard, such as CAS, may be used, but permanent differences arising from the application of another accounting standard in excess of EUR 1 million will still need to be adjusted.

The accounting profit or loss will be adjusted for specific items. These include:

• tax expense,

• dividends arising from non-portfolio holdings,

• capital gains or losses on non-portfolio holdings (capital gains include changes in fair value or gains or losses on disposals including related income or expenses),

• gains or losses on the remeasurement of property, plant and equipment to fair value (including the related tax charge) recognised in equity,

• gains or losses arising from changes in the exchange rate between the functional currency for accounting purposes and the functional currency for tax reporting purposes,

• so-called 'policy disallowed expenses', e.g. illegal payments in the form of bribes and illegal commissions, payments of fines or penalties,

• changes in equity resulting from corrections of errors in the determination of accounting profit or loss in previous accounting periods or from a change in the accounting method,

• certain pension costs.

Other adjustments to the accounting profit or loss may relate, for example, to intragroup transfers of assets (particularly if they are not negotiated in accordance with arm's length principles or in connection with a reorganisation such as merger) or to intragroup financing. In certain cases, the EU Directive offers the possibility to elect the regime for including income or gains in qualifying income (e.g. in the case of share-based remuneration expenses). In addition, each of the above categories has its own definition, which may be different from the definition we use for tax purposes.

Accounting profits or losses of permanent establishments are generally allocated to the jurisdictions in which the permanent establishment is located - a standard issue for tax purposes that may be a completely new one for accounting (IFRS) purposes. Special rules apply to tax transparent entities in different situations. When we add the transitional provisions where, for example, intra-group transactions after 30 November 2021 need to be monitored, the calculation of qualifying income will be challenging, and the result may be surprising. The ability to elect regime for certain items introduces an element of great uncertainty into the process and the need to make the right decision based on accurate numbers and reasonable estimates. 

Next time we will focus on the calculation of the so-called covered taxes so that we can then calculate the effective tax rate. If you have any questions, please contact the author of this article or the EY tax team with whom you regularly work.

Author:

Karel Hronek