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

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

Continuing our series on the BEPS 2.0 - Pillar 2 initiative, today's episode focuses on the calculation of the so-called covered taxes. Like the last time when we covered the calculation of qualifying income or loss, the goal of this article will not be to give a detailed procedure for the calculation because the rules are extremely complex, but we would rather like to highlight the basic rules and logic.

Covered taxes is the second component for calculating the effective tax rate (for subsequent comparison to the minimum effective tax rate of 15%). Covered taxes generally include taxes based on its income or gain reported in the financial statements of an entity (and taxes imposed in lieu of income taxes). As a reminder, financial statements generally refer to the financial statements kept under the accounting standards under which the ultimate parent entity consolidates. In practice, this will most often be International Financial Reporting Standards (IFRS). Conversely, covered taxes do not include, in particular, top-up taxes under the GloBE rules.

The calculation is based on the tax expense recognised in the net accounting profit or loss in relation to the covered taxes for the accounting period. This item is increased mainly by:

• the amount of taxes included in the financial accounts as an expense in profit before tax
• the amount of the deferred tax asset arising from a qualifying loss that has been utilised following a qualifying loss election
• the amount of taxes included related to the uncertain tax position previously excluded that is paid in the current accounting period; and
• the amount of the credit or refund related to a qualified refundable tax credit that has been recorded as a reduction to the existing tax expense.

On the contrary, this item will decrease mainly by:

• the amount of the tax expense relating to income excluded from the calculation of qualifying income or loss
• the amount of the credit related to the so-called non-qualified refundable tax credit that has not been recognised as a reduction to the existing tax expense
• the amount of covered taxes refunded or credited to an entity that has not been treated as an adjustment to the existing tax expense in the financial statements (except to the extent that it relates to a "qualified refundable tax credit");
• the amount of tax expense that relates to an uncertain tax position; and
• the amount of tax expense that is not expected to be recovered within three years after the end of the accounting period.

The result is further increased or decreased by the covered taxes recognised in equity or other comprehensive income if they relate to amounts included in the calculation of qualifying income or loss and the total amount of the deferred tax adjustment. Deferred tax is adjusted based on a separate set of rules that generally involves two steps:

1. recalculating the deferred tax expense at a rate of 15% if the tax rate used to calculate the deferred tax expense is greater than 15% (if it is less, it is used to calculate the covered tax - with certain exceptions); and
2. adjusting deferred tax by the amount of deferred tax expense related to items excluded from the computation of qualifying income or loss, related to uncertain tax positions, related to profit distribution, etc.

As with the calculation of qualifying income or loss, the transitional provisions (which in some cases operate differently from the rules described above), the ability to elect treatment for tax losses, and the extremely complex rules for calculating the covered tax can introduce an element of great uncertainty. A correct decision based on precise figures and reasonable estimates and assumptions will be necessary. 

Next time we will focus on the calculation of the effective tax rate and the top-up tax. 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