9 minute read 22 Sep 2023
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Why a 15% financial statement tax rate may not avoid global minimum tax

By EY Global

Ernst & Young Global Ltd.

9 minute read 22 Sep 2023

A 15%+ financial statement effective tax rate may not be enough to avoid global minimum tax as part of BEPS 2.0 Pillar Two.

In brief
  • BEPS 2.0 introduces a 15% global tax for multinational companies with at least EUR 750 million revenue.
  • The complexity of the minimum tax rules may result in companies with effective tax rates above 15% still incurring a top-up tax.

The Organisation for Economic Co-operation and Development (OECD) Inclusive Framework on Base Erosion and Profit Shifting (BEPS) issued Pillar Two Global Anti-Base Erosion (GloBE) Model Rules and related guidance (collectively, GloBE rules). The GloBE rules introduce a new, complex 15% global minimum tax regime applicable to multinational enterprises (MNEs) with consolidated financial statement revenues of EUR 750 million or more in two of the four fiscal years immediately preceding the tested fiscal year.

More than 140 countries and tax jurisdictions are members of the Inclusive Framework. Many of these countries and tax jurisdictions are enacting tax laws to adopt the GloBE rules in 2023, in general, with effective dates beginning in the first fiscal year that starts on or after December 31, 2023 (i.e., from January 1, 2024 for entities with calendar year-ends). As of the date of this article, four jurisdictions: South Korea, Japan, Qatar and the United Kingdom have enacted elements of the GloBE rules into local laws.

While GloBE "safe harbor" rules may provide temporary relief, the detailed GloBE rules include several nuances in the calculation of GloBE Income and Adjusted Covered Taxes that can result in GloBE top-up tax liability for companies with financial statement effective tax rates (ETRs) above 15%. Accordingly, affected MNEs should review their facts against the GloBE rules to ensure they will not be liable for GloBE top-up tax, regardless of whether their consolidated or local statutory financial statement ETRs are above or below 15%.

In EY's 2023 Tax Risk and Controversy Survey, Pillar Two was cited as a major source of potential risk for MNEs.

Moreover, MNEs should be aware that the GloBE rules do not need to be enacted in the jurisdiction of the ultimate parent entity of an MNE group to be applicable to the MNE group. The GloBE minimum tax may be levied by an intermediate parent entity or a single subsidiary in a jurisdiction that has enacted the new global minimum tax.

"The GloBE minimum tax is based on a multi-variable calculation that can yield results that are not obvious when viewing facts at a cursory level," says Brian Foley, EY Global Tax Accounting and Risk Advisory Services Leader. "Careful analysis is necessary to avoid pitfalls that can produce unanticipated top-up tax liabilities."

A look at MNE's financial statement ETR to understand:

  • Factors that drive financial statement and GloBE effective tax rate differences.
  • Identify four common scenarios in which MNEs with "high" ETRs (i.e., above 15%) may be liable for the new global minimum tax, notably:
    • Deferred tax differences
    • Withholding taxes
    • Uncertain tax positions
    • Changes in recognition of deferred tax assets (or valuation allowances)
  • Highlight practical steps companies can take now to prepare for Pillar Two.

What's in your ETR?

MNE's financial statement ETR is a single metric that blends the tax effects of worldwide pre-tax income earned across all jurisdictions in which the group operates, by its various entities (i.e., corporations, partnerships, branches, joint ventures). The tax effects reported in a financial statement ETR include current and deferred taxes, uncertain tax positions, the impact of new tax laws, changes in the recognition of deferred tax assets (or valuation allowances), withholding taxes, tax credits, tax incentives, and other matters.

GloBE differences

The GloBE rules begin with consolidated group financial statement net income, but quickly deviate from the book results by calculating separate GloBE ETRs for each jurisdiction in which the MNE group operates. Calculating GloBE ETR by jurisdiction exposes low-taxed income in one jurisdiction that is blended with high-taxed income in another jurisdiction in the consolidated financial statement ETR.

Further deviations exist based on differences between book income and GloBE Income and differences between book total tax expense and GloBE Adjusted Covered Taxes. For example, GloBE Income excludes, among other things, certain dividends, certain equity gains or losses, certain foreign exchange gains and losses, fines and penalties, and accrued pension expenses otherwise included in book income. GloBE Adjusted Covered Taxes, among other things, excludes the tax effects of items excluded from GloBE Income, recasts high-tax deferred tax expense to deferred tax based on 15%, accounts for uncertain tax positions on a cash basis, defers current tax expense not expected to be paid within three years, and excludes (or recaptures) deferred tax expense related to certain deferred tax liabilities that do not reverse within five years. 

“Companies need to understand the items in their book ETR that are not in their GloBE ETR and be able to account for differences that impact GloBE Income and Adjusted Covered Taxes”, says Foley. “Companies should be working now to anticipate the 2024 impact of Pillar Two to inform stakeholders and internal constituents, and if appropriate plan for increased cash taxes and a higher book ETR.”

Deferred taxes

In general, temporary book-tax differences impact the current and deferred tax provision in equal and offsetting amounts. For example, when current and deferred tax rates are the same, accelerated tax depreciation reduces current taxes payable and increases deferred tax liability in offsetting amounts, resulting in no net tax expense attributable to the difference. The GloBE rules require deferred taxes to be accounted for at the lower of the applicable tax rate or 15%. When deferred taxes are recast down to the 15% rate, a routine temporary difference will impact the GloBE ETR. For example, when current and deferred tax are subject to a 25% tax rate, accelerated tax depreciation will reduce GloBE Covered Taxes because current tax benefit is measured at the 25% rate and deferred tax liability is recast to 15%, resulting in a reduction of the GloBE ETR.

In isolation, the recast of deferred tax expense to 15% will not result in a GloBE ETR less than 15%. However, in combination with other items, such as tax credits or favorable permanent book-tax differences which themselves may not result in a GloBE ETR below 15%, the recast of deferred tax expense to 15% can result in a GloBE ETR below 15% and potentially cause top-up tax liability.

Also, under the GloBE rules, certain deferred tax liabilities generated during a year in which GloBE rules are applicable are excluded (or recaptured) from Adjusted Covered Taxes. This situation may occur, for example, as a result of tax amortization of goodwill creating a deferred tax liability that does not reverse within five years. The deferred tax liability recapture results in only current benefit remaining in Adjusted Covered Taxes, reducing the GloBE ETR and potentially causing top-up tax liability.

Withholding taxes

Withholding taxes may be levied on certain transactions between entities within the same MNE group. Most commonly, such withholding taxes are the tax obligation of the payee (i.e., recipient) entity. Under the GloBE rules, withholding taxes generally are attributed to the payor jurisdiction, resulting in a jurisdictional shift between financial statement and GloBE ETRs. As a result of the difference between book and GloBE accounting for withholding taxes, the payee entity jurisdiction will have a lower GloBE ETR and may incur top-up tax, while the payor entity jurisdiction will have a higher GloBE ETR that may increase an already high ETR. In other circumstances, the allocation of taxes to the payor entity jurisdiction may be a welcome increase in the payor entity jurisdiction GloBE ETR. MNEs must carefully analyze and plan for the GloBE impacts of withholding taxes to avoid unanticipated top-up tax liability.

Uncertain tax positions (UTPs)

Often, when an MNE accrues for an UTP, the MNE's book ETR increases. Under the GloBE rules, accrued UTP are excluded from Adjusted Covered Taxes until paid. Effectively, the GloBE rules account for UTP on a cash basis. Accordingly, the GloBE ETR may be lower to the extent of accrued UTP and may be higher to the extent of paid UTP. Consequently, an MNE's GloBE ETR may fall below 15% in a period UTP is accrued, potentially causing top-up tax liability. Conversely, an MNE's GloBE ETR may increase above 15% in a period a UTP is paid resulting in foregone GloBE benefit (i.e., GloBE ETR above 15% does not reduce prior or future top-up tax).

Changes in recognition of deferred tax assets (or valuation allowances)

The GloBE rules exclude from Adjusted Covered Taxes tax expense/benefit related to the de-recognition/recognition of deferred tax assets under IFRS (or recognition/de-recognition of valuation allowances under US GAAP). Changes in recognition of deferred tax assets (or valuation allowances) generally impact an MNE's deferred tax provision, without corresponding offset to current taxes. As such, unrecognized deferred tax assets (increases in valuation allowances) generally increase an MNE's book ETR, while recognized deferred tax assets (decreases in valuation allowances) generally decrease an MNE's book ETR.

Because the GloBE rules ignore changes in recognition of deferred tax assets (or valuation allowances), a high financial statement ETR resulting from unrecognized deferred tax assets may result in unanticipated top-up tax liability. In fact, under the GloBE rules, in certain situations, a jurisdiction that incurs a GloBE loss and pays no corporate income tax can still incur GloBE top-up tax liability. MNEs should carefully analyze jurisdictions with unrecognized deferred tax positions (or valuation allowances) to ensure GloBE top-up tax liability does not occur in such jurisdictions.

There are several steps MNEs can take to prepare for GloBE

  • Complete a GloBE impact assessment with particular attention on Covered Tax Adjustments that impact the GloBE ETR. Don't assume a high MNE group financial statement ETR, high applicable statutory tax rates, or high statutory cash tax rates will prevent GloBE top-up tax liability.
  • Evaluate whether transitional country-by-country safe harbors can be applied to simplify GloBE calculations for up to three years after the initial GloBE effective date, thereby reducing GloBE Income and Adjusted Covered Tax adjustments and more closely aligning the GloBE ETR with the financial statement ETR.
  • When GloBE top-up tax is anticipated, determine data, workflow, technology and controls requirements to ensure timely inclusion of the minimum tax in the interim and annual tax provisions. Also, consider group and statutory financial statement disclosure requirements to describe the accounting for, and impact of, the minimum tax.
  • Communicate Pillar Two risks and requirements to internal stakeholders to ensure expectations are understood and investments are appropriate to meet reporting and compliance requirements.
  • Plan for change. Business, tax, personnel, technology and other disruptions and changes will continue to occur. MNEs need to be prepared to assess and account for timely the impact of such changes.
    • Global minimum tax nuances: BEPS 2.0 introduces a 15% global tax for MNEs with at least EUR 750 million revenue, posing top-up tax risks even if ETR is above 15%.
    • Broad adoption and limited relief: Over 140 countries will enact GloBE rules by 2024. "Safe harbor" offers limited relief, requiring thorough review.
  • Plan for unseen liabilities: Subsidiaries, not just parent entities, could levy the tax. MNEs must analyze multi-variable factors to avoid surprises.


The introduction of BEPS 2.0's GloBE rules marks a significant shift in global taxation, affecting MNEs with revenues of at least EUR 750 million. The rules set a 15% Global Minimum Tax and contain nuanced rules and intricate calculations that could lead to unexpected “top-up tax” liabilities. Many countries are legislating these rules into local law, effective in 2024. MNEs should act now to assess the impact of these new rules and local laws. Importantly, the new tax framework may impact even MNEs with effective tax rates above the 15% minimum rate, making compliance a challenging task.

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By EY Global

Ernst & Young Global Ltd.