Before calculating Global Base Erosion (GloBE) or Pillar Two reconciliation, it is necessary to first determine which companies are subject to GloBE taxation. The determination of GloBE tax subjects can be done in the following:
- Determine the Ultimate Parent Entity (UPE), which is the top of the Multinational Entity ownership hierarchy.
- After determining the UPE, ensure that the UPE has exceeded the minimum consolidated income threshold of €750 million and must meet 2 out of a minimum of 4 years.
- Determine the Constituent Entities (CE) of each country or company that are subject to GloBE taxation in each country.
After confirming and determining the UPE, the next step is to determine the financial statements. The financial statements used must be in accordance with accounting standards such as IFRS or GAAP and use the currency of each CE country and have a financial reporting period in one CE fiscal year or a financial reporting period in one UPE consolidated fiscal year.
The next step is to calculate the net income before tax for each CE and exclude accounts that contain extraordinary and non-recurring journal entries. The next step is to adjust the net income of each CE to GloBE income in the following:
- Expenditure of income from dividends of companies with special relationships,
- Expenditure of income from gains/losses on the sale of assets,
- Expenditure of income from transactions with companies with special relationships,
- Expenditure of expenses from illegal payments or bribes,
- Expenditure of expenses from fines and penalties,
- Expenditure of non-deductible costs,
- Adjusting the timing of provisions and impairments,
- Adjusting the timing of pension expenses,
- Adjusting the timing of share-based compensation,
- Adjusting the timing of accelerated depreciation.
After everything has been done, combine the GloBE income per country by adding up the GloBE income for each country. Next, determine the covered taxes that can be recognized, which consist of current tax and deferred tax according to GloBE. The next step is to calculate the Earning Tax Ratio (ETR) per country using the formula: covered taxes divided by GloBE income, then compare it with the minimum rate of 15%. If the ETR is less than 15%, calculate the top-up tax by using the formula 15% – ETR (%). Before multiplying by the top-up tax %, GloBE income is first deducted from the substance-based income exclusion (SBIE).
SBIE can be determined from payroll expenses and tangible assets using the formula SBIE = (α x payroll) + (β x tangible assets), where α and β are constants set based on the GloBE rule between 10% and 5%.
The final stage is to allocate the top-up tax in the following order
- QDMTT (source country)
- IIR (parent group)
- UPTR (the country where the CE operates)
By Olina Rizki Arizal – Partner
TBrights is a tax consultant in Indonesia that is currently an Integrated Business Service in Indonesia that can provide comprehensive tax and business services.
