Why elections matter
The GloBE rules contain a significant number of elections that allow MNE groups to choose between alternative treatments for specific items. These elections are not merely administrative; they can have a material impact on the jurisdictional ETR, the top-up tax calculation, and the overall compliance burden. Choosing the right combination of elections requires careful analysis of the group's specific facts and circumstances.
Elections fall into three categories based on their duration and revocability:
- Five-year elections: Once made, these apply for a minimum of five fiscal years and cannot be revoked during that period. They are designed for structural choices that should be consistent over time.
- Annual elections: These are made on a year-by-year basis and can be changed from one fiscal year to the next. They provide flexibility for items that may vary in relevance.
- One-off (transitional) elections: These are available only at the time the GloBE rules first apply to the group and cannot be made (or revoked) thereafter. They address transitional issues.
Five-year elections
The following elections, once made, are binding for a minimum of five consecutive fiscal years. After the five-year period, the group may revoke the election, but if it does, it cannot re-elect for another five years.
1. Excluded entity election
Under certain conditions, an MNE group can elect to treat specific entities as excluded entities for GloBE purposes. This is most relevant for entities that are close to the boundary of the standard exclusion categories (government entities, non-profits, pension funds). If an entity is excluded, its income and taxes are removed from the GloBE computation entirely.
This election is narrowly available and subject to specific qualifying criteria; it cannot be used to exclude entities simply because they are low-taxed.
2. Stock-based compensation election
As discussed in the GloBE income chapter, the default treatment for stock-based compensation uses the accounting expense (IFRS 2 or equivalent). This election allows the group to substitute the amount that is deductible for local tax purposes in the jurisdiction of the entity.
The election applies to all constituent entities in all jurisdictions; it cannot be applied selectively to some jurisdictions and not others. This "all or nothing" approach prevents cherry-picking.
The election is particularly relevant for groups with significant equity compensation programs. In jurisdictions where the tax deduction is based on the intrinsic value at exercise (and shares have appreciated significantly), the tax deduction may substantially exceed the accounting charge, increasing GloBE income and potentially lowering the ETR. Conversely, if the share price has declined, the tax deduction may be less than the accounting charge.
3. Realisation basis election
This election allows the group to compute GloBE income on a realisation basis for certain assets, rather than using fair value or mark-to-market accounting. It is primarily relevant for investment entities or entities that hold financial instruments measured at fair value through profit or loss (FVTPL).
Under the realisation basis, gains and losses on qualifying assets are not included in GloBE income until the asset is sold or otherwise disposed of. This can smooth the ETR over time and prevent year-to-year volatility caused by unrealised gains and losses.
4. Tax consolidation election (aggregate basis)
In jurisdictions that have a tax consolidation regime (where multiple entities file a single consolidated tax return), this election allows the group to compute GloBE income and covered taxes on an aggregate basis for the tax-consolidated group, rather than separately for each entity. This can simplify the computation and better reflect the way taxes are actually incurred in the jurisdiction.
5. Investment entity election
Certain investment entities (as defined in the GloBE rules) can elect for special treatment. Under this election, the investment entity is subject to a separate ETR computation, and its income is taxed under a "taxable distribution method" rather than being included in the standard jurisdictional ETR computation.
6. Distribution method election
For certain types of entities (particularly those in specific industries or structures), the group can elect to apply a distribution method for computing GloBE income. Under this method, income is only included in the GloBE computation when it is distributed (as a dividend or equivalent), rather than when it is earned. This can defer the GloBE income recognition and affect the timing of any top-up tax.
Annual elections
The following elections are made on a year-by-year basis. They can be changed or discontinued from one fiscal year to the next, providing flexibility to adapt to changing circumstances.
1. Aggregate gains and losses election
This election allows the group to compute gains and losses on an aggregate basis across all constituent entities in a jurisdiction, rather than separately for each entity. This can be beneficial where one entity has gains and another has losses on similar transactions.
2. Unclaimed accrual election
Where a tax accrual has been recognised in the financial statements but is not claimed as a deduction on the entity's tax return, this election allows the unclaimed amount to be excluded from the covered tax computation. This prevents overstatement of covered taxes for amounts that will never result in an actual tax benefit.
3. De minimis exclusion election
As described in the top-up tax chapter, the de minimis exclusion eliminates top-up tax for jurisdictions with average revenue below EUR 10 million and average GloBE income below EUR 1 million. This is an annual election; the group must affirmatively elect to apply it each year for each qualifying jurisdiction.
4. SBIE election
In certain circumstances, the group can elect not to apply the SBIE in a jurisdiction. This may seem counterintuitive (why forego a carve-out?), but it can simplify the computation in jurisdictions where the SBIE is immaterial, and it avoids the data collection burden of gathering payroll and tangible asset data for that jurisdiction.
5. Distribution method for tax transparent entities
For entities that are tax transparent, the group can annually elect whether to apply the distribution method or the default treatment. This flexibility is useful where the entity's distribution pattern changes from year to year.
6. Safe harbour elections
The application of transitional safe harbours (CbCR safe harbour, QDMTT safe harbour) is effectively an annual election. The group chooses each year, for each jurisdiction, whether to apply the safe harbour or to perform a full GloBE computation. A jurisdiction that fails the safe harbour in one year may pass it in the next, and vice versa.
One-off (transitional) elections
These elections are available only at the time the GloBE rules first apply to the group. Once the window closes, the election cannot be made, and once made, it generally cannot be revoked.
1. GloBE loss election
This election determines how pre-existing losses (losses arising in fiscal years before the GloBE rules apply) are treated in the first year of application. Under the default treatment, no GloBE loss carry-forward exists at the start; the computation begins fresh. Under the election, the group can create an opening GloBE loss based on certain pre-existing tax losses, which generates a deemed deferred tax asset at 15%.
This election can be valuable for groups that have entities with significant tax loss carry-forwards at the transition date. Without the election, those losses receive no GloBE benefit, and the entity may show a low ETR in its first profitable year even though it has substantial accumulated losses.
2. Intra-group asset transfer election
When an asset is transferred between constituent entities within the group before the GloBE rules take effect, the asset's book value for GloBE purposes may differ from its tax basis. This election allows the group to reset the asset's GloBE carrying value to its fair value (or tax basis) at the transition date, preventing the creation of artificial GloBE income or loss when the asset is subsequently depreciated or disposed of.
This election is relevant for groups that have undergone significant intra-group restructurings in the years preceding the adoption of Pillar 2.
3. Filing entity designation
While technically a designation rather than an election, the choice of filing entity, whether the UPE files the GloBE Information Return or a designated filing entity in another jurisdiction does so, must be made at the outset. The designation can be changed subsequently but requires notification to the relevant tax authorities.
Managing elections effectively
Given the number and complexity of available elections, groups should take a structured approach:
- Inventory all available elections: Create a comprehensive list of every election available, noting the type (five-year, annual, one-off), the deadline, and the default treatment if no election is made.
- Model the impact: For each election, model the effect on the jurisdictional ETR and top-up tax under the group's specific facts. Use multiple scenarios (e.g., different income levels, different asset valuations) to understand the sensitivity.
- Consider interactions: Elections do not operate in isolation. The stock-based compensation election affects GloBE income, which in turn affects the ETR and the SBIE computation. Modelling should capture these interdependencies.
- Document the rationale: For each election made (or not made), document the analysis and reasoning. Tax authorities may enquire about election choices, and a well-documented decision is easier to defend.
- Track ongoing obligations: Five-year elections require monitoring for the revocation window. Annual elections require a conscious decision each year. One-off elections have a single deadline that must not be missed.