The jurisdictional ETR formula
The effective tax rate (ETR) under the GloBE rules is calculated at the jurisdictional level. All constituent entities in a given jurisdiction are aggregated, and a single ETR is computed for the jurisdiction as a whole. The formula is:
Jurisdictional ETR = Adjusted Covered Taxes / Net GloBE Income
Where:
- Adjusted Covered Taxes is the sum of all covered taxes (current and deferred, after GloBE adjustments) for all constituent entities in the jurisdiction (as described in Chapter 6).
- Net GloBE Income is the sum of the GloBE income (or loss) of all constituent entities in the jurisdiction (as described in Chapter 5).
If the resulting ETR is 15% or above, no top-up tax arises for that jurisdiction in the relevant fiscal year. If the ETR is below 15%, the difference between 15% and the actual ETR becomes the top-up tax percentage, which is applied to the jurisdiction's excess profit (see Chapter 8).
What happens with net losses?
When a jurisdiction has a Net GloBE Income of zero or below (i.e., a net loss), no ETR is computed for that jurisdiction in that year. You cannot divide by zero or a negative number to produce a meaningful rate.
However, the loss is not simply ignored. The GloBE rules provide two mechanisms for dealing with losses:
Default treatment: GloBE loss carry-forward
Under the default treatment, a net GloBE loss in a jurisdiction creates a "GloBE Loss" that is carried forward. In subsequent years, the GloBE Loss offsets GloBE income in the same jurisdiction before the ETR is computed. The effect is that the loss increases the future covered taxes through a deemed tax credit equal to the loss multiplied by 15%. This mechanism ensures that losses generate a tax benefit at the minimum rate, preventing a situation where a jurisdiction with volatile income repeatedly shows a low ETR in profitable years while the losses in loss-making years go unrecognised.
Specifically, the GloBE loss deferred tax asset is calculated as:
GloBE Loss DTA = Net GloBE Loss x 15%
This DTA is added to the Adjusted Covered Taxes in the year the loss is utilised (i.e., when the jurisdiction has positive GloBE income in a subsequent year). The loss itself is not deducted from income; rather, its tax equivalent at 15% is added to covered taxes, which has the effect of increasing the ETR towards 15%.
Alternative: GloBE loss election
An alternative treatment is available through the GloBE loss election (see Chapter 10). Under this election, the net loss is deducted directly from Net GloBE Income in the subsequent year, rather than generating a deemed DTA. The choice between the two mechanisms can produce different ETR outcomes depending on the jurisdiction's tax rate and the pattern of income and losses over time.
Jurisdictional blending: why it matters
A distinctive feature of the GloBE rules is that the ETR is computed at the jurisdictional level, not per entity. All constituent entities in a jurisdiction are blended together. This has several practical consequences:
- High-tax entities can shelter low-tax entities: If one entity in a jurisdiction has a high effective rate (say, 25%) and another has a low rate (say, 5%), the blended rate may be above 15%, meaning no top-up tax arises. This creates planning opportunities around group structure within a jurisdiction.
- Loss-making entities reduce the base: An entity with a GloBE loss in a jurisdiction reduces the Net GloBE Income for the jurisdiction as a whole. If the loss eliminates all income, no ETR is computed.
- The composition of entities matters: Adding or removing entities from a jurisdiction (through restructuring, acquisitions, or disposals) can change the jurisdictional ETR. Groups should assess the ETR impact of structural changes.
Separate ETR computations
While most constituent entities are blended at the jurisdictional level, certain categories are subject to separate ETR computations:
| Category | Treatment |
|---|---|
| Joint ventures (JVs) | JV entities and their subsidiaries are treated as a separate group; their ETR is computed independently of the main MNE group |
| Minority-owned constituent entities (MOCEs) | MOCEs and their subsidiaries have a separate ETR computation |
| Investment entities (if elected) | Certain investment entities can elect for separate treatment |
| Stateless income | Income that cannot be attributed to any jurisdiction is treated as arising in its own separate "jurisdiction" with its own ETR |
Worked example
The following example illustrates the ETR computation for a single jurisdiction. Suppose an MNE group has three constituent entities in Country X:
| Entity A | Entity B | Entity C | Total | |
|---|---|---|---|---|
| Financial accounting income | EUR 50m | EUR 30m | (EUR 10m) | EUR 70m |
| GloBE adjustments (net) | (EUR 5m) | (EUR 2m) | EUR 1m | (EUR 6m) |
| GloBE income (loss) | EUR 45m | EUR 28m | (EUR 9m) | EUR 64m |
Net GloBE Income for Country X = EUR 64 million
| Entity A | Entity B | Entity C | Total | |
|---|---|---|---|---|
| Current tax expense | EUR 8m | EUR 4m | EUR 0m | EUR 12m |
| Deferred tax (recast at 15%) | EUR 1.5m | (EUR 0.5m) | EUR 0m | EUR 1m |
| Other covered tax adjustments | (EUR 0.5m) | EUR 0m | EUR 0m | (EUR 0.5m) |
| Adjusted Covered Taxes | EUR 9m | EUR 3.5m | EUR 0m | EUR 12.5m |
Adjusted Covered Taxes for Country X = EUR 12.5 million
Jurisdictional ETR = EUR 12.5m / EUR 64m = 19.5%
Since 19.5% exceeds the 15% minimum rate, no top-up tax arises for Country X in this fiscal year.
What if the ETR were below 15%?
Now suppose Entity A had lower covered taxes, bringing the total Adjusted Covered Taxes to EUR 8 million instead of EUR 12.5 million:
Jurisdictional ETR = EUR 8m / EUR 64m = 12.5%
The ETR is below 15%, so:
- Top-up tax percentage = 15% - 12.5% = 2.5%
- The SBIE would then be calculated (see Chapter 8) based on payroll and tangible assets in Country X. Suppose the SBIE is EUR 20 million.
- Excess profit = EUR 64m - EUR 20m = EUR 44 million
- Jurisdictional top-up tax = 2.5% x EUR 44m = EUR 1.1 million
This EUR 1.1 million would then be collected through whichever mechanism applies (QDMTT, IIR, or UTPR) as described in Chapter 9.
The ETR in context
It is worth emphasising what the GloBE ETR is and what it is not:
- It is not the statutory tax rate. A jurisdiction with a 25% headline rate can have a GloBE ETR below 15% if tax incentives, timing differences, or other factors reduce the actual tax burden.
- It is not the accounting effective tax rate. The GloBE ETR uses adjusted figures for both income and taxes. The adjustments can produce a rate that is materially different from the ETR reported in the consolidated financial statements.
- It is not permanent. The GloBE ETR is computed annually. A jurisdiction that is above 15% in one year may fall below it in the next, and vice versa. Volatility in income, taxes, and deferred tax movements can all cause year-to-year variation.
- It is jurisdictional, not global. A group's overall global ETR is irrelevant for GloBE purposes. What matters is the rate in each individual jurisdiction. A group could have a global ETR of 25% but still owe top-up tax if even one jurisdiction is below 15%.
Common causes of a low GloBE ETR
Groups that find a jurisdiction has an ETR below 15% should investigate the root cause. Common drivers include:
- Tax holidays or incentive regimes: Reduced rates or exemptions that lower the current tax charge below the GloBE threshold.
- Significant non-taxable income: Items that are included in GloBE income but are not taxable locally (e.g., certain capital gains, intercompany items).
- Deferred tax recasting: Deferred taxes recognised at the statutory rate but recast at 15% for GloBE purposes, reducing the covered tax amount.
- Timing differences: Large temporary differences in a given year (e.g., accelerated depreciation) that push down the current tax charge without a corresponding deferred tax benefit at the 15% rate.
- Withholding taxes not credited: Withholding taxes paid by the entity may not be properly allocated as covered taxes, reducing the numerator.
- Loss-making entities in the jurisdiction: Counterintuitively, a loss-making entity can sometimes lower the ETR by reducing Net GloBE Income (the denominator) without a proportional reduction in covered taxes (the numerator), depending on the specific facts.