Calculating GloBE income

Starting point: financial accounting net income or loss

The GloBE income computation begins with the financial accounting net income or loss of each constituent entity, as determined under the accounting standard used in preparing the MNE group's consolidated financial statements. This is a deliberate design choice: rather than starting from taxable income (which varies by jurisdiction), the GloBE rules use a common accounting base to ensure consistency across jurisdictions.

The starting point is the net income or loss before any consolidation adjustments; that is, the figure from the entity's consolidation package that feeds into the group accounts. Intercompany eliminations that occur at the consolidation level are not reversed; each entity's income is taken as reported in the consolidation process.

For entities that do not use the same accounting standard as the UPE, the figures must be adjusted to the UPE's accounting standard if the differences would be material. This is an area that can create practical challenges, particularly for entities in jurisdictions where local GAAP differs significantly from IFRS or the UPE's reporting standard.

Key principle: The GloBE rules use financial accounting income as the starting point because it provides a globally consistent base. The adjustments described below are designed to remove items that the rules consider should not affect the ETR computation, and to add items that are economically relevant but may not appear in accounting income.

The key adjustments

Starting from financial accounting net income or loss, the following categories of adjustment are applied to arrive at GloBE income. Each adjustment is made at the entity level before aggregation at the jurisdictional level.

1. Net tax expense

All income tax expense (both current and deferred) recognised in the financial statements is added back to income. This is because taxes are dealt with separately through the covered tax computation; including them in both the numerator and denominator of the ETR would distort the result. The add-back ensures that GloBE income reflects pre-tax economic income.

2. Excluded dividends

Dividends received from entities in which the MNE group holds an ownership interest of 10% or more (a "short-term portfolio shareholding" threshold) are excluded from GloBE income. This prevents the same income from being taxed twice within the GloBE framework: once when it is earned by the paying entity and again when it is received as a dividend by the parent.

Dividends from short-term portfolio holdings (less than one year) and from interests below 10% are generally included in GloBE income, as the group does not have sufficient influence to control the taxation of the underlying income.

3. Excluded equity gains and losses

Gains and losses on the disposal of ownership interests in entities that meet the 10% ownership threshold are also excluded. The rationale mirrors that for excluded dividends: the underlying income has already been (or will be) subject to the GloBE rules at the entity level, so taxing the gain on disposal would create double counting.

This exclusion applies to gains and losses recognised in the income statement. Unrealised gains or losses that are recognised only in other comprehensive income (OCI) are generally not part of financial accounting net income and therefore do not require adjustment.

4. Asymmetric foreign currency gains and losses

The GloBE rules include specific provisions for foreign currency (FX) gains and losses. Where FX gains or losses arise from the translation of the entity's functional currency into the presentation currency of the consolidated accounts, and those gains or losses are not reflected in the local tax base, they are excluded from GloBE income. This prevents phantom income or losses arising solely from currency translation from distorting the ETR.

FX gains and losses that are included in the local tax base (for example, transaction gains on foreign currency receivables) are generally retained in GloBE income.

5. Policy disallowed expenses

Certain expenses that are disallowed for tax purposes in many jurisdictions, such as fines, penalties, bribes, and certain illegal payments, are added back to GloBE income if they have been deducted in the financial statements. The rationale is that these items represent costs that should not reduce the GloBE income base, as they would not be deductible for tax purposes in most jurisdictions.

6. Pension fund adjustments

Accounting for defined benefit pension plans under standards like IAS 19 can create significant timing differences between the pension cost recognised in the income statement and the actual cash contributions made. The GloBE rules allow an election to substitute actual pension contributions for the accounting pension cost. This can simplify the computation and reduce volatility caused by actuarial remeasurements.

7. Stock-based compensation

Stock-based compensation (share options, restricted stock units, etc.) is another area where accounting and tax treatment often diverge. Under the default GloBE rules, the accounting expense (IFRS 2 or equivalent) is used for GloBE income purposes. However, an election is available to substitute the tax deduction amount, where a local tax deduction is based on the intrinsic value or fair value of the award at the time of exercise or vesting.

This election can have a material impact where the accounting charge and the tax deduction differ significantly, for example in jurisdictions like the United States where the tax deduction for non-qualified stock options is based on the spread at exercise, which may be substantially different from the IFRS 2 expense.

8. Prior period errors and changes in accounting principles

Adjustments arising from the correction of prior period errors or changes in accounting principles are generally included in GloBE income for the year in which they are recognised. However, where the adjustment relates to a prior year and would change the ETR for that prior year, there may be a need to reopen the prior year computation; this is addressed through the post-filing adjustment mechanism.

9. Accrued pension expense vs. contributions (election-dependent)

As noted above, this is subject to a five-year election. Where the election is made, the accounting pension expense is replaced with actual contributions for GloBE income purposes across all entities in all jurisdictions.

10. Transfer pricing adjustments

The GloBE rules generally respect the transfer prices used in the consolidated financial statements, provided they are set in accordance with the arm's length principle. However, where a transfer pricing adjustment is made by a tax authority (or agreed through an Advance Pricing Agreement), the GloBE income of the affected entities may need to be adjusted to reflect the revised pricing.

This can create complications where adjustments are unilateral (only one side is adjusted); the GloBE rules seek to ensure that the total income across jurisdictions remains consistent, but in practice, mismatches can arise.

11. Other specific adjustments

The GloBE rules contain a number of additional, narrower adjustments, including:

Insurance company adjustments: Specific rules for measuring income of insurance companies that recognise policyholder reserves.
Shipping income: Exclusion of income that qualifies for a tonnage tax or equivalent shipping regime, under certain conditions.
International shipping income: Excluded from GloBE income if it qualifies under specific criteria.
Intra-group transactions: Unrealised gains and losses on intra-group transactions that are eliminated in consolidation are not reversed for GloBE purposes; the consolidated view is maintained.
Pushed-down income: Where accounting pushdown is applied (for example, fair value step-ups on acquisition), the GloBE rules may override the pushed-down values in certain circumstances.

Key takeaway: The adjustments to GloBE income are designed to create a neutral, consistent measure of pre-tax income across all jurisdictions, removing items that are driven by accounting policy choices or that would create double counting within the GloBE framework. Many of the adjustments are subject to elections that can significantly affect the outcome; these are covered in Chapter 10.

Allocation of income to PEs and flow-through entities

Once the entity-level GloBE income has been calculated, specific allocation rules determine how income is attributed to permanent establishments and flow-through entities:

Permanent establishments

Income attributable to a PE (as determined under the applicable tax treaty or domestic law) is removed from the head office entity's GloBE income and treated as the GloBE income of the PE.
The PE is treated as a separate constituent entity located in its own jurisdiction.
Any residual income that is not allocated to a PE or any other entity is treated as "stateless" income of the head office entity and is subject to its own separate ETR computation.

Flow-through entities

If a flow-through entity is the UPE, its income is allocated to its owners in proportion to their ownership interests, unless the entity is subject to tax in its own jurisdiction, in which case it retains its income for GloBE purposes.
If a flow-through entity is below the UPE in the group structure, income is allocated based on the tax treatment: if taxed at the entity level, it stays with the entity; if taxed in the hands of the owners, it is allocated upward.

Aggregation at the jurisdictional level

After all entity-level adjustments and allocations have been made, the GloBE income (or loss) of all constituent entities in the same jurisdiction is aggregated to arrive at the Net GloBE Income for that jurisdiction. This aggregation is a critical step, because the ETR is computed at the jurisdictional level, not the entity level.

Key points about jurisdictional aggregation:

Losses offset income: If one entity in a jurisdiction has a GloBE loss and another has GloBE income, the loss reduces the Net GloBE Income for the jurisdiction. This jurisdictional blending can significantly affect the ETR.
Net loss jurisdictions: If the Net GloBE Income for a jurisdiction is zero or negative, no ETR is computed for that year. The loss may, however, be carried forward under certain mechanisms (see the GloBE loss election in Chapter 10).
JVs and MOCEs: Joint venture groups and minority-owned constituent entities aggregate separately from the main group.

Practical note: The GloBE income computation is where most of the data collection effort is concentrated. Groups need entity-level financial accounting data, detailed enough to identify each adjustment category, for every constituent entity. This often requires changes to existing consolidation processes and additional data collection from local finance teams.

Common pitfalls

Based on the experience of groups preparing for their first GloBE filings, the most common challenges in the GloBE income computation include:

Accounting standard mismatches: Entities using local GAAP that differs materially from the UPE's standard require reconciliation, which can be time-consuming.
Identifying excluded dividends: Groups with complex intercompany dividend flows need to trace each dividend to determine whether the 10% ownership threshold is met and whether the holding period requirement is satisfied.
Stock-based compensation elections: The choice between accounting expense and tax deduction can have a large impact, particularly for technology companies or groups with significant employee equity plans. The election is binding for five years, so modelling both options before electing is advisable.
FX adjustments: Determining which FX gains and losses are "asymmetric" (included in accounting income but not in the local tax base) requires detailed analysis of each entity's functional and presentation currencies.
Transfer pricing adjustments: Unilateral adjustments by tax authorities can create GloBE income mismatches that are difficult to resolve without corresponding adjustments in the counterparty jurisdiction.

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