Effective tax rate calculation

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: deferred tax accounting under Article 4.4

Under the default treatment, losses are reflected through the standard deferred tax accounting in the constituent entity's financial statements, subject to the GloBE-specific adjustments to deferred taxes (the cap at the minimum rate, the five-year recapture rule for unpaid deferred tax liabilities, and others). A jurisdictional loss generates a deferred tax asset under the entity's accounting framework; that asset reverses against future profits and feeds into the Total Deferred Tax Adjustment Amount within Adjusted Covered Taxes. The economic effect is that losses produce a tax benefit roughly at the minimum rate, preventing a jurisdiction with volatile income from repeatedly showing a low ETR in profitable years while loss-making years go unrecognised.

This route depends on the entity actually recognising a deferred tax asset for the loss in its financial statements (IFRS recognition, for example, is gated on probability of future recovery) and on tracking those deferred taxes through the GloBE adjustments year on year.

Alternative: GloBE Loss Election (Article 4.5)

An MNE group can elect under Article 4.5 to bypass the Article 4.4 deferred tax mechanic for a jurisdiction and use a simpler deemed deferred tax asset instead (see Chapter 10 for the election mechanics). For each fiscal year the jurisdiction has a Net GloBE Loss, a GloBE Loss Deferred Tax Asset is created equal to:

GloBE Loss DTA = Net GloBE Loss x 15%

The deemed DTA carries forward and is added to Adjusted Covered Taxes in subsequent profitable years until the cumulative loss is consumed. The election is made jurisdiction-by-jurisdiction at the time the jurisdiction first comes into scope; once made, it applies indefinitely unless the group revokes it, and revocation wipes out any remaining GloBE Loss DTA for the jurisdiction, so groups treat it as permanent in practice.

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:

Worked example

The following example illustrates the ETR computation for a single jurisdiction. Suppose an MNE group has three constituent entities in Country X:

Net GloBE Income for Country X = EUR 64 million

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.