Pillar 2 GloBE rules technical series: unpacking and applying GloBE model rule adjustments

Continuing our technical series on Pillar 2 GloBE, article five aims to assess how to determine your Financial Accounting Net Income or Loss (FANIL) by applying the relevant OECD-listed adjustments, alongside a brief overview of other additional adjustments.

As discussed in previous articles in this series, calculating any top-up tax liability under Pillar 2 begins with determining the Effective Tax Rate (ETR) for each jurisdiction in which a multinational enterprise (MNE) group operates. Chapter 3 of the GloBE Model Rules requires this determination to be based on financial accounting data, subject to specific adjustments to ensure consistency with international tax norms. The purpose of these adjustments is to eliminate certain book-to-tax differences that are commonly observed in various jurisdictions.

Once a constituent entity (CE) has determined its FANIL, specific adjustments are applied to arrive at the Pillar 2 GloBE income or loss.

Let’s take a closer look at the various types of adjustments and how they are quantified and applied in practice.

Key GloBE adjustments

Net tax expense and excluded dividends

Net Tax Expense:

The net tax expense must be added back to CE’s FANIL. In some cases, this may result in a negative adjustment to the profit and loss (P&L) statement, for instance, when a CE incurs a net loss that gives rise to a deferred tax asset (DTA). Net Tax expense is broadly defined to include covered taxes accrued, Deferred Tax asset and and disqualified refundable imputation taxes. It also encompasses any Qualified Domestic Minimum Top-up Tax (QDMTT), Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR) top-up taxes.

Excluded Dividends:

The excluded dividends provision adjusts the CE’s FANIL by reducing the income or increasing the loss by the amount of any excluded dividends received during a year. Excluded dividends are dividends paid from shares or equity interest where the MNE group holds 10% or moreof the payor), or the recipient CE has held full economic ownership of the interest for a period of 12 months or more.

There are two key exceptions to the excluded dividends adjustment:

First, dividends received from short-term portfolio shareholdings where the MNE group holds less than 10% of the interest or has owned such an interest for less than one year.

The second exception is related to dividends received from an investment entity for which a taxable distribution method election has been made.

Equity adjustments and included revaluation method gains and losses

Certain adjustments are made to FANIL for a CE’s excluded equity gains and losses. Excluded equity gains and losses can be defined as:

• changes in fair value (FV) of ownership interests (except of portfolio shareholdings) reported as a gain or loss in the P&L;
• Profits or losses in respect of ownership interests included under the equity method of accounting (typically where the interest held is between 20% and 50%);
• Gains and losses from the disposition of an ownership interest other than a portfolio holding.

However, no adjustment is needed if the FV changes are included in other comprehensive income (OCI). If there is equity method net income, then there is a negative adjustment to the FANIL, whereas an equity method loss is treated as a positive adjustment.

With respect to the disposition of ownership interest there is no minimum holding period (as there is for certain excluded dividends).

In many jurisdictions, gains from the disposition of interests are either fully or partially exempt from tax, or taxed at a reduced rate. As a result, if these gains are not appropriately adjusted in the GloBE income or loss calculation, they could impact the ETR. To ensure accuracy, an adjustment is therefore required.

Under certain financial accounting standards, entities may elect to use the revaluation method as their accounting policy for property, plant and equipment (PPE). This method involves periodically adjusting the carrying amount of PPE to fair value, recognising revaluation gains or losses in Other Comprehensive Income (OCI), without subsequently reporting the gains or losses recorded in OCI through its P&L. The gains or losses resulting from the revaluation will need to be taken into account for the determination of the qualifying income or loss unless an election is made.

This election permits CE to defer the recognition of these “revaluation method” gains and losses in GloBE income until the asset underlying the PPE is disposed.  If this election is made, any depreciation of the PPE will need to be based on the cost of the PPE rather than its revalued amount.

Disposition of excluded assets and asymmetric foreign currency issues

Asset sales are generally included in the GloBE income computation, even when the buyer is a group entity. However, adjustments can be made for intra-group transactions to ensure that asset sales do not affect the MNE group’s consolidated income. Article 6.3’s GloBE reorganisation provisions require the exclusion of any gain or loss arising from a transfer of assets and liabilities.  A GLoBE reorganisation is one where there is a transfer of assets and liabilities such as in a merger, demerger, liquidation or similar transaction where (i) the consideration is, or includes significant, equity interests of the acquirer, (ii) the vendor is not subject to tax and (iii) the acquiring entity is required to compute any future gains/losses based on the vendor’s tax cost.  Where there is a GLoBE reorganisation, gains and losses recognised in FANIL are excluded for the GLoBE income/loss calculation.

A negative adjustment is required for an excluded gain, an while a positive adjustment applies to an excluded loss.

In case of anon-qualifying gain or loss in a GLoBE reorganisation, the lesser of taxable or financial accounting gain or loss on the transfer, as defined in Article 10, should be applied.

Adjustments may also arise due to differences between a CE’s accounting and tax functional currencies. These asymmetric foreign exchange gains or losses (FXGL) can occur, for example, when a CE prepares its financial statements in US dollars but files tax returns in euros. Such differences may impact either the CE’s taxable income or its FANIL, leading to positive or negative adjustments.

• Where the FXGL arises in the tax computation due FX fluctuations between the tax functional currency and the accounting functional currency, then FANIL is adjusted to include the FXGL.
• Where the FXGL arises in FANIL due to FX fluctuations between the tax functional currency and the accounting functional currency, then the FXGL is removed from FANIL.
• Where a third foreign currency is involved FXGL may arise due to fluctuations in FX between the third foreign currency and the accounting and functional currencies.
  • Where the FXGL arises from differences with the accounting functional currency, the FXGL is removed from FANIL.
  • Where the FXGL arises from differences with the tax functional currency, the FXGL is added to FANIL

Policy disallowed expenses, errors and accrued pension expense adjustments

An adjustment to FANIL is required for policy-disallowed expenses accrued by a CE, as defined under Article 10. These include non-deductible items such as fines, penalties and illegal payments (e.g., bribes and kickbacks). However, a de minimis threshold applies specifically to fines and penalties and no adjustment is necessary if the total amount is less than €50,000.  Also interest on late tax payments is not classified as a fine and therefore does not require an adjustment under the GloBE rules.

Two specific adjustments are required when changes to a CE’s opening equity at the start of a fiscal year are attributable to either a prior period error or a change in accounting principles.

• A prior period error involves the correction of an error that impacted the computation of GloBE income or loss in a previous fiscal year in which the GloBE rules applied. These corrections must be removed from FANIL. However, if the correction results in a reduction of covered taxes of €1 million or more for that prior year, a full recalculation of GloBE figures for the affected period is required. A change in accounting principle or policy triggers an adjustment only to the extent that the equity movement relates to income or expense items that should have been included in the GloBE income or loss computation.

The accrued pension expenses adjustment addresses the difference between the pension contributions actually made to a pension fund during the fiscal year (excluding direct payments to former employees) and the amount recorded as an expense in the CE’s FANIL. If the accrued pension expense in FANIL exceeds the contributions made, a positive adjustment is required. Conversely, if the actual contributions exceed the amount accrued, a negative adjustment is applied. 

Additional GloBE adjustments and next steps

There is a wide range of additional GloBE adjustments that can be applied. These include: 

• Debt Release Exclusion Election, 
• Stock-Based Compensation Adjustment, 
• Arms-Length Adjustment, 
• Qualified Refundable Tax Credit Adjustment, 
• Marketable Transferable Tax Credit Adjustment, 
• Fair Value Gain/Loss Adjustment, 
• Aggregate Asset Gain Election,  
• Intra-group Financing Arrangement (IFA) Expense, 
• Intra-group Transaction Election Adjustment,
• Insurance Company Tax and Tier One Capital Equity Adjustment, 
• GloBE M&A Adjustment.

Effectively applying the additional GloBE adjustments requires a clear understanding of both their eligibility criteria and practical implementation. In some cases, elections tied to these adjustments can be binding for up to five years, and deductions cannot be claimed for options that are unlikely to be exercised. Maintaining consistency, adhering to arm’s length principles, and aligning Pillar 2 strategies with local tax rules is essential, particularly where jurisdictional differences or interpretive uncertainties may arise. In addition to the adjustments discussed, certain types of international shipping income are also excluded from GloBE income calculations.

To ensure compliance with GLoBE requirements, establishing a robust tracking mechanism is crucial. Such a system should identify when specific adjustments are triggered, monitor compliance with market-based thresholds, and assess the impact on safe harbour elections and top-up tax calculations.

The key to effectively applying any of the GLoBE adjustments discussed in this article lies in understanding their impact on the covered tax calculations. Equally important is recognising how local tax and accounting rules may influence the GloBE outcome. While the Pillar 2 framework is designed to ensure that any deviation in treatment is offset by a corresponding adjustment elsewhere, thereby minimising distortions, differences at the local level can still affect the overall result. As the Pillar 2 rules continue to evolve, staying informed of updated OECD guidance and the specific implementation approaches adopted by each jurisdiction will be critical for ensuring accurate and compliant GloBE calculations.

For a more comprehensive explanation of GloBE adjustments please listen to our webcast #5: Pillar 2 Technical Series: Computation of GloBE Adjustments where you can hear more in-depth analysis and download technical slides giving examples.

For a recap of previous topics covered, please refer to previous articles:

1. Pillar 2 GloBE rules technical series: Getting to know top-up taxes and safe harbours
2. Pillar 2 GloBE rules technical series: Understanding MNE group structures through the lens of the GloBE rules
3. Pillar 2 GloBE rules technical series: Addressing MNE group complexities under Pillar 2 GloBE
4. Pillar 2 GloBE rules technical series: Understanding how Pillar 2 GloBE impacts tax accounting

You can also contact us directly to discuss the above topics or other GloBE issues.