The Global Minimum Tax | Selected Issues on Pillar Two

1. Introduction

1.1. Addressing Temporary Differences by the Deferred Tax Approach

The proper effective tax rate (ETR) calculation requires identifying the taxes corresponding to the income calculated on an accounting standard basis (not the taxes actually paid) and considering temporary differences caused by differences in treatment by tax and accounting rules. The underlying idea can be condensed into the following statement. Given that the denominator of the ETR is basically accounting income, the numerator of the ETR must also be the tax amount corresponding to accounting income (not taxable income). This is easier said than done. To achieve this idea, the drafters of GloBE Model Rules had to invent and develop a method from scratch. Finally, the method adopted by the GloBE Model Rules is the deferred tax approach rather than the carry-forward mechanism that had initially been discussed both in the Programme of Work in May 2019 and the Pillar Two Blueprint published in October 2020.

Without background knowledge of deferred tax accounting, it is difficult to understand the highly complex deferred tax approach of Pillar Two. Accounting has already developed a set of standards for id...