Loyens & Loeff New York regularly posts 'Snippets' on a range of EU tax and legal topics. This Snippet describes the Jan 2025 OECD guidance (𝐀𝐆) on the treatment of deferred tax assets (𝐃𝐓𝐀𝐬) under Pillar Two (𝐏𝟐).
A DTA arises due to a temporary difference between tax and book
income or a tax attribute that can be used in a future year (e.g.,
NOLs). A DTA reduces the effective tax rate for P2 purposes
(𝐄𝐓𝐑) in the year it is created and
increases the ETR in the year it is reversed.
The P2 rules allow DTAs incurred before the first year that P2
applies (Transition Year; 𝐓𝐘) to be used in the ETR
calculation. It is therefore beneficial to start the TY with high
DTAs (generated before the start of the TY) as the reversal of
these DTAs in subsequent years will have a positive effect on the
ETR.
As a main rule, all DTAs in the financial accounts in the TY are
available for P2 purposes. However, the P2 rules contain
limitations on the use of DTAs. Amongst others, a DTA is denied if
(i) it arises from items excluded from P2 income while (ii) the DTA
is generated in a transaction after 30 Nov. 2021. The AG broadens
the scope by expanding both conditions (i) and (ii) to combat
certain situations that the OECD deems undesirable. It –
amongst others - targets specific arrangements that countries have
entered into with taxpayers before the P2 rules came into effect to
mitigate the impact of P2.
Re (i), the AG states that this not only includes DTAs that are
expressly excluded from P2 income (e.g., income from qualifying
shareholdings) but also DTAs related to non-economic expenses or
losses for tax purposes (e.g., depreciation expenses in excess of
the cost of an asset) or tax benefits that are designed to achieve
similar effects.
Re (ii), the AG notes that a 'transaction' also includes
any 'governmental arrangement' (𝐆𝐀), e.g.,
a ruling or similar agreement. The AG mentions three examples of
DTAs related to actions performed after 30 Nov. 2021 that are
excluded from the ETR (and transitional CbCR safe harbour)
calculations under P2. It concerns DTAs:
- arising from a GA that entitle the taxpayer to a tax credit or step-up that otherwise would not have arisen.
- arising from a retroactive change in the treatment of a transaction in a year for which a final tax assessment was already issued or a tax return was already filed.
- arising from a step-up due to the introduction of a corporate tax regime in a country which previously had none (e.g., Bermuda).
For the first years, the AG provides a so-called Grace Period that allows part of the affected DTA to still be used in the ETR calculations under conditions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
