The six subjects in the June 2024 guidance
This 144-page OECD administrative guidance, approved in May and released in June 2024, addresses deferred-tax liability recapture, differences between GloBE and accounting carrying values, cross-border current and deferred taxes, flow-through ownership structures, and securitisation vehicles. This article explains that edition rather than treating every historical statement or proposed future clarification as a current domestic rule. This is an adaptation of an original work by the OECD. The opinions expressed and arguments employed in this adaptation should not be reported as representing the official views of the OECD or of its Member countries.
When a deferred-tax liability must be recaptured
A deferred-tax liability (DTL) included in adjusted covered taxes generally has to reverse within the following five fiscal years. Otherwise the amount is removed from covered taxes of the original accrual year, that year’s effective tax rate and top-up tax are recalculated, and the additional current top-up tax is recognised under Article 5.4. A subsequent reversal of a recaptured liability receives the corresponding adjustment under Article 4.4.2(b). Recapture-exception accruals and properly elected unclaimed accruals have separate treatment; not every book DTL enters this tracking system.
Choose a tracking unit that the accounting records support
Tracking can be by individual asset or liability, by a general-ledger account, or by an aggregate category of several ledger accounts within the same balance-sheet or sub-balance-sheet account. Methods can coexist, but a group cannot track part of one ledger account individually while aggregating the rest. Pure deferred-tax asset accounts are excluded from aggregate DTL categories, and an account that swings between an asset and a liability must be separated. Excluded-income liabilities are also excluded. Including a recapture-exception item in an aggregate category exposes the entire category to recapture.
Limits on aggregation and the choice of FIFO or LIFO
An aggregate category cannot contain non-amortisable goodwill or intangibles, intangibles amortised over more than five years, or related-party receivables and payables. Those items require at least ledger-level tracking. FIFO is available for a single ledger account and for an aggregate category with demonstrably similar reversal patterns, including full reversal within two years of one another, or adequate evidence that longer-lived accruals are properly recaptured. Otherwise use LIFO. An unsupported category cannot be claimed merely because tracking is inconvenient.
The category-level recapture calculation
Annual net increases count as new accruals and annual net decreases as reversals. Compare the outstanding post-transition balance with the maximum justifiable amount over the five-year testing period. Under FIFO, that maximum is the sum of positive annual net increases in the testing period. Under LIFO, it is the positive balance, if any, of all increases and decreases in that period. The excess is the unjustified balance. An increase in that balance triggers recapture of the tested accrual year; a decrease identifies subsequent reversals of amounts previously recaptured or otherwise not claimed.
What the 16-year recapture tables demonstrate
In the FIFO illustration, year-six outstanding DTL is 510 and the maximum justifiable amount is 500, giving recapture of 10 from year one. The unjustified balance then rises to 130, 180 and 300 in years seven to nine; its year-ten reduction of 80 is a reversal adjustment, followed by a year-eleven increase of 120. In the separate LIFO illustration, year-six outstanding DTL is 370 against a maximum of 360, also recapturing 10; year seven recaptures a further 210. Years eight to sixteen then reverse the previously recaptured amounts. The examples use different movement patterns, so they do not establish that one method always gives a lower tax charge.
Short-term accruals and the evidence needed
A category proven to reverse completely within five subsequent years need not use the full recapture tracking calculation. Evidence can include contractual collection periods, established write-off policies, statutory gain deferrals, software licence lives, construction contracts and normal inventory turnover. The document also illustrates ten-year book versus five-year tax amortisation that still produces appropriately short-lived timing differences. Aged wine or spirits cannot automatically be treated like rapidly turning stock. A category that later ceases to meet the short-term condition enters tracking, with its opening balance treated as pre-transition DTL.
Pre-transition liabilities must not be mistaken for new reversals
Deferred-tax liabilities brought in under Article 9.1.1 are not subject to recapture. FIFO allocates early reversals to those opening liabilities first; LIFO allocates reversals to post-transition accruals first. In the FIFO example, an opening liability of 150 reverses by 20 in year seven, 80 in year eight and 50 in year ten; those amounts are removed from the post-transition movement calculation. In the LIFO example, 110 of the opening balance reverses in year twelve and 10 in each of years thirteen to sixteen. A change in category structure must preserve outstanding balances, unjustified balances, opening liabilities and the prior five years’ accruals without duplication.
Unclaimed-accrual elections and QDMTT alignment
The annual unclaimed-accrual election applies to an entire eligible tracking unit expected not to reverse within five years. The five-year election for a ledger or aggregate category does not require that expectation and excludes relevant new accruals and reversals until revoked. Opening pre-transition reversals remain covered taxes and are identified first. Switching between claimed and unclaimed years requires records that distinguish their later reversals. The DTL arising for a finance lessor from cost recovery of underlying tangible leased assets can qualify as a recapture exception. QDMTTs use the same principles and elections, although local accounting standards can support different categories from those used in group reporting.
Use the GloBE carrying value for income and deferred tax
The second chapter covers divergences caused by pension adjustments, stock compensation, arm’s-length pricing, realisation elections, acquisitions and reorganisations. When GloBE income uses a different asset or liability carrying value, compute deferred tax from that GloBE carrying value and the local tax basis, then apply the relevant accounting standard and GloBE adjustments. Do not mechanically import the deferred tax shown in the accounts. An accounting initial-recognition exception continues to apply unless the GloBE rules specifically create an asset, as Article 9.1.3 can. Recapture also tests the GloBE-based DTL.
An intragroup transfer recorded at cost
The source example transfers an asset with seller carrying value 50 and arm’s-length value 150. Although both parties account for the transfer at 50, the seller includes a GloBE gain of 100 and the buyer takes GloBE carrying value 150. If the buyer’s tax basis is also 150, its book DTA of 20 at a 20% tax rate is disregarded: there is no initial GloBE timing difference. Ten-year GloBE amortisation is 15 annually, and a shorter tax amortisation period may produce a new DTL. If tax basis instead equals 160, a GloBE DTA of 1.50 arises, reducing adjusted covered taxes in the acquisition year before reversing over the relevant amortisation period.
Impairment and the substance-based exclusion use different bases
There is no independent impairment test merely because GloBE carrying value differs from book value. Only a qualifying accounting impairment whose resulting book value falls below GloBE carrying value reduces that GloBE value, subject to the ordinary exclusions from income and tax. For the substance-based income exclusion, continue to use the average opening and closing consolidated accounting value, including purchase-accounting adjustments and eliminating intercompany sales. The GloBE income basis does not replace that tangible-asset carve-out basis.
How elections change the deferred-tax basis
A stock-compensation election replaces book expense with the tax deduction; capitalised stock compensation is removed from the GloBE asset basis and related deferred tax is recalculated. Pension-related book deferred tax is generally excluded, while deferred tax on pension surplus is retained. A realisation election uses the relevant opening-year or acquisition GloBE basis rather than subsequent excluded fair-value movements. Reorganisations preserve historical basis, adjusted for non-qualifying gain or loss where required. An Article 6.3.4 fair-value election reverses existing deferred taxes and uses the newly determined GloBE basis for later years.
Transition rules do not require reconstructing every old transaction
Arm’s-length adjustments and the ordinary asset-transfer provisions generally apply from the transition year, including the adjusted transition date after a transitional CbCR safe harbour. Historical-basis acquisition rules under Article 6.2.1(c), however, also apply before transition. Push-down purchase accounting may be retained for acquisitions before 1 December 2021 only if adequate historical records are unavailable; the concession is not available for later acquisitions. In the example, a purchased company’s book asset is 140 at transition but historical GloBE and tax bases are both 70, so book DTL 10.5 is excluded. If the tax basis was stepped up and is now 140, GloBE DTA 10.5 can arise even though no deferred tax appears in the accounts.
Paid tax on a pre-transition asset transfer can support a special DTA
Article 9.1.3 restricts non-inventory intragroup transfers after 30 November 2021 and before transition, generally preserving the seller’s historical basis. A special GloBE DTA may nevertheless reflect proven tax on the transfer, qualifying other tax effects and covered taxes allocable to the seller. The amount cannot exceed 15% of the excess of local tax basis over GloBE carrying value. It can arise independently of book recognition; its creation does not reduce the buyer’s adjusted covered taxes, and it runs off with depreciation, amortisation or impairment. Using the alternative permitted accounting carrying value does not also create this special DTA.
Cross-crediting current taxes requires a four-step allocation
Where a main or parent entity pools foreign-source income and cross-credits foreign taxes, allocate its residual current tax to the PEs, CFCs, hybrid entities, reverse hybrids and distributions that generated the income. Apply the mechanism separately to each permitted income basket and to taxes with different bases; identical-base taxes on the same entities may be aggregated. Blended CFC taxes use their separate mechanism. Step one identifies each net foreign-source inclusion. Step two determines the positive allocable tax pool. Step three measures each recipient’s positive residual-tax allocation key. Step four distributes the pool in proportion to those keys, including any foreign income earned directly by the parent.
Net foreign income, expenses and disregarded payments
Use the foreign inclusion under the parent’s tax regime, including a dividend gross-up and deductions linked directly to that inclusion. Expenses allocated only to limit foreign tax credits generally enter step one only where they are also recognised in the recipient’s GloBE income. A disregarded parent-to-hybrid payment counts where the recipient includes it in GloBE income; a reverse payment reduces the foreign inclusion only where it is a GloBE expense. Between two foreign recipients, the payment must be both income of the recipient and expense of the payer. Foreign-recipient income sourced in the parent’s country can still be treated as foreign income for this allocation.
Calculate the tax pool before assigning recipients
Allocable covered taxes equal relevant current tax expense less hypothetical domestic tax without foreign income or foreign attributes and less separately allocated blended CFC tax, floored at zero. The hypothetical domestic tax is non-negative, and the pool cannot exceed current tax. Exclude uncertain tax positions and amounts not expected to be paid within three years; foreign-source withholding taxes are separately allocated. QRTCs, marketable transferable credits and elected qualified flow-through benefits receive their required GloBE treatment. For domestic and foreign income of 1,000 each, a 20% rate and QRTC 100, the source adjusts actual tax 300 to 400 and domestic income to 1,100, giving domestic hypothetical tax 220 and allocable tax 180.
Allocation keys, progressive rates and income baskets
Each key is the positive excess of the recipient’s taxable foreign inclusion multiplied by the applicable parent tax rate over creditable foreign taxes on that income. Eligible QDMTT, direct withholding and indirect credits can enter the key. Carry-forward credits affect the actual tax pool but do not replace current-year source taxes in the key. For progressive bands, allocate each band proportionately across taxable sources; if one rate applies to all income above a threshold, use the actual rate. Basket taxes and tax attributes must be allocated reasonably, consistently under IIR, UTPR and QDMTT, and without a negative allocation.
Excluded income and passive-income limits still apply
Include non-group recipients in the allocation calculation so that taxes on excluded dividends can be removed from the parent’s covered taxes. Taxes on a short-term portfolio distribution included in parent GloBE income are retained. A recipient must also exclude taxes attributable to its own excluded GloBE income. The passive-income ceiling in Article 4.3.3 applies after allocation to CFCs, hybrids and reverse hybrids; excess tax stays with the owner rather than being redistributed. Where domestic law recognises a CFC and its PE as one entity, split income using the regime’s separate taxable-unit information and match foreign taxes to the income actually taxed.
Examples with pooled and exempt dividends
The pooled-dividend example produces parent current tax 150.5, domestic tax 80 and an allocable pool of 70.5. Allocation keys total 80.5, distributing 13.14 and 21.89 to two PEs, 17.95 to the group subsidiary and 17.52 to a non-group dividend payer. The last amount is excluded from group covered taxes. If foreign dividends are exempt, parent tax becomes 110 and the pool 30, split 11.25 and 18.75 between the PEs. In the separate-basket example, branch credits fully absorb branch tax, while the passive basket has residual tax 41, split 20.5 each between a group and a non-group dividend payer.
CFC baskets and expense-allocation examples
A 30% parent-tax example divides allocable tax 85 into 5 for the branch basket, 50 for the low-tax CFC basket and 30 for the other CFC basket. The latter is split 15, 10 and 5, with the non-group recipient’s 5 excluded. Another example gives no additional PE tax after expenses allocated to foreign income and credit limits are considered. With two PEs and expenses 200 allocated only for credit limitation, actual parent tax 105 less hypothetical domestic tax 100 leaves a pool of 5, split 1.67 and 3.33. Page 81 calls 20 the allowable credit, but 20 is the credit ceiling: actual foreign tax is 15 and the source’s tax calculation correctly uses 120 minus 15.
PE losses follow the domestic foreign-credit regime
Where the domestic credit regime first nets one PE’s loss against another PE’s income, only any excess loss moves to the main entity under Article 3.4.5. With PE profit 100 and two PE losses 150 each, the net main-entity deduction 200 is attributed as 100 from each loss PE. In the two-year example of loss 40 offsetting another PE’s profit 40, no loss moves to the main entity in year one; foreign credit 4 carries forward. In year two, residual tax 8 is split 5.33 and 2.67 using current-source keys 8 and 4, producing PE ETRs about 13.3% and 16.7%.
Separate PE credit limits change loss recovery
If credit limits are calculated separately for each PE, the first-year loss 40 moves to the main entity: its GloBE income 60 and covered tax 12 give 20%, and the profitable PE has own tax 4 plus allocated tax 4. The next year’s recovering PE income 40 moves back to the main entity until the prior allocation is recaptured; main income 140 and tax 28 again give 20%. A separate carry-forward-loss example creates a main-entity GloBE loss DTA 6 in year one. In year two, main income 140 and covered tax 26, including that DTA reversal, give about 18.5%; the other PE has income 40 and tax 8, giving 20%.
The combined current-and-deferred-tax illustration
The detailed two-year example includes accelerated parent depreciation for PE equipment, a PE bad-debt deduction delayed in the parent country, passive CFC income, group and non-group dividends, and direct royalties. Year one has allocable current tax 80.75. After the CFC passive ceiling, 71.66 moves from the parent; recast equipment DTL 30 moves to PE1 and DTA benefit 15 to PE2. Final jurisdiction ETRs are 19.82%, 16.12%, 21.45% and 17.58%. Year two reverses those timing differences: current-tax pool 120.75 allocates 113.07 after the ceiling, while deferred movements are minus 30 and plus 15. The corresponding ETRs become 19.54%, 15.22%, 40% and 17%. Non-group taxes are excluded and royalty withholding tax remains with the parent.
Substitute loss carry-forward DTAs are extended
The substitute loss carry-forward mechanism is extended beyond CFC income to foreign PEs, hybrids and reverse hybrids. It also covers a qualifying domestic loss carry-forward used against foreign income in a later year. The problem is that compulsory use of domestic losses can reduce the normal loss DTA while leaving foreign credits to shelter later domestic GloBE income. Equivalent loss-recapture mechanisms can qualify, with or without an actual credit carry-forward, but cannot produce more relief than an ordinary loss DTA recast at 15%. The substitute asset reverses only to the extent recapture increases credits used against GloBE income. This edition does not resolve every case where one foreign operation’s loss offsets another’s profit.
Allocate deferred CFC taxes through five steps
First separate each CFC’s deferred tax into excluded income, non-passive GloBE income and passive GloBE income. Second identify gross pre-credit deferred tax and relevant creditable foreign taxes, even if the accounts show only a net amount. Relevant credits include eligible amounts across years and reasonable available cross-credits, without duplicate use. Third exclude deferred tax on non-GloBE income from both entities. Fourth allocate non-passive deferred tax, recasting the gross amount to at most 15% before deducting unrecast creditable taxes, capped at that recast amount. Fifth apply the collective passive-income ceiling. Blended CFC deferred-tax accruals, reversals and transition attributes are excluded entirely; only the separate current-tax allocation remains.
Recast gross tax rather than the net balance
For GloBE income 100 recognised before tax, parent gross CFC tax 25 and foreign tax credit 5 give a book net DTL of 20. Recast gross 25 to 15, then subtract credit 5: the allocable DTL is 10, not 12 from proportionately recasting net 20. Together with the CFC’s own DTL 5, deferred tax is 15. When tax is paid, current CFC tax 20 less allocated DTL reversal 10 leaves 10 additional covered tax. If tax is paid before the income is recognised, the gross DTA enters negatively and the used credit also enters negatively; a minus-15 asset less minus-5 credit gives a minus-10 allocated benefit.
Passive deferred tax follows a strict ordering rule
The passive-income ceiling applies collectively to current and deferred CFC and transparency taxes. Allocate reversals previously assigned to the recipient first, current tax second, and new deferred tax third. Amounts blocked by the ceiling remain with the parent, and reversals stay with the entity that originally recognised them. In the example, year-one CFC income 200 and own tax 14 permit only 8 of net deferred tax 10 to move; 2 remains with the parent. Year two allocates prior reversal minus 8, current tax 20 and only 5.34 of new deferred tax 20, using the source’s rounded ceiling 17.34. Recipient covered tax becomes 36.34 on income 300, or 12.11%; parent covered tax is 12.66.
A five-year election can exclude outbound deferred tax
A group can elect by parent or main-entity jurisdiction to exclude all outbound deferred-tax allocations under Article 4.3.2(a), (c), (d) and (e). The exclusion applies to national and subnational taxes, every relevant subsidiary or PE and the parent itself, including passive amounts that would otherwise stay there. It cannot be restricted to selected recipients or selected levels of tax. Only current taxes are then allocated. Without the election, the same deferred-tax principles apply to hybrids, reverse hybrids and PEs, but PEs are not subject to the passive-income ceiling.
The three-year machine example
A PE buys a machine for 900, depreciates it over three years in the accounts and two years at a 10% local tax rate; its parent country allows immediate deduction at 20%. The PE’s own DTL movements are 15, 15 and minus 30. The parent’s gross DTL is recast to 90 at the end of year one, with unrecast relevant foreign credit 15, giving allocated deferred expense 75. Years two and three allocate minus 60 and minus 15. Combined PE deferred-tax expense is therefore 90, minus 45 and minus 45, with none of those parent-book deferred balances remaining in parent covered taxes.
Find the reference entity before allocating flow-through profits
After any PE profit allocation, classify a flow-through entity for each ownership interest by reference to the closest constituent-entity owner that is not itself flow-through, or a flow-through UPE if no such owner exists. That reference jurisdiction must treat the tested entity and every intervening entity as transparent. A direct transparent intermediary is not automatically the reference, even if it has an IIR location. Positive transparency rules are necessary: having no corporate income tax does not itself establish transparency. Transparent profits move to the reference owner; reverse-hybrid profits generally remain stateless.
The ownership examples prevent incorrect profit blending
Where A owns transparent B and B owns transparent C, but A’s law treats C as opaque, B’s profit 100 moves to A and C’s profit 200 stays in C. Do not allocate 300 to A simply because B’s law regards C as transparent. If A is itself opaque locally but an upper owner treats A, B and C as transparent, A remains the closest reference for C, and upper-owner taxes on C follow the income to A. A no-income-tax intermediary that does not qualify under Article 10.2.4 can also be the reference, causing C to be reverse hybrid despite a more remote owner treating the chain as transparent.
Minority ownership does not disappear under a flow-through UPE
Article 3.5.3 removes profit attributable to non-group owners holding directly or through qualifying transparent structures. Direct minority ownership does not require investigating the minority owner’s tax treatment. Indirect minority ownership through a group flow-through entity between the tested entity and the reference also qualifies. A flow-through UPE exception protects only interests held through the UPE; it does not suppress the separate minority reduction. Thus, where the UPE owns 80% of a flow-through subsidiary with profit 100, reduce the unrelated 20 before allocating 80 to the UPE and applying Article 7.1.
Taxes follow transparent profits, including previously pushed CFC tax
Article 4.3.2(b) moves both a transparent entity’s own taxes and taxes previously allocated to it to the owner receiving its income. In the example, upper-parent CFC tax 15 first moves to C with profit 100, then follows that profit to reference B. With multiple references, only ownership paths through which the taxpaying parent holds the tested entity receive that parent’s tax. In the 30% transparent B, 30% opaque D and 40% external-minority example, CFC tax 9 divides 4.5 to B and 4.5 remaining in C as reverse-hybrid tax, with none to the minority. Calculate blended CFC allocation keys before reallocating the transparent income, then move the resulting tax with the income.
Hybrid and reverse-hybrid taxes can come from indirect owners
The hybrid definition covers direct and indirect constituent-entity owners. In the active-income example, C has profit 100 and own tax 10; immediate owner B pays residual tax 5 and indirect owner A residual tax 3, all allocated to C, giving 18% ETR. An entity in a no-CIT jurisdiction can be hybrid where an owner treats it as transparent and it does not qualify as transparent under Article 10.2.4, for example because it has a local place of business. Where the nearest reference regards C as opaque but a higher owner taxes C as transparent, C remains reverse hybrid, yet the higher owner’s covered tax can be allocated to C subject to the passive ceiling.
QDMTT excludes foreign pushdown but retains local primary taxes
The QDMTT ETR excludes foreign CFC, branch-owner, hybrid-owner and reverse-hybrid-owner tax pushdown, and foreign net-basis distribution taxes. This does not exclude the QDMTT jurisdiction’s own primary taxes on income of its local hybrid or reverse-hybrid entity, including relevant tax paid through an owner. Local withholding taxes on distributions are also allocated to the distributing entity. The distinction is the jurisdiction exercising its primary taxing rights, not a blanket rule that all owner-level tax is ignored.
Why securitisation vehicles need special treatment
Securitisation isolates an asset pool from the originator’s insolvency risk and finances it with securities issued to external investors. Synthetic structures use derivatives or guarantees and secure assets instead of transferring the pool. Originator junior debt can provide overcollateralisation, and surplus cash is regularly extracted so the vehicle earns only negligible economic profit. Servicing or control arrangements can nevertheless make an orphan-owned vehicle a consolidated constituent entity. Fair-value hedges without matching hedge accounting or deferred tax can create significant annual accounting profits, while imposing another group tax liability on the vehicle undermines bankruptcy remoteness.
The securitisation definition has cumulative conditions
A securitisation entity must carry on only activities facilitating one or more qualifying arrangements, secure its assets for its or another vehicle’s creditors, and pay asset cash to creditors at least annually. Permitted retention is limited to documented negligible profit for eventual equity distribution and cash reasonably needed for future payments or creditworthiness. Profit must be negligible relative to annual revenue. The arrangement must pool and repackage assets or exposures for non-group investors, legally segregate the asset pool, and use binding creditor documentation to limit insolvency exposure. An ordinary SPV does not qualify simply because it holds debt.
QDMTT relief is not a general GloBE exemption
A QDMTT may exclude a securitisation entity from scope or protect it from liability, including charging another local group entity. Its income can remain within GloBE. These options do not defeat the consistency standard, but exclusion or absolute protection from collection can trigger the jurisdictional QDMTT safe-harbour switch-off rule. The switch-off does not apply where the entity remains in scope and another constituent entity pays, or the vehicle itself pays as a fallback if collection elsewhere fails. A UTPR jurisdiction may also exclude vehicle liability; if the vehicle is the only constituent entity and tax remains uncollected, the jurisdiction loses allocations in subsequent years under Article 2.6.3. The edition proposes further work on fair-value volatility and possible realisation or deconsolidation relief, rather than granting those measures automatically.
Official source
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