Second edition, June 2026
PartA of ModuleThree of IRAS’s MTT and DTT training explains adjusted covered taxes. This article follows the second edition dated June 2026, including carrying-value divergence, special foreign-tax assets and deferred-tax tracking. The numerator of the GloBE effective tax rate starts with qualifying current and deferred tax expense in financial accounting net income or loss (FANIL), including the required flow-through allocations, and then applies statutory adjustments. It is not simply the tax payable on a domestic return.
What covered taxes include
Covered taxes include taxes on a CE’s income or profits, its share of another entity’s income, relevant transparent-entity or CFC income and distributions. They also include qualifying distribution-system taxes, taxes substituting for a generally applicable profits tax such as the relevant withholding taxes, and taxes by reference to company capital or retained earnings. An eligible distribution system generally taxes distribution or specified non-business expenditure, has a rate at least 15% and was in force by 1 July 2021.
Taxes outside the numerator
Consumption or VAT taxes, excise and input taxes, digital-services taxes, transaction stamp or ad valorem taxes, payroll taxes and property-ownership taxes are not covered taxes. MTT or qualified IIR, DTT or QDMTT and qualified UTPR are also excluded, as are disqualified refundable imputation tax and a life insurer’s specified policyholder tax. Calling a charge a tax, or including it in the accounting tax line, does not make it eligible.
Current tax exclusions
Regulation 38 excludes current tax on excluded GloBE income, uncertain tax positions, the relevant QRTC or MTTC reductions, taxes not expected to be paid within three years after year-end, and taxes on local tangible-asset gains covered by the five-year election. It also addresses non-qualifying credits or refunds not previously accounted for, other non-QRTC/non-MTTC credit refunds and prior-year current tax subject to the post-filing rules. Review each source rather than reducing the numerator by an unexplained total adjustment.
Matching tax with excluded income
Tax is removed to the extent that the associated income is excluded. A minority partnership interest accounted for under the equity method can have excluded equity income even though domestic law taxes the holder’s share; remove that associated tax. Likewise, corporate or tonnage tax on qualifying excluded international-shipping income is removed. A partially excluded item requires proportional treatment rather than removing all tax on the entire receipt.
Uncertainty, credit reductions and the three-year expectation
Uncertain-position tax movements do not count until the tax is actually paid. QRTCs and MTTCs are treated as income under the corresponding GloBE rule, so a reduction recorded in current tax expense must be corrected. A tax not expected to be paid within the specified three-year window is excluded under its own rule; uncertain taxes and post-filing adjustments instead follow their specific regulations. The local-tangible-asset election concerns immovable property in the disposing entity’s jurisdiction.
Amounts added under Regulation 39
Include covered tax reflected in FANIL but outside the qualifying current-tax line, using the appropriate sign. Include payment of a previously excluded uncertain tax and subtract its refund. Include covered taxes recorded in equity or OCI only where the associated amount enters GloBE income and is taxable under the entity’s jurisdictional law. This restores qualifying taxes recorded elsewhere without admitting taxes belonging to excluded income.
GloBE carrying values can differ from accounting
Regulation 44E requires deferred tax to follow the GloBE carrying value where it differs from accounting carrying value. Differences can arise under arm’s-length adjustments, realisation elections, stock-compensation deductions, tax fair-value elections and transfers. Update the GloBE value under the accounting standard used for FANIL unless a rule expressly provides otherwise; calculate the DTA or DTL against tax basis using that value. Generally impairment does not reduce GloBE value unless the impaired accounting value falls below it.
The transferred-asset example
A transfers an asset with book value 50 and fair value 150 to B at 150. B’s tax basis is 150 and its rate 20%, but accounting retains 50, creating an accounting DTA 20. Under the specified transfer rule A recognises GloBE gain 100 and B’s GloBE carrying value becomes 150. Because B’s GloBE value equals its tax basis, no GloBE DTA exists. The accounting DTA cannot be carried into the tax numerator without this recomputation.
Deferred-tax adjustments and transition
Regulation 45 removes tax on excluded items, disallowed or elected unclaimed accruals, valuation or recognition movements, tax-rate remeasurements and ordinary tax-credit creation or use. It provides adjustments for later payment, loss assets not recognised, qualifying foreign credits, recaptured liabilities paid, elected local-property gains and special foreign-tax assets. No item is counted twice. The slides state that paragraphs 45(1)(a)–(e) do not apply to DTAs or DTLs arising before the transition year; transition treatment therefore needs separate identification.
Excluded items and disallowed accruals
A DTA or DTL related to excluded income cannot later increase covered taxes when that outside-base income is taxed. Disallowed accruals concern the stated uncertain-tax or intragroup-distribution movements; unclaimed accruals concern a Regulation 46A election not to include the DTL increase. They are excluded in accordance with the timing rules. Where a previously excluded unclaimed accrual is paid, the necessary positive adjustment prevents the DTL reversal from cancelling the current tax payment.
Loss recognition over three years
In the 15% example, a loss 100 creates a GloBE DTA 15 in year 1 even if forecasts cause accounting to record zero. Year 2’s improved forecast and accounting recognition of 15 are disregarded for GloBE, rather than creating a second loss benefit. In year 3, income 100 uses the loss and the DTA reversal increases adjusted covered taxes 15. The alternative example where accounting never initially recognised the DTA reaches the same outcome through the deemed-loss-asset rule and later recognition adjustment.
Rate changes and ordinary credit carryforwards
A deferred-tax remeasurement caused only by a rate change is excluded from the current-year qualifying expense: it is not additional tax on that year’s GloBE income. The explanatory example raises the rate from 10% to 15%. Ordinary foreign-credit carryforward DTA generation does not reduce covered taxes, and its later use does not increase them. The general credit rule must be distinguished from the specifically qualifying foreign-credit and special-asset mechanisms.
Qualifying foreign-tax credits in this edition
The second edition defines relevant foreign income to include specified CFC, foreign hybrid, foreign reverse-hybrid and foreign PE income. The qualifying mechanism requires domestic losses to offset that foreign income before applying credits and permits subsequent credit against domestic-profit tax to the corresponding extent. Include only the part used against tax on income included in GloBE. The amount is the lower of the qualifying credit and the qualifying domestic loss multiplied by the jurisdiction’s tax rate.
Special foreign-tax assets
The special-asset mechanism addresses a jurisdiction that first offsets domestic losses against relevant foreign income, limits annual foreign-credit use and later recharacterises domestic income as foreign income to allow more use. The asset equals the qualifying domestic loss times the lower of 15% and the entity’s applicable rate. Subtract the asset generated and add the asset used under the stated rules, only to the extent of offset against tax on GloBE-included income. It is not a general addition of all unused foreign credits.
Recasting a low-rate loss DTA
A DTA attributable to a loss that enters GloBE income can be recast upward to 15% when recorded below 15%. In the 5% example a loss 100 creates accounting DTA 5, recast to 15, so subtract an extra 10 from qualifying deferred tax in year 1. When income 100 uses that loss in year 2, accounting reverses 5 and GloBE requires an additional 10 positive adjustment. This preserves the 15-value benefit and reversal consistently.
Recasting high-rate deferred tax
Covered deferred tax above 15% is recast downward to 15%. In the 17% example an asset 200 is depreciated 100 annually over two years but receives tax allowance 200 in year 1. The temporary difference creates accounting DTL 17, recast to 15, reducing qualifying expense by 2. In year 2 the 17 accounting reversal is adjusted by a positive 2 so that only the 15 GloBE liability reverses.
Five-year recapture and earlier-year recalculation
A non-exempt DTL counted initially is recaptured if not reversed by the last day of the fifth financial year after that initial year. The slides’ year 1 liability 100 is therefore tested at the end of year 6. Remove the originally counted amount from year 1 and recalculate the jurisdiction’s ETR and entity top-up amounts for that year. Later payment of a recaptured liability is taken into account under the stated adjustment. This is more than reducing the current-year tax line.
Liabilities exempt from recapture
The specified exceptions cover tangible-asset cost recovery, certain government licences for immovable property or natural resources with substantial tangible investment, R&D, decommissioning and remediation, unrealised fair-value net gains, foreign-exchange net gains, insurance reserves and deferred acquisition costs, qualifying same-jurisdiction tangible-property reinvestment gains, and accounting-change additions for those categories. Identify the underlying source of the liability rather than exempting every long-lived asset or foreign-income liability.
Three tracking approaches
An institution may track each single asset or liability separately, group assets or liabilities in a single general-ledger account, or aggregate multiple GL accounts within the same balance-sheet or sub-balance-sheet account. The diagrams contrast individual machines, patents, laptops and furniture with their GL and balance-sheet categories. Excluded-income and recapture-exempt liabilities follow their exclusions. The overview permits the stated simplification for short-term DTLs fully reversing within five years; longer-lived balances require suitable reversal and recapture tracking.
Aggregate restrictions and FIFO or LIFO
The overview identifies restrictions on aggregate-category tracking involving non-amortisable intangibles including goodwill, the listed long-life amortisable intangibles and related-party payables or receivables, standalone DTA-only accounts and swinging accounts. FIFO assumes the oldest liability reverses first and is permitted for a single GL account, a category with similar reversal trends or a demonstrated appropriate recapture outcome. Otherwise, or by choice, apply LIFO, which assumes the newest liability reverses first. A convenient aggregation cannot conceal an old un-reversed liability.
Annual and five-year unclaimed-accrual elections
Regulation 46A permits an annual election where an increase is not expected to reverse within five years. A five-year election is available for GL-account or aggregate-category tracking regardless of expected reversal. Both the elected accrual and its reversal are excluded under the election rules. Apply the election to the entire individually tracked DTL, GL account or category, not a selected portion. A year 1 five-year election requires follow-up through at least year 5; if no follow-up is made in year 6, no new election can be made for years 6–10.
Official source
This article independently explains the substantive contents of the official PDF, including the relevant conditions, procedures and annexes. The linked document remains the authoritative source for its original wording, and later changes should be checked separately.
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