Scope of Module 3B and the accounting starting point
IRAS’s June 2026 second-edition Module 3B explains other adjustments to covered taxes: tax credits, corrections after filing, rate changes, unpaid tax, GloBE losses and distribution-tax elections. It is the continuation of the adjusted-covered-tax module, not a standalone replacement for the earlier current-tax, deferred-tax, recapture and allocation rules.
FANIL means financial accounting net income or loss. A credit recorded as accounting income can need to be removed, while a credit recorded as a tax reduction can need to be added back and recognised as income instead. The correct result depends on the statutory credit classification, the entity’s role as originator or purchaser, its accounting treatment and timing. Merely describing an incentive as a “tax credit” does not determine its GloBE treatment.
Qualified refundable tax credits: four years and cash equivalents
A qualified refundable tax credit (QRTC) must be payable in cash or cash equivalents within four years after the entity meets the payment conditions under the granting jurisdiction’s law. Credits relating to qualified imputation tax or disqualified refundable imputation tax are not included in this category.
A QRTC is GloBE income rather than a reduction in covered tax. If it is already recorded as income, no reclassification is needed. If the accounts show a negative tax expense, add the credit to FANIL and add back the reduction in qualifying current-tax expense. For credits linked to acquiring or constructing an asset, an originator’s policy of reducing asset carrying value or recording deferred income is followed where the specified conditions hold. Other QRTCs enter income at face value when the entitlement accrues.
Marketable transferable credits: originator tests
For an originator, transferability requires a legal ability to transfer the credit to an unrelated party in the grant year or within fifteen months after that financial year. Marketability is a separate test. A transfer to an unrelated party during the relevant period must fetch at least 80% of the credit’s net present value.
If the originator transfers to a related party or does not transfer during that period, credits of the same type must trade between unrelated parties, typically for at least 80% of the net present value. The 80% comparison is with discounted value, not simply face value. A credit’s treatment as marketable for its originator does not automatically decide its treatment for every purchaser.
Purchaser tests and income treatment for MTTCs
A purchaser must be legally able to retransfer the credit to an unrelated party in its acquisition financial year, without restrictions more stringent than those applying to the originator’s transfer. It must acquire from an unrelated party for at least 80% of net present value. Both transferability and marketability are necessary.
A marketable transferable tax credit (MTTC) is treated as GloBE income or loss rather than as a tax reduction, and any reduction in qualifying current-tax expense must be removed. Timing differs between originator and buyer; recognition of income does not necessarily mean putting the entire face value into the buyer’s acquisition-year income.
MTTC originators: early transfer, late transfer and expiry
If an originator transfers in the grant year or within fifteen months after that year, the actual consideration is income of the grant year. If not transferred within that window, recognise credit value as it accrues under the relevant accounting policy; asset-acquisition or construction credits may follow the qualifying asset or deferred-income policy.
A later transfer below the remaining credit value produces a loss for the transfer year equal to that shortfall. On expiry, unused credit value is a loss, except that the qualifying asset-policy case increases asset carrying value instead. These rules prevent recording full accrued value and a subsequent sale receipt as two independent incomes without reconciling the remaining credit balance.
MTTC buyers: utilisation, disposal and expiry formulas
When a buyer uses part of an MTTC, recognise income equal to credits used ÷ full credit value × (full credit value − purchase price). This spreads the acquisition discount over utilisation. On resale, income or loss is resale consideration plus cumulative credits used, less purchase price and cumulative income previously recognised on utilisation.
On expiry, the loss is purchase price plus that previously recognised utilisation income, less cumulative credits used. The same year and all earlier years are included in the cumulative measures. The formulas therefore need a credit-by-credit history of price, uses, income and disposal proceeds; applying the discount to the unused balance alone can give the wrong result.
Non-marketable credits reduce covered taxes
A non-marketable transferable tax credit is not a QRTC and fails the relevant MTTC test; for an originator it must still be transferable to another person or entity. The originator’s use reduces qualifying current-tax expense. A transfer is treated as utilisation and the sale consideration is a negative tax expense.
For a buyer’s utilisation, the tax reduction is credits used × (full value − purchase price) ÷ full value. On resale, calculate proceeds plus cumulative uses minus purchase price and cumulative negative tax expense previously recognised. A positive result reduces tax expense; a negative result is a GloBE loss under the specific rule. Credit income otherwise included in FANIL is removed, subject to that resale-loss provision. These results differ from the MTTC income classification even if the commercial cash flows look similar.
Qualified ownership interests for flow-through benefits
A qualified ownership interest is a constituent entity’s investment in a flow-through entity that is not a reverse hybrid for the income attributable to that investor. The investment must be equity for tax in the investor’s jurisdiction and under an authorised accounting standard where the investee operates. The investee must not be a constituent entity of the investor’s MNE group.
At investment, returns must reasonably be expected to be negative without the flow-through tax benefits. The investor needs a genuine economic interest without protection against investment loss, and the benefits must be available whether or not the group is subject to MTT or qualified IIR. Flow-through benefits include non-QRTC credits and the value of tax-deductible losses made available to the owner. All these qualifications are needed, rather than simply holding an interest in a transparent partnership.
Flow-through tax benefits and covered-tax reconciliation
Where the regulation 34(1) election brings otherwise excluded equity gains and losses into FANIL, qualified flow-through benefits add positive tax expense to the extent previously excluded. Other flow-through benefits subtract tax expense to the extent not already taken into account. QRTCs and other proceeds or distributions from the investment are negative tax expense within the specified cumulative cap relating to benefits added under the first limb.
The tax-credit element is removed from FANIL to the extent already recorded as income. Qualification is determined against investment recovery, rather than an unlimited add-back of every credit or tax saving; proceeds, distributions and benefits must be reconciled together.
Proportional amortisation election and the recovery limits
The filing entity may elect in the GIR to adopt proportional amortisation for the interest. The election is irrevocable and must be made in the later of the acquisition year and the investor’s first in-scope year. If proportional amortisation is already used for accounting, or is elected for this rule, compare annual proceeds, distributions and flow-through benefits with that year’s amortisation.
If their total does not exceed amortisation, all that year’s flow-through benefits qualify. If it exceeds amortisation, reduce qualified benefits by the excess, with a floor of zero. Without that method, benefits qualify only within the investment-recovery limit shown in the module: total proceeds, distributions and benefits received in the year and the previous financial year must not exceed the investment. This wording follows the specific slide rather than extending its stated time period without checking the regulation.
Tax increases and decreases after filing
An increase in covered taxes relating to an earlier financial year is normally recognised in the year of adjustment. A decrease normally requires recalculation of the original year and all affected subsequent years through the adjustment year. For an immaterial decrease of less than EUR 1 million, the filing entity may elect in the GIR to recognise it in the adjustment year instead.
The refund example starts with year-one income of 100 and covered tax of 15. A year-four reassessment refunds 15, leaving year-one covered taxes and ETR at zero. Year four has income of 200 and tax of 30, retaining its 15% ETR because the refund is allocated back to year one. Treating the refund as a year-four tax reduction would incorrectly move the effect between years.
Loss carry-back creates a deemed deferred-tax asset
When a later loss offsets earlier taxable income, and no immaterial-decrease election is made, the loss creates a deemed DTA in the loss year and that DTA is deemed used in the earlier year. The relevant deferred-tax rules apply to both creation and use.
The 15% example has year-one GloBE income of 100 and year-two loss of 100 carried back. Year-one current tax falls from 15 to zero, but reversal of the deemed DTA adds deferred-tax expense of 15, maintaining adjusted covered taxes of 15 and ETR of 15%. Year two has current tax zero and deferred-tax expense of negative 15 from the DTA’s creation, giving adjusted covered taxes of negative 15; ETR is not applicable to its loss. The return of cash tax must therefore not simply erase the first-year GloBE tax without the deemed-DTA adjustment.
Rate decreases below 15% and increases toward the cap
If a rate reduction below 15% creates negative deferred-tax expense, it decreases the related qualifying deferred-tax expense of the earlier year; the post-filing decrease and immaterial-election rules apply. In the example, income of 100 produces a DTL of 15 in year one. A rate cut to 10% in year two reduces the DTL by 5; only 10 will ultimately be paid. The reduction of 5 therefore adjusts year-one covered tax, rather than leaving its original 15 unchanged.
A rate increase giving positive deferred-tax expense increases the corresponding earlier-year amount only when the extra DTL reverses on payment. The increase is capped at the difference between the deferred-tax expense measured at 15% and the original expense. This is not unrestricted recognition of a higher domestic-rate deferred tax in the remeasurement year.
Current tax still unpaid three years later
Two conditions trigger the unpaid-tax rule: qualifying current-tax expense remains unpaid three years after the last day of the year when it was recognised, and the unpaid qualifying amount exceeds EUR 1 million. The amount is then deducted from that entity’s covered taxes in the original recognition year, and the jurisdiction’s ETR and constituent-entity top-up amounts are recalculated.
The test is tied to the original financial-year end, not simply a three-year period beginning when a later demand is issued. Tracking payment status and the original covered-tax recognition is needed to identify a retroactive adjustment.
GloBE loss election replaces ordinary deferred-tax treatment
A jurisdiction-wide GloBE loss election is made in the GIR for the transition year of a constituent entity there. It applies to all group constituents in that jurisdiction and cannot be made for a jurisdiction with an eligible distribution-tax system. While effective, those constituents have no qualifying deferred-tax expense under the ordinary system; a net jurisdictional GloBE loss gives a special loss DTA at 15%.
In a later profitable year, qualifying current-tax expense is increased by the lower of the unused special loss DTA and 15% of net GloBE income. An unused balance remains for subsequent years. A loss of 100 therefore creates 15; later income of 80 uses 12, leaving 3. Where several constituents have positive income, utilisation is allocated proportionately among them. Revocation wipes out the remaining unused balance at the start of the first year without the election.
A flow-through UPE has a separate loss-election treatment
Where the UPE is a flow-through entity in the elected jurisdiction, the loss-election provisions operate as though it were the only constituent of a separate group located there, and not a constituent of the original group in that jurisdiction. This prevents its special loss DTA being casually pooled with all other local constituents under the normal jurisdiction-wide calculation.
The special treatment is specifically attached to a flow-through UPE. It should not be extended automatically to every flow-through subsidiary or to an ordinary corporate UPE.
Deemed distribution tax election: not for Singapore DTT
A group with constituents in a jurisdiction having an eligible distribution-tax system may elect in the GIR for the year to apply the deemed-distribution-tax rules. Regulation 48 is expressly not applied for DTT purposes. The deemed amount is the lower of the tax needed to bring the jurisdictional ETR to 15% and the tax that would be payable if all current-year profits were distributed.
The amount increases combined covered taxes, but an equal recapture balance must be tracked. It is a timing mechanism pending actual distribution tax or other permitted balance reductions, not a permanent fictional tax credit without a payment or recapture constraint.
Recapture reductions, ordering and the timing wording in the slides
A recapture balance is reduced first by actual or deemed distribution taxes paid during the year, then by 15% of a jurisdictional net GloBE loss, and then by unused corresponding loss amounts from earlier years. Earlier recapture balances are reduced before later ones, and tax used to reduce a balance is excluded from that year’s covered taxes to avoid double counting.
If a balance remains at the end of the fourth financial year after its recognition year, the relevant earlier covered taxes, ETR and top-up amounts are recalculated. The timeline illustrates recognition in FY1 and a remaining balance at the end of FY5. There is a wording issue in the source: slide 131 (physical page 56) says an equal recapture amount is recognised in the “next FY”, whereas slide 133’s timeline starts recognition in FY1. The article preserves this discrepancy rather than presenting both as an unambiguous filing timetable; the operative regulation must determine the year for an actual return.
Departure and substantial asset transfers can accelerate recapture
A recapture event also arises when a constituent leaves the group, transfers all or substantially all assets to an outside entity or individual, or transfers them to a group constituent in another jurisdiction, where earlier recapture balances exist. For each recapture year, deduct the balance from that year’s combined covered taxes and recalculate the ETR and top-up amounts, then apply the departing entity’s relevant ratio.
The slide bounds that ratio between zero and one and relates it to the departing entity’s GloBE income or loss and the group constituents’ aggregate. Its printed numerator contains an extra “Ratio of” phrase, so the slide should not be used as a self-sufficient legal formula without the regulation. Departure monitoring is needed before the ordinary four-year recapture horizon ends.
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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