Where substance-based income exclusion fits
Part B of Module Four, Second Edition dated June 2026, contains 35 physical pages corresponding to the substance-based income exclusion material in the wider effective-tax-rate and top-up-tax module. Its outline lists the wider module’s other topics, but this part develops the payroll and tangible-asset carve-outs rather than supplying the complete allocation or de minimis rules.
The substance-based income exclusion, or SBIE, reduces jurisdictional GloBE income to determine excess profits. It recognises substantive activity through payroll costs and tangible assets, which are generally less mobile than other sources of profit. It changes the excess-profit base used in the top-up computation; it is not a deduction from covered taxes or an ordinary corporate income tax deduction. Constituent entities are abbreviated CEs, fiscal years FYs and the ultimate parent entity UPE.
Jurisdictional calculation and the annual choice
For the CEs of an MNE group in a jurisdiction, SBIE equals the sum of their payroll carve-outs plus the sum of their tangible-asset carve-outs. Jurisdictional excess profits are GloBE income or loss for the CEs in that jurisdiction less that jurisdiction’s SBIE. The slides place this in step five of the effective-rate and top-up computation.
The group may elect not to claim SBIE for its CEs in a jurisdiction for a particular fiscal year. If it claims SBIE, it can take into account all or a portion of eligible payroll costs and eligible tangible assets. The calculation therefore requires both the eligibility and allocation rules and the group’s chosen claim, not simply a percentage of all local expenditure and assets.
The complete transitional percentages
The GloBE transition starts in 2023 with payroll and tangible-asset percentages of 10% and 8%, gradually falling to 5% each from 2033. The Singapore table is keyed to the year in which the fiscal year begins. Its payroll/asset percentages are: 2025, 9.6%/7.6%; 2026, 9.4%/7.4%; 2027, 9.2%/7.2%; 2028, 9.0%/7.0%; 2029, 8.2%/6.6%; 2030, 7.4%/6.2%; 2031, 6.6%/5.8%; 2032, 5.8%/5.4%; and 2033 onwards, 5.0%/5.0%.
Apply the payroll percentage to eligible payroll costs and the asset percentage to the eligible carrying value. A fiscal year beginning in 2026 uses the 2026 row even if it ends in 2027; the table is not based simply on the return-filing date. The rates are set out by section 18 and the Second Schedule of the MMT Act.
Eligible employees and payroll costs
An eligible employee performs activities for the group in the CE’s jurisdiction and is either the CE’s employee, including a part-time employee, or an independent contractor participating in the ordinary operating activities of the CE or group under the group’s direction and control. The label independent contractor alone does not establish eligibility.
Payroll costs are payments recorded in the financial statements used to determine the CE’s financial accounting net income or loss, or FANIL. They include employee compensation, payroll and employment taxes, and employer social-security contributions or similar payments for eligible employees. Exclude costs already taken into account in the tangible-asset carve-out, so capitalised payroll is not counted twice. Also exclude the relevant international and ancillary international shipping costs. A PE’s main entity excludes the PE’s payroll costs from its own claim.
Payroll allocated through flow-through entities
For a flow-through entity, or FTE, that is not the UPE, where a proportion of FANIL is allocated to its PE or to a qualifying reference entity, allocate the same proportion of eligible payroll costs only if the relevant employees are in the same jurisdiction as that PE or reference entity. For a reference-entity allocation, its jurisdiction must treat the FTE and each intermediate entity through which the interest is held as tax transparent. Remaining payroll is disregarded in the FTE’s payroll carve-out.
Where the FTE is the UPE and a proportion of FANIL is allocated to itself, only that proportion of payroll is eligible, and only if the eligible employees are in the FTE’s own jurisdiction. The rules follow the allocation of the underlying income and the location of the people; they do not let the same payroll remain in several jurisdictional claims.
Shipping payroll exclusions and the location test
Payroll directly attributable to excluded international or ancillary international shipping income is excluded in full. For indirect international-shipping costs, exclude payroll costs multiplied by international-shipping revenue divided by total revenue. For indirect ancillary-shipping costs, replace the revenue numerator with A × B ÷ C: A is ancillary international-shipping revenue, B is ancillary international-shipping income excluded from FANIL, and C is total ancillary international-shipping income for the year.
If an eligible employee spends 50% or less of total group-activity time in the CE’s jurisdiction, multiply the otherwise adjusted eligible payroll for that person by the percentage of time spent there. The slides state the apportionment trigger as 50% or less, including exactly 50%; they do not require this particular reduction whenever the employee has any overseas activity.
Payroll adjustments for permanent establishments
Payroll taken into account in determining a PE’s FANIL is treated as payroll of that PE; payroll not taken into account is excluded. Payroll included in the FANIL of a stateless PE is treated as nil for this purpose.
Where a proportion of a PE’s FANIL is excluded under the specified FTE-UPE or transparent-chain rules, exclude the same proportion of its eligible payroll. Conversely, where an FTE that is the UPE allocates a proportion of its FANIL to its PE, allocate the same proportion of the FTE’s eligible payroll to that PE if the employees are in the PE’s jurisdiction. The transparent-chain case concerns an FTE conducting business through a PE, held directly or through transparent FTEs by the relevant FTE UPE; the slide’s statutory conditions remain essential.
Eligible tangible assets and lessor exceptions
Eligible assets include locally situated property, plant and equipment and natural resources; a lease right to use a tangible asset in the CE’s jurisdiction; and a government licence or similar arrangement to use immovable property or exploit natural resources there. Property held for sale, lease or investment is generally excluded, subject to the listed lessor exceptions. Shipping-income assets have the separate exclusions described below. A main entity excludes its PE’s eligible assets from its own calculation.
Property held as lessor qualifies under the same-group lease exception if the lessee is another CE of the group in the lessor’s jurisdiction. A further exception covers property held by the CE as lessor under an operating lease where the property is in the lessor’s jurisdiction. These exceptions establish eligibility but are followed by adjustments to carrying value, so qualification does not always mean using the entire lessor balance.
Average carrying value and accounting adjustments
Carrying value is the average of the opening and closing fiscal-year values recorded for preparation of the UPE’s consolidated financial statements. Include accumulated depreciation, amortisation or depletion, impairment, capitalised payroll, purchase-accounting adjustments and consolidation eliminations attributable to intercompany sales. Exclude increases in the asset value, or in accumulated depreciation, caused by revaluation.
For a non-UPE FTE, allocate the same proportion of carrying value as the FANIL allocated to a PE or qualifying reference entity, provided the assets are in that recipient’s jurisdiction; disregard the remainder in the FTE’s carve-out. The reference-entity transparent-chain conditions mirror the payroll rule. An FTE UPE receiving an allocation to itself counts only that proportion and only for assets located in its own jurisdiction.
Shipping-asset and cross-border location adjustments
An asset used solely to derive international-shipping income has its full carrying value excluded. For an asset used solely for ancillary international-shipping income, exclude carrying value multiplied by the excluded ancillary income divided by total ancillary income. For other assets attributable to international shipping, use international-shipping revenue divided by total revenue; for other ancillary-shipping assets, use the A × B ÷ C specified formula described for payroll, divided by total revenue.
If an eligible tangible asset is in the CE’s jurisdiction for 50% or less of the fiscal year, multiply its otherwise adjusted carrying value by the proportion of the year it is there. The test is duration, not the payroll test of working time. Preserve both the ordinary carrying-value adjustments and location records before applying the asset percentage.
The three operating-lease value treatments
For a same-jurisdiction intragroup lease qualifying under the first lessor exception, adjust the property’s carrying value for the relevant intercompany-lease elimination entries. For the operating-lease exception, where property is not short-term rental property and the lessee is a CE of the same group, use the lessor’s carrying value minus the lessee’s carrying value.
Where that non-short-term property is leased to a lessee outside the group, subtract the average undiscounted remaining lease payments from the lessor’s carrying value. For short-term rental property, use the lessor’s carrying value. The slide refers the operating-lease and short-term definitions to regulation 56(7); it supplies no separate numerical day limit in this part. Do not invent one or apply the intragroup subtraction to every rental.
Permanent-establishment assets and the final reconciliation
Assets taken into account in a PE’s FANIL are treated as its eligible assets; those not taken into account are excluded, and the eligible assets of a stateless PE are treated as nil. If a proportion of a PE’s FANIL is excluded under the specified FTE-UPE or transparent-chain rules, remove that same proportion of eligible asset carrying value. If an FTE UPE allocates income to its PE, allocate the same proportion of its eligible asset value when the assets are in the PE’s jurisdiction.
The practical reconciliation is to identify the employees and assets, apply shipping and capitalisation exclusions, align FTE and PE allocations with FANIL, make location and lease adjustments, establish the eligible bases and then apply the fiscal-year percentages and the elected claim. This part ends after those rules and the presentation disclaimer. It contains no worked numerical example or appendix; the wider module must be consulted for the remaining effective-rate, allocation and exclusion topics.
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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