The GloBE effective tax rate (ETR) is the central figure in Pillar Two. A jurisdiction's ETR below 15% triggers a top-up tax; at or above 15%, no top-up is due. Calculating the ETR correctly requires four sequential steps, each with its own set of adjustments and exception rules. This article walks through each step in detail.
Step 1: GloBE Income (Art. 3.1–3.5)
Start from financial accounting net income (FANIL) for each constituent entity. Apply the Art. 3.2 adjustments:
- Exclude dividends and equity gains on substantial participations (Art. 3.2.1)
- Include or exclude certain policy disallowed expenses (Art. 3.2.2) — stock-based compensation, bribery fines, illegal payments
- Adjust for prior period errors and changes in accounting principles (Art. 3.2.3)
- Apply pension expense adjustment if IAS 19 is used (Art. 3.2.4)
- Exclude asymmetric foreign currency gains and losses (Art. 3.2.5)
- Market value or impairment method election for equity interests (Art. 3.2.6)
- Real estate investment entity adjustment (Art. 3.2.7)
Sum the adjusted figures across all constituent entities in the jurisdiction to get Net GloBE Income at jurisdictional level. If the jurisdiction has a net loss position, it produces a GloBE Loss — which may carry forward.
Step 2: Adjusted Covered Taxes (Art. 4.1–4.6)
Start from current tax expense and deferred tax expense recorded in the financial statements. Recast all deferred tax balances at 15% (Art. 4.4.1) — any deferred tax recorded at a rate above 15% is reduced to 15%; deferred tax at rates below 15% is excluded. Apply the Art. 4.2 adjustments (taxes on excluded dividends, controlled foreign company taxes, tax credits). The result is Adjusted Covered Taxes per entity.
Common error: including withholding taxes on dividends paid by the entity — these are the payer entity's taxes, not the recipient's, and are generally excluded from Adjusted Covered Taxes.
Step 3: GloBE ETR
The jurisdictional GloBE ETR is:
ETR = Sum of Adjusted Covered Taxes ÷ Net GloBE Income
Where Net GloBE Income is zero or negative, the ETR is not computed — the jurisdiction is in a loss position and no top-up tax applies (but GloBE Losses carry forward to reduce future GloBE Income).
Step 4: Top-up Tax (Art. 5.2)
If the ETR is below 15%:
Top-up % = 15% − ETR
Excess Profit = Net GloBE Income − SBIE Carve-out
Top-up Tax = Top-up % × Excess Profit
The SBIE Carve-out (Art. 5.3.3) is calculated as: (eligible payroll × payroll rate) + (tangible asset net book value × asset rate), using the applicable year rates. For FY 2024: payroll at 9.8%, tangible assets at 7.8%.
Where implementations go wrong
The most common errors are: (1) applying Art. 3.2 adjustments at jurisdictional rather than entity level; (2) failing to recast deferred tax at 15% (computing ETR using the statutory rate deferred tax instead); (3) using the wrong SBIE rate for the fiscal year; (4) computing Excess Profit before applying the SBIE carve-out correctly to the net (not gross) GloBE Income figure.
Pillar2OS runs the four-step calculation automatically and stores every intermediate figure as a provenance node, with the OECD rule cited at each step. Try the live sandbox — no account needed.