Overview
Under the OECD Pillar Two framework, deferrred tax adjustments (valuation allowances and accounting recognition adjustments) are disregarded for Global Anti-Base Erosion (GloBE) purposes. This principle also applies when calculating the Qualified Domestic Minimum Top-up Tax (QDMTT).
Deferred Tax Asset Recognition
For QDMTT purposes, a deferred tax asset (DTA) must be recorded for a domestic tax loss, regardless of whether there is an expectation of future taxable profits.
- The DTA is recorded in the same year the loss occurs.
- Even if the DTA is not recognized in the financial statements, it is included for QDMTT calculation purposes.
- Reversals of valuation or accounting recognition adjustments in later periods are disregarded.
Therefore, domestic tax losses are considered in QDMTT calculations through the recognition of deferred tax assets, even when not reflected in financial statements.
Effect on the Effective Tax Rate (ETR)
When tax losses are utilized in the current year, 15% of the utilized losses are treated as deferred tax expense under QDMTT rules.
This amount increases the Effective Tax Rate (ETR).
Deferred tax income resulting from the release of deferred tax liabilities (DTLs) due to valuation allowances or accounting recognition adjustments is disregarded. This mechanism ensures that prior-year losses can offset current-year income through deferred tax expense recognition in the same period.
Provisions Under the Turkish Corporate Tax Code
Additional Article 4/4 of the Turkish Corporate Tax Code regulates how deferred tax expenses are adjusted for Pillar 2 Adjusted Covered Taxes (ACT) and Effective Tax Rate (ETR) computations.
According to this article:
- “Amounts arising from the accounting recognition adjustment or impairment of deferred tax assets” are specified as deductions from the deferred tax expense.
- There is no explicit item listed as an addition to the deferred tax expense; however, the draft communiqué indicates that additions may be made when such adjustments occur.
Application Within QDMTT Framework
For QDMTT purposes, adjustments related to valuation allowances or accounting recognition may lead to a reduction or negative deferred tax expense in a given year. In these cases, the deferred tax expense is adjusted to ensure that the use of prior-year losses is properly reflected in the current year’s QDMTT calculation.
This treatment maintains consistency between deferred tax accounting and the objectives of the QDMTT regime.
Conclusion
Valuation allowances and accounting recognition adjustments play a significant role in determining deferred tax treatment under QDMTT.
Recognizing domestic tax losses as deferred tax assets, even when not shown in financial statements, ensures accurate and consistent ETR calculations in line with Pillar Two principles and the Turkish Corporate Tax Code.
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