Calculating the effective tax rate step by step

This article will answer the following questions:

• Who is the taxpayer of the global top-up tax?
• Is a given constituent entity taxed low?
• Is the effective tax rate equal to the CIT rate of 19% or 9%?
• How to correctly calculate the effective tax rate?

In September 2024, the Polish Ministry of Finance published an amended draft act on top-up taxation of constituent entities of international and domestic groups. The key indicator necessary for entities to settle taxation with the global top-up tax is the effective tax rate (ETR), which is calculated to determine whether a given jurisdiction is a low-tax jurisdiction. The obligation to pay top-up tax will arise when the effective tax rate for a given country / jurisdiction is – for a given tax year – less than 15%. 

Who is the taxpayer of the global top-up tax?

The taxpayers of the global top-up tax are:

• ultimate parent entities of international groups,   
• lower-level parent entities in which the consolidating share is held by the ultimate parent entity that is an excluded entity or an entity that is not subject to the principle of including income in taxation in the jurisdiction in which it is located, 
• partially owned parent entities in which the ultimate parent entities have a consolidating share,

located in the territory of Poland.

It is worth noting that if the above conditions for being a taxpayer of the global top-up tax are met by more than one entity of a given group, then all of these taxable entities are officially taxpayers for the purposes of the Pillar 2 provisions.

The effective tax rate is calculated not at the level of a given constituent entity, but at the level of a given country (jurisdiction) – i.e. taking into account all the group’s constituent entities located in that jurisdiction (e.g. in Poland).

This "combined calculation" mechanism may result in a situation where the top-up tax is levied on an entity that would not be low-taxed in itself. Conversely, an entity that would be low-taxed under the stand-alone calculation may not be so treated in general because of the tax burdens or losses of other entities in the same jurisdiction. 

This approach of the legislator minimises the risk that taxpayers will optimise their taxes through appropriate allocation of income and taxes within the group.

How does the legislator define low-taxed constituent entities?

Once the global top-up tax liability has been established, the taxpayer must verify whether the constituent entities in which it has an ownership interest are low-taxed constituent entities.

Low-taxed constituent entities include:

• constituent entities located in low-tax jurisdictions,
• stateless constituent entities that have earned a qualified income and their effective tax rate is less than 15%,
• constituent entities that have been allocated an additional top-up tax in a given tax year. 

Effective tax rate – how to calculate it?

The effective tax rate calculated for Pillar 2 purposes should not be confused with the nominal corporate income tax rate (19% or 9%) or the effective tax rate calculated for financial statement purposes.

The effective tax rate under Pillar 2 takes into account differences related to reliefs or deductions that affect the actual amount of tax.

Under the regulations implementing the Pillar 2 directive, effective tax rates are calculated according to the following formula:

The jurisdictional qualified net income in the formula is the difference between the qualified income of all constituent entities located in a given jurisdiction and the qualified loss of all constituent entities located in a jurisdiction.

Calculating the adjusted qualified taxes of the constituent entities is quite a challenge and requires collecting a lot of data

The starting point for calculating the amount of jurisdictional qualified net income for the tax year of a given constituent entity with its registered office in Poland is the amount of net profit or loss of such entity, which was adopted for the purposes of preparing the consolidated financial statements of the group and determined in accordance with the accounting standard from such statements. 

In turn, the basis for calculating the adjusted qualified taxes of all constituent entities with their registered offices in Poland is the sum of the amounts of income tax recorded in the books in the current part, excluding the amounts of taxes other than qualified taxes. After calculating this sum, the necessary adjustments to the tax amount should be made – through appropriate increases and decreases. 

The legislator requires the taxpayer to include in the adjusted qualified taxes the effects of the choice of settlement methods for qualified ownership interests. This means the obligation to include in the calculation increases and decreases both for such interests and for qualified indirect tax assets and benefits related to the settlement of profit or loss in accordance with the rules of the choice made for qualified ownership interests.

How to check whether an entity is a low-taxed constituent entity?

In order to check whether a given jurisdiction is a low-tax jurisdiction, the parent entity that is a taxpayer of the global top-up tax is required to perform the so-called effective tax rate test.

To determine whether an entity is a low-tax constituent entity, the taxpayer must calculate (for the given tax year and for each entity in which it has an ownership interest) qualified income and adjusted qualified taxes. For each jurisdiction in which at least one constituent entity is located, the taxpayer must also calculate the jurisdictional qualified net income and effective tax rate. 

Only then does the taxpayer calculate the global top-up tax on the ownership interests in the low-tax constituent entities.

To calculate the effective tax rate for the top-up tax, it is worth using the help of an expert

Calculating the effective tax rate is complicated and requires careful preparation, i.e. adapting information systems, collecting a lot of data and introducing appropriate procedures in the company. 

If you want to be sure of your settlements and avoid disputes with the tax office (or reading our post has raised any questions or doubts in your mind), please contact our experts.