ETR (Effective Tax Rate): The Jurisdictional Ratio Behind the Top-Up

Definition

The ETR — the effective tax rate — in the GloBE context is the jurisdictional ratio the top-up tax runs on: the covered taxes (the numerator — the income taxes paid / payable to the jurisdiction) over the adjusted covered income (the ACI, the denominator — the jurisdictional profit with the GloBE adjustments). The ETR is the 15% floor test’s input — where the jurisdictional ETR is below 15%, the top-up tax is charged (the (15% − ETR) on the ACI less the SBIE). The ETR and SBIE guide has the computation in full; the glossary’s content is the ratio’s shape and its role in the floor test.

Jurisdictional ETR = the covered taxes ÷ the ACI

The numerator: the covered taxes (the income taxes paid / payable to the
               jurisdiction — the current, the deferred per the model rules,
               the credits per the model rules)
The denominator: the ACI (the adjusted covered income — the jurisdictional
               profit from the consolidation, with the GloBE adjustments —
               the intercompany consistency, the loss treatment, the
               specified items)
The floor test: ETR < 15% → the top-up tax (the (15% − ETR) × (ACI − SBIE))

The element	The content
The numerator	The covered taxes — the income taxes paid / payable to the jurisdiction (the current tax, the deferred tax per the model rules, the tax credits per the model rules) — the ETR and SBIE guide has the numerator’s components
The denominator	The ACI (the adjusted covered income) — the jurisdictional profit from the consolidation, with the GloBE adjustments (the intercompany consistency, the loss treatment, the specified items) — the ETR and SBIE guide has the denominator’s structure
The floor test	The ETR against 15% — the floor met (ETR ≥ 15%, no top-up) or failed (ETR < 15%, the top-up tax)
The top-up	Where the floor is failed: the top-up tax — the (15% − ETR) × (ACI − SBIE), the SBIE excluded from the base

The working read (the Pillar Two guide and the GloBE rules guide): the ETR is the ratio the minimum tax runs on — the jurisdictional computation (the covered taxes over the ACI) that determines whether the jurisdiction clears the 15% floor. The transfer pricing interaction (the Pillar Two for TP teams guide): the intercompany price (the TP decision) determines the jurisdictional split (the ACI, the jurisdictional profit), and the split determines the ETR — the pricing decision feeds the ETR, the ETR feeds the top-up. The ETR is the link between the transfer pricing (the price, the split) and the minimum tax (the floor, the top-up) — the ratio the two regimes share.

Example

The in-scope group entity: the jurisdictional ACI (the jurisdictional profit, the consolidation with the GloBE adjustments) is €50m. The covered taxes (the income tax paid to the jurisdiction — the current tax, the deferred per the model rules) are €7.5m. The jurisdictional ETR is 7.5/50 = 15% — the floor met (ETR = 15%, no top-up tax for the jurisdiction). The contrast: the same entity, the covered taxes €5m (the ETR 5/50 = 10%, the floor failed) — the top-up tax is charged (the (15% − 10%) × (€50m − SBIE), the SBIE excluded). The ETR is the floor test’s input — the ratio that determines the top-up’s engagement, the jurisdictional computation the GloBE rules guide has in full.

See also

• ETR and SBIE: The Exclusions That Matter (the guide)
• GloBE · Top-Up Tax
• Pillar Two for TP Teams

FAQ

ETR or statutory rate — which is the floor test’s input? The jurisdictional ETR (the effective rate — the covered taxes over the ACI, the actual rate on the jurisdictional profit), not the statutory rate (the nominal rate, the legislature’s set rate). The floor test runs on the effective rate (the actual tax over the actual profit) — the statutory rate is the label, the ETR is the computation. The jurisdiction with the 25% statutory rate but the 12% ETR (the incentives, the deductions, the preferential regime) is below the floor (the ETR 12% < 15%, the top-up engaged) — the effective rate, not the nominal, is the test. The ETR and SBIE guide has the numerator (the covered taxes, the incentives’ treatment) and the denominator (the ACI, the adjustments).

What is the ACI, exactly? The adjusted covered income — the jurisdictional profit (the jurisdictional PBT, the profit before tax) from the consolidation, with the GloBE adjustments (the intercompany consistency — the intercompany transactions’ effects computed consistently across the group; the loss treatment — the loss carryforward’s effect; the specified items — the equity-method income, the other specified adjustments). The ACI is the denominator — the jurisdictional profit on the GloBE basis, the ETR and SBIE guide has the structure. The ACI is the transfer pricing’s outcome (the intercompany price determines the jurisdictional split, the split determines the ACI) — the Pillar Two for TP teams guide has the pricing-to-ACI chain.

Does the SBIE affect the ETR? No — the SBIE (the substance-based income exclusion — the payroll and the tangible assets’ substance income) affects the top-up base (the ACI minus the SBIE, the base the top-up runs on), not the ETR (the floor test’s input — the covered taxes over the ACI, before the SBIE). The ETR is the floor test (the ratio, the 15% comparison); the SBIE is the base reduction (the top-up base, the substance relief). The two are separate steps in the computation: the ETR (the floor test) → the top-up (where the floor is failed) → the SBIE (the base reduction, the top-up amount). The ETR and SBIE guide has the sequence.