Effective Tax Rate and SBIE: The Exclusions That Matter

The jurisdictional ETR — the ratio the top-up tax runs on — is two computations with a division between them: the covered taxes (the numerator) over the adjusted covered income (the denominator), with the SBIE (the Substance-Based Income Exclusion) carving the substance income out of the top-up base. This guide is the two halves in detail, and the SBIE’s numbers — the part of the computation where the group’s real economy (the payroll, the assets) is the computation’s relief.

The numerator: the covered taxes

The covered taxes are the income taxes that count toward the jurisdiction’s ETR — the taxes the jurisdiction charges (or will charge) on the jurisdictional profit, per the model rules:

Component	The treatment
The current taxes	The income taxes paid or payable to the jurisdiction in the year (the current year’s income tax on the jurisdictional profit) — the tax as filed/paid, the computation’s anchor
The deferred taxes	The deferred tax expense, per the model rules’ treatment — the deferred taxes on the temporary differences (the tax timing), counted in the ETR on the model rules’ basis (the recognized deferred taxes, with the specified exclusions — the indefinite-lived items’ treatment, the specified deferred taxes’ exclusion)
The tax credits	The specified tax credits, per the model rules (the credits that reduce the covered taxes, the credits that do not) — the incentive credits’ treatment is the examined detail for the incentive-regime jurisdictions
The preferential regimes	The qualifying preferential regime’s tax, where the regime is recognized under the model rules (the safe-harbour regimes’ carve-outs — the regimes that qualify carry their own ETR computation, with the regime’s recognized tax)
The loss positions	The loss carryforward’s effect — the loss reducing the covered taxes (the loss year’s tax is the loss’s effect, with the carryforward mechanics and the utilization)

The numerator’s discipline: the covered taxes reconcile to the jurisdiction’s tax filings — the current tax as filed, the deferred tax as computed per the tax return’s deferred tax schedule, the credits as claimed. The numerator that does not reconcile to the filing is the numerator the authority re-runs, on the filing’s numbers.

The denominator: the adjusted covered income (ACI)

The ACI is the jurisdictional profit, on the financial statements, with the GloBE adjustments — the GloBE rules guide has the full adjustment set; the denominator’s structure:

ACI = financial statement income (the jurisdictional PBT)
    − the income tax expense (the current and the deferred, per the model rules)
    ± the specified adjustments (the equity-method income, the loss treatment,
      the intercompany consistency, the specified items)

The denominator’s discipline: the ACI reconciles to the jurisdictional financial statements — the jurisdictional profit as the group’s consolidation splits it, the intercompany transactions’ effects per the consistency rules. The denominator is the number the transfer pricing shapes most directly — the intercompany margins determine the jurisdictional profit, and the ACI follows — which is the Pillar Two for TP teams core interaction: the pricing decision (the margin within the arm’s length range) determines the jurisdictional split, and the split determines the ETRs.

The ETR, and the 15% floor

Jurisdictional ETR = covered taxes ÷ ACI

• ETR ≥ 15% — the jurisdiction clears the floor: no top-up tax, the SBIE not engaging (the carve-out is irrelevant where there is no top-up base).
• ETR < 15% — the top-up applies, on the base ACI − SBIE: the substance income excluded, the financial profit top-up’d.

The ETR’s reading, per jurisdiction, is the group’s map’s row: the jurisdiction, the ACI, the covered taxes, the ETR, the floor test, the mechanism (where the top-up applies) — the IIR, UTPR and QDMTT charging map, fed by this computation.

The SBIE: the substance carve-out

The Substance-Based Income Exclusion is the income excluded from the top-up base for the substance the jurisdiction holds:

SBIE = 8% × qualified payroll costs  +  net book value of qualified tangible assets (excluding land)

Component	The content	The effect
The payroll credit	8% of the qualified payroll costs — the payroll of the jurisdiction’s undertakings (the employees’ compensation, per the model rules’ qualified-payroll definition — the payroll actually paid/incurred in the jurisdiction, the employees working in the jurisdiction)	The headcount’s income excluded from the top-up base — the service centre, the manufacturing base, the R&D centre with the headcount: the payroll’s 8% is the substance credit
The tangible asset credit	The net book value of the qualified tangible assets (the depreciable tangible assets, excluding land — the plant, the equipment, the buildings (the buildings’ value, land excluded), per the net book value (the cost less the accumulated depreciation))	The real-asset income excluded — the factory, the infrastructure: the assets’ net book value is the substance credit, in full (not a percentage — the full NBEV)

The SBIE’s design logic: the top-up tax is on the financial profit — the profit that is not the return on the real economy (the people, the assets) the jurisdiction hosts. The holding with no payroll and no assets (the IP box, the finance entity) has no SBIE — its entire profit is the top-up base. The service centre with 500 employees and a real estate footprint has the SBIE — the payroll’s 8% and the assets’ NBEV excluded, the top-up base the residual.

The worked exclusion

A jurisdiction J (the 10% rate — below the floor), the service-centre profile:

Item	Value
ACI (the jurisdictional profit, after the GloBE adjustments)	200
Covered taxes (the 10% on 200)	20
Jurisdictional ETR	10.0% — below 15%, the top-up applies
Qualified payroll	150 (the service centre’s headcount cost)
Qualified tangible assets (NBEV, excl. land)	50 (the equipment, the buildings less land)
SBIE	8% × 150 + 50 = 12 + 50 = 62
Top-up base	200 − 62 = 138

Top-up tax = (15% − 10%) × 138 = 6.9

Contrast the holding profile in the same jurisdiction (the 10% rate, no substance): the ACI 200, the covered taxes 20, the ETR 10%, the SBIE 0 (no payroll, no assets) — the top-up base 200, the top-up tax (15% − 10%) × 200 = 10. Same ETR, same jurisdiction — the SBIE is the difference between the 6.9 and the 10: the substance (the payroll, the assets) is the top-up base’s relief, and the group’s structure decision (the profit’s location, the substance’s location) is the decision that determines which number the group carries.

The SBIE’s data, and its quality: the qualified payroll (the payroll records, per jurisdiction, per the model rules’ qualified definition) and the qualified tangible assets’ net book values (the fixed-asset register, per jurisdiction, the depreciation, the land exclusion) — the two data sets the group must maintain per jurisdiction, with the quality standard: the payroll reconciled to the payroll records and the tax filings (the payroll tax returns), the assets reconciled to the fixed-asset register and the depreciation schedules. The data checklist carries the SBIE inputs as the standing data obligation.

The group’s reading

1. Per jurisdiction: the ETR and the SBIE, together — the ETR row is meaningless without the SBIE (the top-up base is the ACI minus the SBIE, not the ACI), and the SBIE is meaningless without the ETR (the carve-out engages only where the ETR is below the floor). The map’s row is the pair: the ETR, the SBIE, the top-up base, the top-up tax, the mechanism.
2. The structure’s economics — the profit’s location (the intercompany pricing) and the substance’s location (the payroll, the assets) are the two variables the group controls, and the SBIE is the variable that rewards the substance’s location: the jurisdiction with the headcount and the assets carries the smaller top-up base, all else equal. The arm’s length standard is unchanged (the pricing is still the arm’s length pricing) — but the top-up tax prices the location, and the location’s economics include the SBIE.
3. The data — the payroll and the assets, per jurisdiction, reconciled to the records and the filings — the SBIE’s defence is the data’s quality, in the same discipline as the CbCR’s data quality.

See also

• GloBE rules — the full computation
• IIR, UTPR and QDMTT — the charging
• Transitional CbCR safe harbour
• Pillar Two for TP teams — the data checklist