Income Inclusion Rule (IIR)

What is Income Inclusion Rule (IIR)?

The IIR operates as a top-down rule. When a constituent entity (CE) in a low-tax jurisdiction has a GloBE effective tax rate (ETR) below 15%, the parent entity at the top of the ownership chain (in a jurisdiction that has enacted the IIR) picks up the resulting top-up tax. Article 2.1 of the GloBE Model Rules assigns the charge first to the ultimate parent entity (UPE). If the UPE's jurisdiction has not implemented the IIR, liability cascades down to the nearest intermediate parent entity (IPE) in a jurisdiction that has.

Calculating the top-up tax requires four inputs per jurisdiction: GloBE income, covered taxes, the substance-based income exclusion (SBIE), and the resulting ETR. The SBIE removes a routine return on tangible assets and payroll from the top-up base, so the charge falls only on excess profit. EU Directive 2022/2523 transposed these rules for EU member states, with the IIR effective for fiscal years beginning on or after 31 December 2023. By early 2025, 22 of 27 EU member states had enacted both the IIR and the qualified domestic minimum top-up tax (QDMTT).

For the auditor, the IAS 12 amendments (May 2023) are the starting point. IAS 12.4A introduces a mandatory exception: entities do not recognise deferred tax assets or deferred tax liabilities arising from Pillar Two top-up taxes. The charge is accounted for as current tax in the period it arises. IAS 12.81 requires separate disclosure of the Pillar Two current tax expense and qualitative information about the group's exposure.

Worked example: Groupe Lefevre S.A.

Client: Belgian holding company, FY2025, consolidated revenue EUR 185M, IFRS reporter. Groupe Lefevre is the UPE of a group that exceeded EUR 750M consolidated revenue in FY2022 and FY2023 (before a 2024 divestment reduced revenue). The group holds a wholly owned subsidiary, Lefevre Singapore Pte Ltd, with GloBE income of EUR 6.2M. Singapore's headline rate is 17%, but a development incentive reduced covered taxes to EUR 620,000.

Step 1 — Calculate the jurisdictional ETR

Covered taxes of EUR 620,000 divided by GloBE income of EUR 6.2M produces an ETR of 10.0% for Singapore.

Documentation note: record the GloBE income (adjusted from financial accounting net income per Articles 3.1-3.4) and the covered taxes (per Articles 4.1-4.4). Show the resulting ETR and cross-reference to the Singapore local tax computation.

Step 2 — Apply the substance-based income exclusion

Lefevre Singapore has tangible assets (net book value) of EUR 1.8M and payroll costs of EUR 1.1M. The 2025 SBIE rates are 7.8% of tangible assets (EUR 140,400) and 9.8% of payroll (EUR 107,800). Total SBIE is EUR 248,200. Excess profit equals EUR 6.2M less EUR 248,200, which is EUR 5,951,800.

Documentation note: record the tangible asset base and payroll figure per the SBIE calculation. Confirm the transitional rates for FY2025 (these phase down annually until 2033) and document the excess profit.

Step 3 — Compute the top-up tax

The top-up tax percentage is 15.0% minus 10.0%, which equals 5.0%. Multiply 5.0% by excess profit of EUR 5,951,800 to produce a top-up tax of EUR 297,590. Because Belgium has enacted the IIR through its transposition of EU Directive 2022/2523, Groupe Lefevre S.A. (as UPE) owes the EUR 297,590 in Belgium.

Documentation note: record the top-up tax percentage and the UPE allocation (100% ownership). Note the Belgian filing obligation and verify whether Singapore's domestic top-up tax (effective 1 January 2025) qualifies as a QDMTT that would reduce or eliminate the IIR charge.

Step 4 — Account for the top-up tax under IAS 12

Groupe Lefevre recognises EUR 297,590 as current tax expense in FY2025. Per IAS 12.4A, no deferred tax is recognised on the Pillar Two exposure. The charge flows through consolidation adjustments at the parent level. The notes disclose the top-up tax as a separate line within income tax expense with a qualitative description of the group's exposure by jurisdiction.

Documentation note: verify the separate disclosure per IAS 12.81. Confirm no deferred tax has been recognised for Pillar Two (the mandatory exception). Check whether the Singapore QDMTT interaction is correctly reflected in the current tax line.

Conclusion: the EUR 297,590 IIR charge is defensible because the ETR calculation follows the GloBE Model Rules with the correct transitional SBIE rates, and the accounting treatment recognises the charge entirely as current tax with no deferred tax recognition per IAS 12.4A.

Why it matters in practice

• Teams sometimes recognise a deferred tax liability for expected future Pillar Two top-up taxes. IAS 12.4A (effective May 2023) explicitly prohibits this. The mandatory exception applies regardless of how predictable the future charge may be. Recognising deferred tax on Pillar Two exposure overstates the deferred tax liability and duplicates the current tax charge recorded when the top-up tax crystallises.
• Practitioners on mid-market group engagements frequently overlook the EUR 750M consolidated revenue threshold test or apply it to a single year rather than the required two-of-four-years lookback. Article 1.1 of the GloBE Model Rules specifies the lookback period. An entity that exceeded EUR 750M in only one of the four preceding years is out of scope, and recognising a top-up tax provision for it misstates the current tax line.

IIR vs UTPR

The practical difference on an engagement is sequencing. The auditor first checks whether a QDMTT applies in the low-tax jurisdiction. If not, the IIR charges the parent. The UTPR operates only on residual low-taxed income that neither a QDMTT nor an IIR has reached. Confusing the order overstates the parent's current tax expense.

Related terms

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