SBIE: What a headache! Understanding the Routine Income Exclusion in Pillar 2
Introduction
The application of the Substance-Based Income Exclusion (SBIE ) in the OECD’s GloBE Pillar 2 rules is an issue that raises many questions.
Why do some companies choose not to apply it, even though it can reduce their tax base? What are the eligibility criteria and calculation methods? Let’s decipher this complex concept that can impact your tax strategy.
1. What is SBIE (Substance-Based Income Exclusion) ?
The Substance-Based Income Exclusion (SBIE) is defined in article 5.2 of the GloBE rules. It allows a portion of profits to be excluded from the Pillar 2 top-up tax calculation, based on the entity’s actual economic presence in a given jurisdiction.
📌 Why this exclusion?
The aim of the SBIE is to prevent entities with real economic substance from being excessively taxed under the new international tax rules. It is based on two main criteria:
- Eligible personnel costs → A percentage of the salary costs of employees working in the jurisdiction concerned.
- Eligible tangible assets → A percentage of the average net book value of physical assets located in the jurisdiction.
👉 These criteria were selected because they are considered less mobile, thus reducing the risk of tax manipulation through artificial profit transfers.
2. SBIE’s Calculation Challenges: Why is it a headache?
Although SBIE reduces the tax base, some companies choose not to apply it. Why not? Quite simply because calculating it can be complex and time-consuming!
🛠 Method of calculating payroll costs and tangible assets
The method is based on a careful sorting of employees and assets into two categories:
- Sedentary → Employees and assets fully located in the jurisdiction.
- Mobiles → Employees working outside the jurisdiction or who can be moved.
Mobile employees pose a particular challenge. Should we include sales representatives who travel frequently? Technicians on the move? Should international telecommuting be included?
For property, plant and equipment, the rule is based on an average of their net book value (NBV) over the years N and N-1, taking into account provisions for depreciation and any revaluations.
3. Specific treatment of lease contracts
The case of leasing contracts (is another point of complexity. Depending on whether the lessor and lessee are in the same or different jurisdictions, the accounting treatment of SBIE varies:
- If the lessor and lessee are in different jurisdictions → The lessee recognizes the rights of use of the leased assets, while the lessor excludes these assets from its VNC.
- If lessor and lessee are in the same jurisdiction → Treatment depends on whether or not they belong to the same multinational group.
📌 Special case: When a lessor and a lessee are in the same jurisdiction and belong to the same group, the intra-group lease is ignored when calculating the SBIE.
4. Annual Option for greater flexibility
Another special feature of SBIE is its optional and reversible nature. A group can :
✅ Do not apply the SBIE one year if you feel that the calculation is too complex in relation to the potential tax benefit.
✅ Activate it the following year if you revise your strategy.
✅ Apply it to only part of your business (for example, by counting only sedentary employees).
This mechanism enables groups to adapt their approach according to available data and expected benefits.
5. Simplify SBIE calculations with GMT Insight
Calculating the Substance-Based Income Exclusion (SBIE) is a complex process, requiring analysis of payroll costs, employee mobility, net book value of tangible assets and compliance with administrative guidelines. With so many variables involved, the risk of error and the administrative burden can be considerable.
💡 That’s where GMT Insight comes in.
Why use GMT Insight to manage Pillar 2?
- Automated SBIE calculation: Integration of eligibility criteria (sedentary/mobile employees, tangible assets) for fast, reliable calculation.
- Tracking key indicators: intuitive dashboards to visualize the impact of SBIE on your tax base and anticipate your tax obligations.
- Real-time updates: Compliance with the latest administrative directives, including changes to GloBE and Pillar 2 rules.
- Save time and reduce risk: no more miscalculations or time-consuming arbitration – everything is centralized on a single, intuitive platform.
Conclusion: To calculate or not to calculate SBIE?
The decision to apply SBIE is based on a cost-benefit analysis. Some companies find that the administrative burden of the calculation (particularly for tangible assets and mobile staff) is too high in relation to the expected tax benefit.
However, with the evolution of regulations and the standardization of tax practices worldwide, the SBIE will remain a strategic lever to be closely monitored in order to optimize the taxation of international groups.
📢 Any questions? Need clarification? Talk to us on LinkedIn, or contact us. We’re here to help!
