Pillar 2 elections explained

In this blog series we explain the computation of GloBE Income or Loss as prescribed in Global Anti-Base Erosion Model Rules (Pillar Two)

Pillar 2 stock-based compensation election

Article 3.2.2* provides an election to substitute in the computation of GloBE Income or Loss the amount of stock-based compensation allowed as a deduction in the computation of a Constituent Entity‘s taxable income in place of the amount expensed in its financial accounts.

Financial accounting (book): an example

Let’s use a simple example of stock-based compensation accounting using present value and amortization. Suppose a company, XYZ N.V., grants an employee 1,000 stock options with a 4-year vesting period, and the options have an exercise price of €10 per share.


  • Fair market value of XYZ N.V.’s stock is €12 p/share at the time of the grant
  • Black-Scholes model is used to calculate the present value of stock option
  • Black-Scholes model estimates the present value of each stock option at €5
  • No other assumptions for simplicity (e.g., forfeitures or early exercises)

 Calculate the total value of stock options granted

  • Total value = Number of options * Present value per option
  • Total value = 1,000 options * €5 per option
  • Total value = €5,000

Calculate the annual expense based on the vesting period

  • Annual expense = Total value / Vesting period
  • Annual expense = €5,000 / 4 years
  • Annual expense = €1,250

Amortize the expense over the vesting period

  • Each year, XYZ N.V. will recognize a stock-based compensation expense of €1,250 for 4 years, totaling €5,000.

During each of the 4 years, XYZ N.V. would record the following journal entries:

  • Debit “Stock-Based Compensation Expense” for €1,250
  • Credit “Additional Paid-In Capital – Stock Options” for €1,250

These entries reflect the stock-based compensation expense and the increase in shareholders’ equity due to the stock options granted. When the options are exercised, the accounting entries will depend on the actual market value of the stock at the time of exercise and the cash received (if any) from the employees.

Tax treatment (tax): an example

Let‘s assume that – in the relevant jurisdiction – for tax purposes, the company can deduct the intrinsic value of the stock options at the time of exercise.


Let’s use the previous example with some additional assumptions:

  • The employee exercises all 1,000 stock options at the end of the 4-year vesting period
  • The market value of XYZ N.V.’s stock has increased to €20 per share at the time of exercise
  • The employee’s exercise price is still €10 per share

Intrinsic value

Calculate the intrinsic value of the stock options at the time of exercise:

  • Intrinsic value = (Market value per share – Exercise price per share) * Number of options
  • Intrinsic value = (€20 – €10) * 1,000
  • Intrinsic value = €10,000

Tax treatment

The company can deduct the intrinsic value of the stock options at the time of exercise, which is €10,000. This deduction is higher than the expense recognized for financial accounting purposes.

Identify the book-tax difference

For financial accounting purposes, XYZ N.V. recognized a total stock-based compensation expense of €5,000 (€1,250 per year for 4 years).

  • Book-tax difference = Tax deduction – Financial accounting expense
  • Book-tax difference = €10,000 – €5,000
  • Book-tax difference = €5,000

The €5,000 book-tax difference is a permanent difference, as the tax deduction will not reverse in the future. Without the election, this permanent difference will impact the GloBE effective tax rate.

The impact of the election

The election under Article 3.2.2 brings the GloBE Income or Loss more into line with the local tax rules in those jurisdictions that allow a deduction based on the value of the stock at the exercise date. If the election is not made, the Constituent Entity simply computes its GloBE Income or Loss, taking into account the amount of stock-based compensation allowed in the computation of its Financial Accounting Net Income or Loss.

Additional notes

  1. Election by: Filing CE
  2. Scope: Compensation expenditures in the form of stock, stock options, stock warrants (or an equivalent) where the amount allowed as an expense is computed differently for local tax purposes than for financial accounting purposes.
  3. Period: 5-YR
  4. Applies to: Jurisdiction
  5. Can be revoked: revocation of the election only affects stock-based compensation expense for which the final tax deduction has not been determined; it does not affect the amount allowed as a deduction in respect of options that have already been exercised.
  6. Tracing: expenses must be traced back to the relevant CE who received the property, services, etc., for which the compensation was paid
  7. Only one Constituent Entity: is allowed to deduct stock-based compensation in excess of the amount allowed in the financial accounts and only if that Constituent Entity is allowed a deduction for such stock-based compensation for local tax purposes.

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