ASC 740: Q2 2026 provision considerations
Executive summary: Updates and considerations for 2026 Q2 tax provisions
The second quarter of 2026 remained relatively quiet from a federal legislative perspective, but companies should continue evaluating the ASC 740 effects of OBBBA provisions now effective in 2026, emerging tariff refund considerations and upcoming ARPA changes. Multinational groups also should monitor Pillar Two developments, including the Organisation for Economic Co-operation and Development (OECD) side-by-side package and GIR filing relief, as well as jurisdiction-specific updates in Australia, Canada, France, Germany, India, Ireland, Italy, Japan, the Netherlands and the UK that may affect compliance, deferred taxes and interim provision reporting.
Income tax provision considerations for Q2 2026
The second quarter of 2026 has continued the relatively slow pace of federal tax developments, with no new substantial corporate legislative changes enacted. However, as discussed in our first quarter update, several provisions of the One Big Beautiful Bill Act (OBBBA) are effective in 2026, and additional considerations related to the treatment of tariff refunds have begun to emerge. These developments, together with American Rescue Plan Act (ARPA) changes slated for 2027, require companies to continue evaluating the impact on their interim tax provisions.
Changes to permanent items effective for 2026
As discussed in our Q1 ASC 740 update, the OBBBA introduced several corporate tax changes that will begin impacting tax provisions in 2026 and should be considered as part of Q2 reporting. Companies should be mindful of the new 1% floor (and continued 10% cap) on charitable contribution deductions, the updated treatment of employee meal deductions for certain industries and the expansion of section 162(m) through the application of controlled group rules. These changes may affect the annual effective tax rate within a company's interim tax provision.
In addition, the upcoming ARPA expansion of ‘covered employees’ (effective 2027) is worth evaluating now as companies assess current compensation arrangements, including stock-based and deferred compensation, for potential limitations under section 162(m). From an ASC 740 perspective, this includes evaluating whether certain amounts expected to be permanently disallowed should be excluded from deferred taxes. For a more detailed discussion of these provisions and their technical implications, refer to the 2026 Q1 RSM article.
For a detailed discussion on the impacts of tax reform on financial reporting, read our article: Accounting for the income tax impacts of the One Big Beautiful Bill Act.
International tax
On April 8, 2026, the U.S. Tax Court (Tax Court) issued opinions in Varian Medical Systems, Inc. and Subsidiaries v. Commissioner, 166 T.C. No. 8, addressing a narrow mismatch in the effective dates of certain Tax Cuts and Jobs Act provisions. Varian, a fiscal-year U.S. parent with controlled foreign corporations, included a large section 78 gross-up in income while claiming a section 245A dividends-received deduction on that deemed dividend for its 2018 fiscal year. The Tax Court’s 2024 opinion concluded that the statutory text created a temporary gap period in which the old version of section 78 still applied while section 245A became effective, allowing Varian to claim the dividends-received deduction (DRD) in its 2018 fiscal year. The Tax Court also concluded that section 245A(d)(1) required a corresponding reduction in related foreign tax credits.
In its subsequent April 8, 2026 ruling, the Tax Court significantly narrowed the scope of that benefit. The Tax Court held that the section 246 holding-period requirement applied in determining the amount of the section 245A deduction and concluded that the requirement was satisfied only with respect to stock directly held by a U.S. group member. As a result, the section 245A deduction was limited to amounts attributable to directly held first-tier CFCs and was not available for amounts attributable to lower-tier CFCs held indirectly through other foreign corporations. The Tax Court also adopted a less favorable methodology for computing the related foreign tax credit disallowance under section 245A(d)(1), further diminishing the overall tax benefit. Although the 2026 opinion did not disturb the Tax Court’s 2024 conclusion that a section 245A deduction was available for qualifying section 78 amounts during the Tax Cuts and Jobs Act (TCJA) effective-date gap period, it materially reduced the practical benefit available in many fiscal-year structures. As a result, while the Varian case remains the relevant authority regarding the availability of a section 245A deduction in the gap period, its applicability is now substantially narrower.
From an ASC 740 perspective, entities with a fiscal-year fact pattern similar to the Varian case, may need to remeasure the amount of benefit related to section 245A DRD eligibility for indirect or lower-tier CFCs. The 2026 opinion limited the recognized tax benefit by eliminating the amount attributable to the lower-tier piece and by requiring a less favorable FTC haircut.
For background on the original refund opportunity and the legislative gap, see Refund opportunity for fiscal year taxpayers with international footprint.
Beyond the above DRD and FTC issues, companies should continue to focus on the implementation and financial reporting implications of the international tax provisions enacted as part of the OBBBA, which became effective for tax years beginning after Dec. 31, 2025. Areas warranting continued attention include the modifications to the foreign-derived deduction eligible income (FDDEI) regime, net CFC tested income (NCTI), the base erosion anti-abuse tax (BEAT), foreign tax credit (FTC) rules and changes affecting the treatment of controlled foreign corporation (CFC) inclusions for purposes of the section 163(j) interest limitation calculation. These provisions may affect current tax expense, estimated annual effective tax rates, foreign tax credit utilization and broader ASC 740 analysis.
Visit Global taxation reform: What changes to GILTI and FDII mean for multinationals for a detailed discussion on how FDDEI and NCTI interplay with domestic big three provisions.
Tariffs
In Q2 2026, the Customs and Border Protection’s (CBP) Consolidated Administration and Processing of Entries (CAPE) system began processing and paying refunds on certain International Emergency Economic Powers Act (IEEPA) tariff claims. Companies should continue to evaluate whether they meet the criteria to record a refund receivable for IEEPA tariffs paid either under the gain contingency model (ASC 450-30) or under the loss recovery model (ASC 410-30). Based on that assessment, companies will need to determine whether any tariff refunds should be included in the estimated annual effective tax rate or as a discrete item (i.e., a significant infrequent or unusual item) in the interim provision, if applicable.
To learn more about the potential impacts and uncertainties, read our Accounting Brief: Update on Potential Tariff Refunds and Q1 2026 IEEPA tariff reporting considerations | RSM US
Updates from the Financial Accounting Standards Board (FASB) and Securities and Exchange Commission (SEC)
The FASB issued two new accounting standards updates (ASUs) during the second quarter of the year, including the following:
- ASU 2026-01 – Equity (Topic 505): Initial Measurement of Paid-in-Kind Dividends on Equity-Classified Preferred Stock
- ASU 2026-02 - Environmental Credits and Environmental Credit Obligations (Topic 818)
While these ASUs may not have a direct impact on a company's tax provision, it is crucial for tax professionals to monitor these updates as these ASUs may impact pretax income when they become effective.
On May 5, 2026, the SEC issued a proposal to allow public companies to elect semi-annual reporting rather than the current quarterly reporting requirements. Shortly thereafter, on May 19, 2026, the SEC issued two other proposals which would, among other things, expand the availability of Form S-3, expand the ability to incorporate information by reference in Form S-1, and increase the public float threshold while adjusting certain other requirements that must be met for a company to be classified as a ‘large accelerated filer.’ These proposed changes could provide for significant relief of reporting burdens for certain public companies.
Read about the various provisions of these proposals and their potential impacts in our financial reporting insights: SEC proposal could reshape interim reporting for public companies, SEC proposal could expand access to registered capital markets and SEC proposal could provide reporting relief for many public companies.
State tax
A growing number of states addressed the OBBBA during the second quarter of 2026. The uneven state conformity will continue to put pressure on corporate taxpayers with increasingly complex state income tax calculations through conformity and/or decoupling positions on various provisions. Companies should continue to monitor these updates closely and reflect the changes in the financial statements in the period of enactment. More discussion on this topic can be found in our tax alert: State corporate income tax law changes for the second quarter of 2026.
Global tax compliance updates: OECD Pillar Two and country-specific changes
The following section includes key global tax law updates contributed by RSM’s global teams.
Status of Pillar Two
In January 2026, the OECD released its side-by-side (SbS) package, which introduced the SbS and ultimate parent entity (UPE) safe harbors intended to provide relief from Pillar Two exposure under the income inclusion rule (IIR) and undertaxed profits rule (UTPR) for eligible U.S.-parented multinational groups beginning in fiscal years starting on or after Jan. 1, 2026. The package also includes several administrative and compliance simplification measures, including a permanent simplified effective tax rate safe harbor, an extension of transitional country-by-country reporting (CbCR) safe harbor relief and a substance-based tax incentive safe harbor. Notably, the package does not apply to qualified domestic minimum top-up taxes (QDMTTs), and in-scope multinational enterprise (MNE) groups must continue to satisfy annual GloBE Information Return (GIR) filing requirements.
The financial reporting impact of these measures remains dependent on enactment by individual jurisdictions. As of June 30, 2026, most jurisdictions have not enacted legislation implementing the SbS package. Notably, Canada introduced Bill C-31 on May 6, 2026, which, if enacted, would implement the SbS and UPE safe harbors, extend transitional CbCR safe harbor relief by one year and defer the effective date of Canada's UTPR by one year.
The absence of enacted legislation in many jurisdictions may limit the ability of U.S.-parented groups to conclude that SbS relief is available when evaluating Pillar Two exposures under ASC 740. Accordingly, companies should continue to assess potential IIR and UTPR exposures based on legislation enacted as of the reporting date and monitor legislative developments on a jurisdiction-by-jurisdiction basis. Consistent with ASC 740, legislative impacts must be recognized in the period of enactment.
OECD guidance on centralized GIR filing
Thirty-seven jurisdictions have implemented a qualified IIR and/or QDMTT that applies to in-scope groups beginning with their 2024 fiscal year. Under the GloBE Model Rules and Commentary, these jurisdictions require an MNE group to satisfy GIR filing obligations in each jurisdiction where it is subject to the rules. However, Pillar Two includes a centralized filing mechanism that allows an MNE group to file a single GIR in one jurisdiction and have that information exchanged with other relevant jurisdictions. Recognizing that many jurisdictions may not have operational filing portals or information exchange arrangements in place before the first GIR filing deadline, participating 2024 Implementing Jurisdictions agreed to a one-time administrative measure intended to facilitate compliance during the initial reporting cycle, subject to certain jurisdiction-specific reservations and limitations.
On May 18, 2026, the OECD published a ‘Common Understanding’ among participating jurisdictions establishing a transitional framework for the first GIR filing year. Under this framework, an MNE group may file its 2024 GIR in a qualifying filing jurisdiction. Where an MNE group timely files its GIR in one of these qualifying jurisdictions and complies with all applicable local notification requirements, participating jurisdictions generally agreed to use mechanisms available under their domestic law to waive penalties that might otherwise apply or not enforce their local GIR filing obligation before the relevant GIR exchange deadline. In effect, the centrally filed GIR, together with any required local notifications, will generally satisfy the group's local GIR filing obligations in participating jurisdictions for the first reporting year.
However, this relief is temporary and subject to several conditions. It does not permanently replace local filing requirements. Under the GIR Multilateral Competent Authority Agreement (MCAA), the filing jurisdiction is expected to exchange the relevant GloBE information with other implementing jurisdictions by Dec. 31, 2026, for calendar-year groups filing by June 30, 2026. If a jurisdiction does not receive the GIR through the exchange mechanism by that date, it may require the MNE group to file the return locally in accordance with its domestic law. In addition, the OECD's Common Understanding makes clear that any relief from local filing requirements or penalties applies only to the extent permitted under local law. As a result, the availability of transitional relief ultimately depends on each jurisdiction's domestic legislative and administrative framework.
The 2026-27 Federal Budget, delivered May 12, 2026, proposed significant tax reforms, including the permanent company loss carry-back for companies with aggregated turnover under AUD one billion and enhanced research and development (R&D) incentives. Several of these items are before parliament as part of the Treasury Laws Amendment (Tax Reform No. 2) Bill 2026. For U.S.-parented groups, a key development is Australia’s alignment of its Pillar Two rules with the OECD ‘side-by-side’ package beginning Jan. 1, 2026. As a result, U.S. multinationals should generally avoid Australian top-up tax, although GloBE registration requirements and country-by-country reporting still apply. Read RSM Australia’s comprehensive report on Federal Budget 2026-27 for more details.
Aside from the enacted and proposed legislative measures discussed above, recent Australian case law may also affect U.S. MNEs with Australian operations. In Shell Energy Holdings Australia Limited v Commissioner of Taxation [2026] FCA 577, the Federal Court set aside approximately AUD 99 million of Capital Gains Tax assessments, holding that the market-value cost base of a 34.27% Woodside stake included an 18% control premium over the listed price and accepting comparable-transaction evidence. The decision supports the use of control premiums and a broader evidentiary base when valuing substantial Australian shareholdings.
After the High Court’s narrow 4–3 decision in favor of the taxpayer in PepsiCo, Inc v Commissioner of Taxation [2025] HCA 30, which found no embedded royalty or Diverted Profits Tax (DPT) on concentrate payments, the Commissioner’s parallel claim against Coca-Cola, involving approximately AUD 174 million in DPT, is the next key test. A further Federal Court hearing is scheduled for December 2026. U.S. groups with Australian distribution, licensing or supply arrangements should review potential embedded royalty and DPT exposure.
On June 18, the Canadian government enacted Bill C-30, which, among other measures, allows immediate expensing for eligible greenhouse buildings and may provide cost-saving opportunities through reduced payroll obligations and fuel-related expenses. Visit New tax measures in Bill C-30 carry timely implications for Canadian businesses for more information.
A more significant legislative package, Bill C-31, is not expected to become law before the fall because Parliament has begun its summer recess. The proposed legislation includes new audit powers, including expanded authority to access foreign information and documents, implementation of the Crypto-Asset Reporting Framework and immediate expensing for eligible manufacturing or processing buildings.
Additionally, with the Canada-United States-Mexico Agreement (CUSMA) review scheduled to begin on July 1, Canada is anticipating additional tariff uncertainty, which may affect cross-border planning and supply chain considerations for U.S. multinationals with Canadian operations.
French Law No. 2026-534, which combats social and tax fraud, was published in the Official Journal on June 26, 2026. Two provisions are particularly relevant to U.S. groups holding French real estate. In the absence of transitional provisions, both measures apply to transactions carried out on or after June 27, 2026.
Article 68 introduces new formalities for transfers of shares in French real estate-rich companies, known as sociétés à prépondérance immobilière (‘SPI’). These are entities whose assets consist primarily of French real estate, whether held directly or indirectly. Previously, transfers of SPI shares could generally be completed through a private deed or book-entry transfer between securities accounts. Under the new rules, these transfers must be documented through a notarial deed, a deed countersigned by a lawyer, or where permitted, a private deed prepared by a chartered accountant. If these requirements are not met, the transfer may be refused registration and treated as legally void. The new requirements do not apply to transfers of shares in certain collective investment funds supervised by the French Financial Markets Authority. For U.S. corporations with direct or indirect interests in French real estate holding entities, the change may affect transaction execution, documentation requirements and the legal validity of share transfers in France.
Article 102 strengthens the 3% tax regime applicable to the market value of French real estate held by legal entities. The previous exemption, which was based on an undertaking to provide information upon request, has been replaced by a mandatory annual information return to be filed by May 15 each year. This return must disclose the relevant real estate assets and the identity of shareholders holding, directly or indirectly, more than 1% of the entity’s capital or voting rights. Failure to comply will result in the loss of the exemption and application of the 3% tax. Entities without a permanent establishment in France must appoint a French tax representative authorized to receive communications, procedural documents and notices relating to administration of the tax. This requirement will first apply to filings due by May 15, 2027.
Given the significant legal and tax implications of these measures, including potential nullity of transfers and exposure to the 3% tax, U.S. MNEs should seek advice from both French and U.S. tax advisers before undertaking any transaction involving French real estate or interests in French real estate holding structures.
German withholding tax refund on distributions to hybrid U.S. companies
On March 11, 2026, the German Federal Fiscal Court held that U.S.-resident shareholders of a tax-transparent S corporation generally are entitled to a full refund of German withholding tax on dividends received from a German subsidiary based on the participation exemption provided under the double taxation agreements (DTA). This landmark ruling contrasts with the German Federal Central Tax Office’s (BZSt) prior practice of granting only a limited refund where the tax-transparent S corporation was owned by individuals. Visit Withholding tax refund on distributions to hybrid US companies for more information.
Permanent establishments: Circular of the German Federal Ministry of Finance
On June 18, 2026, the German Federal Ministry of Finance published the final version of its circular on the interpretation and application of permanent establishment criteria under domestic and international tax law. The circular outlines the specific requirements for a permanent establishment (PE) under German tax law and distinguishes the German PE concept from the concept established in DTAs. It also addresses a range of practical scenarios, such as desk sharing, working from third-party premises and influencer activities. Regarding home office arrangements, the circular states that a home office generally does not constitute a permanent establishment. For treaty purposes, the tax authorities adhere to the updated OECD Model Commentary, specifying that use of a home office for less than 50% of working time does not give rise to a permanent establishment. Visit Federal Ministry of Finance: Circular on permanent establishments for more information.
Pillar Two
Irish Revenue has confirmed that Irish entities may continue to rely on a Top-up Tax Information Return (TIR) filed by a ultimate parent entity (UPE) or Designated Filing Entity in another jurisdiction where late-filing penalties are waived, provided the Irish Notification of Filing is submitted by June 30, 2026, for Dec. 31, 2024 year-ends and the TIR is filed by the earlier of the foreign no-penalty deadline or Sept. 30, 2026.
The confirmation provides useful flexibility for large U.S. multinational groups by allowing continued reliance on centralized Pillar Two filings, provided Irish notification deadlines and the Sept. 30, 2026 longstop date is met.
Irish High Court: Foreign withholding tax (FWHT) deduction denied
The Irish High Court, in Accenture Global Solutions Limited v. The Revenue Commissioners (2026) IEHC 305, held that foreign withholding tax (FWHT) on royalty income cannot be deducted as a trading expense, even where no effective credit relief is available.
U.S. MNEs should not assume that FWHT suffered by an Irish royalty recipient will be recoverable where Irish credits cannot be used.
Revenue guidance on tax transparency and withholding tax treatment of investment limited partnerships (ILP)
Irish Revenue’s updated guidance confirms ILPs remain tax transparent, with income, gains and losses attributed directly to partners. ILPs may also qualify for dividend withholding tax exemptions on distributions from Irish subsidiaries, subject to ownership and compliance conditions. However, ILPs continue to be treated as separate persons for interest withholding tax purposes, meaning interest payments may still be subject to withholding tax unless an exemption applies. Revenue will also ‘look through’ partnership structures in bona fide investment chains where the relevant conditions are met.
The guidance supports tax transparency and dividend withholding tax planning, but interest paid to ILPs may still attract Irish withholding tax unless a domestic or treaty exemption is available. This point may be particularly relevant for U.S.-backed, debt-funded structures.
Full self-assessment: Time limits for making inquiries and making or amending assessments
The time limits for making inquiries and making or amending assessments have been amended by Irish Revenue eBrief No. 097/26 on May 21, 2026, to clarify an exception to the four-year assessment period where a taxpayer has not made a full and true disclosure of all material facts necessary to make an assessment for a period.
For U.S. MNEs with Irish operations, the clarification reinforces the importance of maintaining robust Irish tax return files, transfer pricing support and contemporaneous documentation.
Foreign entity classification for Irish tax purposes
Irish Revenue’s updated guidance on foreign entity classification incorporates section 1009A TCA 1997, confirming that a foreign entity may be treated as a partnership for Irish tax purposes where it is tax transparent and has characteristics similar to an Irish partnership, even if legally constituted as a body corporate.
The updated guidance is relevant for determining whether Ireland classifies a U.S. LLC as a company or partnership in Irish-U.S. structures.
The Italian tax authorities have introduced a simplified option for controlled foreign companies (CFCs) for Italian tax purposes. Italian parent companies may elect to pay a 15% substitute tax on the accounting profits of their foreign subsidiaries instead of applying the standard CFC tests. Under this optional regime, future dividends distributed by these subsidiaries generally are exempt from further taxation.
Additionally, the 2026 Budget Law had linked the Italian dividend exemption regime and the Italian participation exemption regime to ownership of a shareholding of at least 5% or a tax value of at least 500,000 euros.
These restrictions were subsequently reversed retroactive to Jan. 1, 2026. As a result, the 95% tax exemption now applies regardless of the size or financial value of the shareholding, restoring a more flexible and favorable environment for investors.
New Global Reporting Obligations (GIR)
Consistent with global minimum tax standards, Italy has released instructions for the Global Information Return (GIR). Large multinational groups are required to file the report electronically, providing tax authorities with information on group structure and income to support administration of the global minimum tax rules.
Japan’s Special Defense Corporate Tax, previously discussed in our Q3 2025 provision considerations, is now effective for fiscal years beginning on or after April 1, 2026. The government has introduced a 4% surtax on corporate income tax, referred to as the ‘Special Defense Corporate Tax.’
The tax liability is calculated as follows:
Special Defense Corporate Tax Amount = ((Standard Corporate Tax Amount– JPY 5,000,000) × 4%) – Applicable Tax Credits
- The Standard Corporate Tax Amount is the corporate income tax liability before application of any tax credits, such as general tax credits and foreign tax credits.
- For corporations filing on a consolidated basis, the JPY 5,000,000 threshold is apportioned among each group member in proportion to its Standard Corporate Tax Amount.
- Applicable tax credits include the foreign tax credit, the deduction for foreign tax equivalents adjusted upon dividend distribution and deductions of the Special Defense Corporate Tax amount in cases of inflated filings due to fictitious accounting, among others.
This change is effective for fiscal years beginning on or after April 1, 2026.
Although no corporate income tax law changes were enacted in the Netherlands during Q2 2026, the following developments are noted for U.S. corporations with Dutch subsidiaries, financing structures or other Dutch tax filing positions.
Dutch tax advisers have been assisting taxpayers with protective objections against the Dutch earnings stripping interest deduction limitation rule under article 15b of the Dutch Corporate Income Tax (CIT) Act. These objections are being considered in light of recent European Union (EU) case law addressing the proportionality of certain EU tax rules. U.S. corporations with Dutch entities that have been subject to an earnings stripping limitation should consult with their Dutch or EU tax advisers to determine whether filing a protective objection may be appropriate to preserve refund or appeal rights.
In addition, on June 24, 2026, the European Commission published a Tax Omnibus proposal intended to simplify EU tax rules, reduce compliance burdens for businesses and enhance the competitiveness of the Internal Market. The proposal includes, among other measures, an R&D allowance, more favorable rules for the earnings stripping interest deduction limitation and exemptions for certain intra-EU dividend, interest and royalty payments. This proposal is not expected to apply until Jan. 1, 2029, with certain measures deferred until later years.
The government has announced that the UK’s foreign branch exemption regime will become mandatory. As a result, profits and losses attributable to foreign permanent establishments of UK-resident companies generally will be exempt from UK corporation tax, rather than subject to an elective regime.
The change is intended to apply to accounting periods beginning on or after Jan. 1, 2027, or beginning on or after Sept. 1, 2026, for UK-resident companies with foreign permanent establishments engaged in activities related to the exploration or exploitation of oil and gas.
Transitional rules also will be amended so that losses and other tax attributes arising before the exemption applies cannot be used to offset UK profits arising after the exemption applies. This change may affect deferred tax provisions. The relevant legislation will be included in the next Finance Bill, which generally would be expected to be enacted in early 2027. Read more commentary on UK foreign branch exemption changes: what multinational businesses need to know.
Tax treatment of design fees in major projects
Overturning the Court of Appeal’s decision, the Supreme Court found that expenditure on studies that informed the design of a wind farm was not ‘on the provision of’ the wind farm and, therefore, did not qualify for capital allowances, i.e., tax depreciation. This decision could significantly affect the tax relief available for major investment projects and, where relevant, should be reflected in income tax provisions. The background and wider implications of the case are outlined on Supreme Court finds environmental studies do not qualify for capital allowances.