GloBE Rules Series

ITQ G-

002

January 14, 2022

Question

ACo 1, a company resident in A, is a Constituent Entity within an MNE Group, for the purposes of the GloBE model rules.

ACo 1 has the following financial information for the current fiscal year:

1. Profit (in P&L): EUR 30 million

2. Other comprehensive income: EUR 8 million, including EUR 5 million (after tax) of gain under fair value accounting in respect of property, plant and equipment (not subsequently reported through P&L). The tax expense on this fair value accounting gain is EUR 1.5 million

3. Income tax expense:

a. In regard to Covered Taxes: EUR 9 million

b. In regard to other taxes: EUR 0.8 million

4. Transfer of assets and liabilities in merger transaction with ACo 2 (another Constituent Entity also resident in A):

a. Gain (included in P&L): EUR 3.5 million (tax-free under A tax law)

b. Consideration received by ACo 1: issue of new shares in ACo 2 (consideration satisfies arm's length principle)

c. ACo 2 inherits ACo 1's tax basis in assets (for A tax purposes)

5. Loss (included in P&L) on sale of 8% shareholding (ACo 1 held these shares for 4 years): EUR 0.7 million

6. Gain (included in P&L) on sale of 10% shareholding (ACo 1 acquired half of these shares 3 years ago, and it acquired the other half during this current fiscal year): EUR 2 million

7. Prior period error of EUR 5 million (after tax expense of EUR 2 million) – This error was an understatement of revenue in a prior fiscal year, and is reported as increase in opening equity at start of current fiscal year

8. Pensions:

a. Pension liability expense in P&L: EUR 2.5 million

b. Contributed to pension fund for current fiscal year: EUR 3 million

9. Royalties expense:

a. Relates to licence of IP from BCo (Constituent Entity resident in B)

b. Actual expense: EUR 3 million

c. Transfer pricing adjustment by A tax authorities: EUR 1 million (i.e., EUR 2 million allowed as income tax deduction)

Based on those numbers, what is ACo 1's GloBE Income or Loss for the current fiscal year?

Answer

Computation of ACo 1’s GloBE Income or Loss:

1. Start with profit (in P&L) (Art. 3.1): EUR 30 million

2. Other comprehensive income: EUR 8 million: ignore.

However, EUR 6.5 million (before tax) qualifies as “Included Revaluation Method Gain or Loss” (Art. 3.2.1(d))

Thus, EUR 6.5 million added

3. Income tax expense:

In regard to Covered Taxes: add EUR 9 million (Art. 3.1.1(a))
In regard to other taxes: to the extent “other taxes” are those described in para. (c), (d) or (e) of definition of “Net Taxes Expense” in Art. 10.1.1, the amount will be added; but not otherwise. I will assume that no part of the “other taxes” falls with para. (c), (d) or (e).

Thus, EUR 9 million is added

4. Transfer of assets and liabilities in merger transaction, which qualifies as “GloBE Reorganisation”: EUR 3.5 million excluded from GloBE Income (Art. 3.2.1(e) & Art. 6.3.2)

Thus, EUR 3.5 million is deducted

5. Loss on sale of 8% shareholding: not treated as “Excluded Equity Gain or Loss”, because a portfolio shareholding (Art. 3.2.1(c) & definitions in Art. 10.1.1)

Thus, no adjustment

6. Gain on sale of 10% shareholding: treated as “Excluded Equity Gain or Loss”, because not a portfolio shareholding (Art. 3.2.1(c) & definitions in Art. 10.1.1)

Thus, EUR 2 million is deducted

7. Prior period error – qualifies as “Prior Period Errors and Changes in Accounting Principles” (Art. 3.2.1(h) & definition in Art. 10.1.1); note that the exception in para. (a) of definition does not apply, because the “error correction” resulted in a material increase (not decrease) in Covered Taxes of EUR 2 million. As the amount reported as an increase in opening equity is after the tax expense, that “after tax” amount should, I think, be the amount which is adjusted.

Thus, EUR 5 million is added

8. Pensions: Contribution to pension fund exceeds pension liability expense by EUR 0.5 million. Thus, Accrued Pension Expense (Art. 3.2.1(i) & definition in Art. 10.1.1) is negative EUR 0.5 million. There is nothing to indicate that Accrued Pension Expense cannot be negative.

Thus, EUR 0.5 million is deducted

9. TP adjustment for royalties expense (Art. 3.2.3)

EUR 1 million is added

Based on the above, ACo 1’s GloBE Income or Loss = 30m + 6.5m + 9m – 3.5m – 2m + 5m – 0.5m + 1m = EUR 45.5 million

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