GloBE Rules Series

ITQ G-

011

April 1, 2022

Question

An MNE Group has one Constituent Entity, XCo, located in jurisdiction X.

At the beginning of the 2025 Fiscal Year, XCo has these operating assets in its balance sheet:

Plant & equipment #1: cost of 20,000 (including capitalised payroll expenses of 5,000); accumulated depreciation of 4,000
Plant & equipment #2: cost of 14,000; accumulated depreciation of 2,000
Land #1: cost of 10,000; impairment adjustment of 3,000
Land #2: cost of 15,000

During the 2025 Fiscal Year:

XCo sells plant & equipment #2 for a price of 15,500
XCo purchases plant & equipment #3 for 5,000
XCo starts holding Land #2 for sale

At the end of the 2025 Fiscal Year, XCo's balance sheet shows:

Plant & equipment #1: accumulated depreciation of 6,000
Plant & equipment #3: accumulated depreciation of 250
Land #1: a further impairment adjustment of 1,000 (i.e., total impairment adjustment is now 4,000)
Land #2: held for sale

Note: With the exception of Land #2: at year-end, all of these assets are being used in the production of XCo's goods.

What is the MNE Group's tangible asset carve-out for jurisdiction X for the 2025 Fiscal Year?

Answer

1. P&E #1:

1.1 Beginning of year carrying value: 20,000 – 4,000 = 16,000

1.2 End of year carrying value: 20,000 – 6,000 = 14,000

1.3 Average carrying value: 15,000 Note: The 5,000 of capitalised payroll expenses is not excluded.

2. P&E #2:

2.1 Beginning of year carrying value: 14,000 – 2,000 = 12,000

2.2 End of year carrying value: nil (sold)

2.3 Average carrying value: 6,000

Note: Sale price is irrelevant.

3. P&E #3:

3.1 Beginning of year carrying value: nil (purchased)

3.2 End of year carrying value: 5,000 – 250 = 4,750

3.3 Average carrying value: 2,375

4. Land #1:

4.1 Beginning of year carrying value: 10,000 – 3,000 = 7,000

4.2 End of year carrying value: 10,000 – 4,000 = 6,000

4.3 Average carrying value: 6,500

5. Land #2:

5.1 Beginning of year carrying value: 15,000

5.2 During year, XCo starts holding Land #2 for sale

5.3 End of year: held for sale (Note 1)

5.4 End of year carrying value: nil (Note 2)

5.5 Average carrying value: 7,500

Note 1: Assuming Land #2 satisfies the Commentary’s requirements to be considered “held for sale”.

Note 2: Art. 5.3.4 states that “the tangible asset carve-out computation shall not include the carrying value of property (including land or buildings) that is held for sale, lease or investment”. However, it does not indicate the treatment of such property which becomes “held for sale” during the year. I think the logical treatment is to include its carrying value at the beginning of the year (when it was not “held for sale”), and to include a carrying value of nil at year-end, and then compute the average carrying value in the same way as for a disposal during the year.

6. Conclusions:

6.1 Aggregate average carrying values of Eligible Tangible Assets = 15,000 + 6,000 + 2,375 + 6,500 + 7,500 = 37,375

6.2 2025 rate: 7.6%

6.3 Tangible asset carve-out for 2025 = 37,375 x 7.6% = 2,840.5

Do you agree?

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