GloBE Rules Series

ITQ G-

031

September 30, 2022

Question

X Group sells 100% of the shares in ZCo (a Constituent Entity located in jurisdiction Z) to Y Group. ZCo is not an Investment Entity.

Both groups are MNE Groups "within scope" of the GloBE rules, and both use the calendar year as the fiscal year.

The sale is effective on 31 May of Year 2.

In its consolidated financial statements for Year 2, X Group reports these 2 items in regard to ZCo: (1) 200 of payroll costs incurred in the 5 months to 31 May; and (2) 50 of depreciation incurred in the 5 months to 31 May. The depreciation relates to a tangible asset ("asset A") which has a carrying value (net of accumulated depreciation) at the start of Year 2 of 240.

In its consolidated financial statements for Year 2, Y Group reports these items in regard to ZCo: (1) 300 of payroll costs incurred in the 7 months to 31 December; and (2) carrying value of asset A (net of accumulated depreciation for Y Group's 7 months of ownership of ZCo) of 350 – this reflects the fair value of asset A, net of Y Group's 7 months' depreciation.

Please assume that: (i) ZCo is the only Constituent Entity in jurisdiction Z for both groups; (ii) the jurisdiction Z corporate income tax law does not treat the transfer of shares in ZCo as a transfer of ZCo's assets and liabilities; (iii) the payroll costs satisfy the conditions for the payroll carve-out in Art. 5.3.3; and (iv) asset A is an Eligible Tangible Asset and it satisfies the conditions for the tangible asset carve-out in Art. 5.3.4.

For each of X Group and Y Group, what will be the amount of Substance-based Income Exclusion for Year 2 for jurisdiction Z?

Answer

1. X Group:

1.1 Payroll carve-out (Art. 5.3.3 & Art. 6.2.1(d)):

5% x 200 = 10

1.2 Tangible asset carve-out (Art. 5.3.4 & Art. 6.2.1(e)):

Carrying value at start of Year 2 (net of accumulated depreciation): 240

Carrying value at end of Year 2 (for X Group) (net of accumulated depreciation): 240 – 50 =190 (see Example 6.2.1-1 in IF's Examples document)

Thus, carrying value for Year 2 = (240 + 190) / 2 = 215 (Art. 5.3.5)

Adjusted carrying value under Art. 6.2.1(e): 215 x 5/12 = 89.5833

Tangible asset carve-out: 5% x 89.5833 = 4.4792

1.3 Substance-based Income Exclusion for jurisdiction Z:

10 + 4.4792 = 14.4792

2. Y Group:

2.1 Payroll carve-out (Art. 5.3.3 & Art. 6.2.1(d)):

5% x 300 = 15

2.2 Tangible asset carve-out (Art. 5.3.4 & Art. 6.2.1(e)):

Carrying value at start of Year 2 (for Y Group) (net of accumulated depreciation): 0

Carrying value at end of Year 2 (net of accumulated depreciation): 350 (step-up to fair value – see Commentary on Art. 6.2.1(e) and Example 6.2.1-1 in IF's Examples document)

Thus, carrying value for Year 2 = (0 + 350) / 2 = 175 (Art. 5.3.5)

Adjusted carrying value under Art. 6.2.1(e): 175 x 7/12 = 102.0833

Tangible asset carve-out: 5% x 102.0833 = 5.1042

2.3 Substance-based Income Exclusion for jurisdiction Z:

15 + 5.1042 = 20.1042

Do you agree?

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