GloBE Rules Series

ITQ G-

034

October 21, 2022

Question

XCo (located in jurisdiction X) is a Constituent Entity in an MNE Group, which is "within scope" of the GloBE rules. The MNE Group uses the calendar year as its fiscal year.

XCo owns 100% of the shares in YCo, which is located in jurisdiction Y.

On 30 June in year 1, XCo sells 100% of the shares in YCo to ZCo, which is an unrelated company located in jurisdiction Z. ZCo is a member of a group which is not an MNE Group "in scope" of the GloBE rules.

The consideration for the sale is in 2 parts: (1) the issue of new shares by ZCo to XCo (this represents 90% of the value of the total consideration), and (2) cash (this represents 10% of the value of the total consideration). The issue of shares does not cause ZCo to become a member of XCo's MNE Group – i.e., the MNE Group does not control ZCo.

In XCo's financial statements, it reports a gain of 100 on the sale of the shares in YCo. The gain is computed as: value of consideration (300) minus carrying value of shares in YCo (200) = 100. XCo’s carrying value of the shares is equal to its tax basis in the shares, for X tax law purposes.

Under the jurisdiction X tax law, XCo recognizes a gain of 10, which represents the gain referable to the cash component of the consideration. XCo is liable for jurisdiction X Covered Tax of 2.5 on that gain. The remainder of the gain is exempt.

Under the jurisdiction Y tax law, the sale of the 100% shares in YCo is treated as a sale, and re-acquisition, of YCo’s assets and liabilities. The deemed sale price and the deemed re-acquisition price of the assets are both equal to the value of the consideration paid to XCo (i.e., 300), plus the value of the liabilities deemed to be transferred and re-acquired (200) – i.e., total consideration of 500. At the date of the transaction, YCo has assets with a carrying value (and tax basis) of 250. The jurisdiction Y corporate income tax rate of 20% applies to any gain deemed to be derived by YCo.

The jurisdiction Y tax law does not impose any tax on XCo in regard to the sale.

Based on these facts, what are the consequences, under the GloBE rules, for XCo's MNE Group? Please assume that XCo’s MNE Group does not make an election under Art. 6.3.4 in regard to YCo.

Answer

1. XCo:

XCo's gain of 100 is excluded from its GloBE Income: Art. 3.2.1(c) (Excluded Equity Gain or Loss), regardless of the cash element of the consideration.

XCo's jurisdiction X tax of 2.5 is excluded from its Adjusted Covered Taxes: Art. 4.1.3(a) (current tax) & Art. 4.4.1(a) (deferred tax).

2. YCo:

A threshold issue is whether Art. 6.2.2 applies to the transfer of shares in YCo. In particular, who is "the seller" referred to the provision – XCo or YCo? Strangely, para. 64 in the Commentary suggests that “the seller” (i.e., the entity on which the jurisdiction Y Covered Tax is imposed) is YCo; but para. 68 in the Commentary suggests that "the seller" is XCo.

If "the seller" is XCo:

Art. 6.2.2 will not apply, as jurisdiction Y does not impose a Covered Tax on XCo.
There will be no further impact on XCo's GloBE rules position.
For jurisdiction Y tax purposes, YCo incurs a tax liability of 50 on its deemed gain of 250. That 50 will likely qualify as Adjusted Covered Taxes. As there should be no impact in YCo’s financial statements (which are used for the group consolidation), there should be no impact on YCo’s GloBE Income. Thus, YCo’s ETR in year 1 will be increased.

If "the seller" is YCo:

Art. 6.2.2 will potentially apply, as the jurisdiction Y Covered Tax is imposed on YCo.
But there is another issue with Art. 6.2.2: is it correct that the Covered Tax of 50 which is imposed on YCo is "based on the difference between the tax basis and the consideration paid in exchange for the Controlling Interest or the fair value of the assets and liabilities"? The consideration paid in exchange for the Controlling Interest is 300, reflecting the value of the assets minus the liabilities. In contrast, the Covered Tax imposed on YCo uses total consideration equal to (i) the value of consideration paid to XCo (300), plus (ii) the value of liabilities deemed to be transferred and re-acquired (200). Possibly, the total consideration of 500 can be accepted as corresponding to “the fair value of the assets and liabilities".
Assuming Art. 6.2.2 applies: for purposes of the GloBE rules, the share transfer will be treated as a disposal and acquisition of 4. YCo's assets and liabilities.
YCo's GloBE Income: (i) deemed gain of 250 included in GloBE Income (Art. 6.3.1); (ii) carrying value of assets and liabilities based on 500: para. 72 of Commentary.
YCo's Adjusted Covered Taxes: 50 included.

Regardless of whether Art. 6.2.2 applies: The allocation of YCo's GloBE Income and Covered Taxes for year 1 to XCo’s MNE Group must be determined, as the share transfer will cause YCo to leave the MNE Group during the year. I will leave that issue for another day!

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