GloBE Rules Series

ITQ G-

053

March 31, 2023

Question

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is "within scope" of the GloBE rules.

The UPE has a 60% Ownership Interest in ACo, with the balance of 40% owned by minority shareholders.

ACo has the following financial income for a fiscal year (determined in accordance with the Acceptable Financial Accounting Standard used by the UPE in preparing its Consolidated Financial Statements) (numbers in parentheses are debits):

Profit (i.e., net income) (in P&L): 30,000
Income included in Profit under equity accounting method: 5,000
Other comprehensive income (relating to changes in liabilities under ACo's pension plan): 4,500 (after deducting tax of (1,500))
Immaterial deviations from the Acceptable Financial Accounting Standard: (800)
Income tax expense: (10,000) (includes (1,000) referable to income included in Profit under equity accounting method)
Withholding tax deducted from outbound royalties: (1,500) – this tax is economically borne by ACo under a "gross-up" condition in the licence agreement

Based on this information, what is ACo's GloBE Income or Loss for the fiscal year?

Answer

Note: Commentary references are to the Commentary to chapter 3 of the GloBE rules.

The fact that the UPE has only a 60% Ownership Interest in ACo does not impact the computation of ACo's GloBE Income: see Comm, para. 8.

Computation of ACo's GloBE Income

Start with Profit: 30,000
Income included in Profit under equity accounting method – negative adjustment of (5,000): see Art. 3.2.1(c) and definition of "Excluded Equity Gain or Loss" in Art. 10.1.1; also, see Comm, para. 51.
OCI (including tax) remains excluded – no adjustment: see Comm, para. 9. [Note that the description, "changes to liabilities under ACo's pension plan", does not indicate that there is any "Accrued Pension Expense" (see Art. 3.2.1(i) and definition of "Accrued Pension Expense" in Art. 10.1.1).]
Immaterial deviations from Acceptable Financial Accounting Standard – no adjustment: see Comm, para. 12.
Income tax expense (including 1,000 referable to income included in Profit under equity accounting method) – positive adjustment of 10,000: see Art. 3.2.1(a) and definition of "Net Taxes Expense" in Art. 10.1.1; also, see Comm, paras. 26 & 27.
Withholding tax deducted from outbound royalties (economically borne by ACo under "gross-up" condition, but legally imposed on payee) – no adjustment: Comm, para. 29. Thus, ACo's GloBE Income: 30,000 – 5,000 + 10,000 = 35,000

Do you agree?

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