GloBE Rules Series

ITQ G-

055

April 21, 2023

Question

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

XCo has established a "defined benefit" Pension Fund in jurisdiction X to provide retirement benefits for most of its employees.

XCo's most senior employees, however, are not covered by the Pension Fund. Instead, their individual employment contracts require XCo to pay "defined benefit" pensions directly to them after they leave XCo's employment (provided they satisfy a "minimum employment period" condition).

In Year 1:

XCo has an accounting profit of 200 (before tax and before pension expenses)
XCo accrues 30 of pension expenses: (1) 20, in regard to contributions to the Pension Fund; and (2) 10, in regard to the pension benefits to be provided to the senior employees
XCo makes no "pension related" payments
The jurisdiction X corporate income tax law (20% tax rate) allows deductions for: (1) contributions paid to pension funds; and (2) pension benefits paid directly to pension beneficiaries – in both cases, the deduction is allowed in the fiscal year in which the payment is made

In Year 2:

XCo has an accounting profit of 300 (before tax and before pension expenses)
XCo does not accrue either of the 2 pension expenses – instead, XCo pays (1) a contribution of 12 to the Pension Fund; and (2) pension benefits of 8 directly to (former) senior employees

In Year 3:

XCo has an accounting profit of 400 (before tax and before pension expenses and pension income)
The Pension Fund earns income of 80, and XCo's pension liabilities for Year 3 are 20; thus, the Pension Fund has a net pension surplus of 60
The net pension surplus: (1) is retained in the Pension Fund, (2) is included as income in XCo's profit and loss statement, and (3) is not taxable under the jurisdiction X corporate income tax law
XCo accrues 20 of pension expenses regarding pension benefits to be provided to senior employees
XCo pays pension benefits of 10 directly to (former) senior employees

Based on this limited information, what is XCo's (1) Financial Accounting Net Income or Loss, and (2) GloBE Income or Loss, for each of Years 1, 2, and 3?

Answer

Year 1

Current tax expense: 200 x 20% = 40
Deferred tax income: 30 x 20% = (6)
Income tax expense: 40 – 6 = 34
FANIL: 200 – 34 – 30 = 136
Accrued Pension Expense (AEP) (Art. 10.1.1 definition; AG, section 2.5 formula): (-20 + 0) x (-1) = +20
GloBE Income or Loss: 136 + 34 (Tax Expense) + 20 (Accrued Pension Expense) = 190

Year 2

Current tax expense: (300 – 20) x 20% = 56
Deferred tax expense: 20 x 20% = 4
Income tax expense: 56 + 4 = 60
FANIL: 300 – 60 = 240
AEP: (0 + 12) x (-1) = -12
GloBE Income or Loss: 240 + 60 (Tax Expense) – 12 (AEP) = 288

Year 3

Current tax expense: (400 – 10) x 20% = 78
(i) Deferred tax expense: 8 x 20% = 1.6 (i.e., due to the net pension surplus, XCo does not need to make the further 8 of contributions to the Pension Fund, based on the pension expense accrued in Year 1; the opening balance of 1.6 is therefore reversed: see example 2 in AG); (ii) Deferred tax income: (10 x 20%) = (2); (iii) Net deferred tax income: (0.4)
Income tax expense: 78 – 0.4 = 77.6
FANIL: 400 + 60 – 77.6 – 20 = 362.4
AEP: (60 + 0) x (-1) = -60
GloBE Income or Loss: 362.4 + 77.6 (Tax Expense) – 60 (AEP) = 380

Do you agree?

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