GloBE Rules Series

ITQ G-

065

July 28, 2023

Question

XCo (a company located in jurisdiction X) and YCo (a company located in jurisdiction Y) are both Constituent Entities in an MNE Group which is "within scope" of the GloBE rules. XCo and YCo have been members of the MNE Group for over 10 years.

For the MNE Group, the Transition Year for both jurisdiction X and jurisdiction Y is the 2024 fiscal year (31 December year-end).

Jurisdiction X imposes a 20% corporate income tax, and jurisdiction Y imposes a 25% corporate income tax.

XCo was the owner of IP. The IP had a carrying value in XCo's balance sheet of EUR 5m. However, its fair market value was EUR 150m. XCo's tax basis in the IP was zero, and XCo had a deferred tax liability of EUR 1m in respect of the IP, due to accelerated tax depreciation.

On 1 January 2022, XCo sold the IP to YCo for a price of EUR 150m. XCo derived a taxable gain of EUR 150m on the sale.

Under the accounting standard used to prepare the MNE Group's consolidated financial statements: (1) At the purchase date, YCo has an accounting carrying value in the IP equal to XCo's accounting carrying value at disposition (i.e., EUR 5m); and (2) YCo amortises the IP at the rate of 10% per annum (reducing balance method).

For jurisdiction Y corporate income tax purposes: (1) At the purchase date, YCo has a tax basis of EUR 150m in the IP; and (2) YCo amortises the IP at the rate of 20% per annum (reducing balance method).

At the start of the 2024 fiscal year, what will be YCo's treatment under Art. 9.1.3 in respect of the IP?

Answer

(1) YCo's GloBE carrying value in IP:

As at the purchase date (1 January 2022), YCo’s GloBE carrying value in the IP is EUR 5m (i.e., XCo's accounting carrying value on that date).

To determine the GloBE carrying value at 1 January 2024 (the start of the Transition Year), we must deduct 2 years of amortisation, using the accounting amortisation rate and method, but applied to the GloBE carrying value (and not YCo's accounting carrying value).

The amortisation in 2022 is: EUR 5m x 10% = EUR 0.5m (giving a carrying value at 31 December 2022 of EUR 4.5m).

The amortisation in 2023 is: EUR 4.5m x 10% = EUR 0.45m.

Thus, YCo's GloBE carrying value at 1 January 2024 is EUR 4.05m.

[See para. 10.1 of Comm to Art. 9.1.3 (added by Feb23 AG, section 4.3.3)].

(2) YCo's deferred taxes relating to IP:

In accordance with para. 10.9 of Comm to Art. 9.1.3 (added by Feb23 AG, section 4.3.3) …

As at the purchase date, YCo's prima facie deferred tax asset relating to the IP would be: [EUR 150m x 20%] + [EUR (1m)] = EUR 29m.

However, "[a] deferred tax asset created under this rule shall not exceed the Minimum Rate multiplied by the difference in the local tax basis in the asset and the GloBE carrying value of the asset …". This limitation is: [EUR 150m – EUR 5m] x 15% = EUR 21.75m.

Thus, as at the purchase date, YCo would have (for GloBE purposes) a deferred tax asset of EUR 21.75m relating to the IP.

Para. 10.9 says: "This deferred tax asset is adjusted annually in proportion to any decrease in the carrying value of the asset for the year, for example due to depreciation, amortization, or impairment."

The meaning of this sentence is not totally clear – however, my "best guess" is this: Over the 2022 and 2023 years, the GloBE carrying value of the IP is reduced by an aggregate of 19% (i.e., 10% per annum reducing balance) – the deferred tax asset should also be reduced by 19%.

If this is correct, then YCo's deferred tax asset (for GloBE purposes) in the IP as at 1 January 2024 would be: EUR 21.75m x 81% = EUR 17.62m.

(3) Final answer:

GloBE carrying value: EUR 4.05m. Deferred tax asset (for GloBE purposes): EUR 17.62m.

Do you agree?

ITQ Disclaimer

This International Tax Quiz (ITQ) contains general information only, and none of International Insights Pte Ltd, its employees or directors is, by means of this ITQ, rendering professional advice or services. You use the content of this ITQ strictly at your own risk. You should not rely on all or any part of the content of this ITQ in making decisions to take action (including inaction) in regard to tax or other matters. Before making any decision or taking any action (including inaction) that may affect your tax position, your finances or your business, you should consult a qualified professional advisor. None of International Insights Pte Ltd, its employees or directors shall be responsible for any loss whatsoever sustained by any person who relies on the content of this ITQ.