GloBE Rules Series

ITQ G-

088

February 16, 2024

Question

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is "within scope" of the GloBE rules. It is the only Constituent Entity located in jurisdiction A. Both ACo and the MNE Group use the calendar year as their Fiscal Year.

100% of the shares in ACo were purchased by the MNE Group (from third parties) in 2024.

ACo's financial accounts (i.e., reporting package) which are used in the preparation of the Group's Consolidated Financial Statements for 2024, 2025, and 2026: (1) include the effect of purchase price accounting (PPA) adjustments relating to the purchase of ACo's shares, (2) include the deferred tax expenses related to those PPA adjustments, and (3) do not include any impairment of goodwill.

Those financial accounts are used to prepare the MNE Group's CbC Report for 2024, 2025, and 2026.

Based on this limited information, will the CbC Report for 2024, 2025, and 2026 constitute a Qualified CbC Report, for the purposes of the Transitional CbCR Safe Harbour (in regard to jurisdiction A)?

Answer

A Qualified CbC Report is "a Country-by-Country Report prepared and filed using Qualified Financial Statements": Safe Harbours and Penalty Relief report (SHPR) (issued by IF in December 2022).

Therefore, the question becomes this: are the financial accounts which are used to prepare the MNE Group's CbC Report for 2024, 2025, and 2026 "Qualified Financial Statements" (QFS)?

Prima facie, ACo's financial accounts (i.e., reporting package) which are used in the preparation of the Group's Consolidated Financial Statements (CFS) for 2024, 2025, and 2026 satisfy the revised definition of QFS in the December 2023 AG (para. 17 of SHPR, as amended by section 1.3 of December 2023 AG).

However, do any of the subsequent comments in the December 2023 AG deem those financial accounts not to constitute QFS?

Issue (1): Inclusion of the effect of purchase price accounting (PPA) adjustments:

Such inclusion will not adversely impact the status of the financial accounts as QFS, if the "consistent reporting condition" (para. 17.4 of SHPR) is met, and the "goodwill impairment adjustment" (para. 17.5 of SHPR) is made.

Consistent reporting condition: "The MNE Group has not submitted a CbC Report for a fiscal year after 31 December 2022 that was based on the Constituent Entity's reporting package … without the PPA adjustments, except where the Constituent Entity was required by law or regulation to change its reporting package … to include PPA adjustments."

As ACo's acquisition was in 2024, then the relevant PPA adjustments were not included in the MNE Group's 2023 CbC Report. Does this mean that the condition is failed? Arguably not, because the 2023 CbC Report was not based on ACo's reporting package: ACo was not yet a member of the group – therefore, the 2023 CbC Report was not based on ACo’s reporting package without the PPA adjustments.

Goodwill impairment adjustment: based on the facts, this adjustment is not relevant.

Issue (2): Inclusion of deferred tax expenses related to the PPA adjustments:

The inclusion of the deferred tax expenses will not adversely impact the status of the financial accounts as QFS: see Example 1 in para. 74.5 of SHPR (added by December 2023 AG).

Conclusion: the CbC Report for 2024, 2025, and 2026 respectively should constitute a Qualified CbC Report.

Do you agree?

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