GloBE Rules Series

ITQ G-

103

June 14, 2024

Question

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

XCo is subject to a low effective tax rate in jurisdiction X, due to tax incentives.

XCo is planning a major acquisition program of plant and equipment, for use in its manufacturing business. The plan is that the plant and equipment will be acquired and installed for use, at some point during the first half of the next fiscal year (which is the calendar year).

XCo wants to maximise its Substance-based Income Exclusion for the next fiscal year. With that as an objective, XCo has asked you whether the acquisition and installation of the plant and equipment should be at any particular date during the first half of the next fiscal year.

What is your advice?

Answer

The tangible asset carve-out for the SBIE is equal to 5% (increased during the years through to 2032: Art. 9.2.2) of the carrying value of the Eligible Tangible Assets: Art. 5.3.4.

Carrying value is computed as the average of the carrying value (net of accumulated depreciation, etc.) at the beginning and ending of the Fiscal Year, as recorded for the purposes of preparing the Consolidated Financial Statements (CFS) of the UPE: Art. 5.3.5.

The impact of a delay in acquisition of plant can be illustrated:

Scenario (1): Plant acquired on 1 February for 1,000, 10% straight line annual depreciation rate:

Carrying value: at beginning of year (0) and end of year (1,000 - (1,000 x 10% x 11/12) = 908.3).

Average carrying value = 454.15.

Tangible asset carve-out (@ 5%) = 454.15 x 5% = 22.7.

Scenario (2): Plant acquired on 1 December for 1,000, 10% straight line annual depreciation rate:

Carrying value: at beginning of year (1,000 - (1,000 x 10% x 1/12) = 991.7) and end of year (991.7 - (1,000 x 10%) = 891.7).

Average carrying value = 941.7.

Tangible asset carve-out (@ 5%) = 941.7 x 5% = 47.1.

Thus, to maximise the SBIE in the next Fiscal Year, XCo must ensure that the plant and equipment is recorded as at the beginning of the Fiscal Year for the purposes of preparing the UPE's CFS.

Two points should be noted:

It should be clarified whether that recording is dependent only on acquisition, or alternatively whether it requires both acquisition and installation ready for use.
It would be prudent to aim for an acquisition / installation date in early to mid December, to ensure that the recording is made as at the beginning of the next Fiscal Year. The amount of carrying value which is "lost" from depreciation in December should be minor, compared to the risk of missing the 1 January date: see above illustration.

Do you agree?

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