GloBE Rules Series

ITQ G-

110

August 16, 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.

YCo, a company located in jurisdiction Y, is also a Constituent Entity in the same MNE Group. YCo is the only Constituent Entity located in jurisdiction Y.

Jurisdiction X does not levy corporate income tax (CIT) on asset disposals (other than inventory).

Jurisdiction Y has a CIT rate of 25%.

XCo sells an asset (not inventory) to YCo for a price of 200 (which is its fair market value).

The cost and the accounting carrying value of the asset for XCo are both 120.

For accounting purposes, both XCo and YCo record the sale at cost (i.e., 120), in accordance with the relevant accounting standard.

YCo amortises the asset for accounting purposes on a straight-line basis over 10 years. However, YCo amortises the asset for jurisdiction Y CIT purposes on a straight-line basis over 5 years.

Based on this limited information, what will be the impact under the GloBE rules, for each of XCo and YCo?

Answer

Art. 3.2.3 (transfer pricing) applies to the sale. This answer is based on the example in para. 104.2 of the Comm to Art. 3.2.3.

1. XCo

XCo will include 80 of gain in its GloBE Income.

There will be no impact on XCo’s Adjusted Covered Taxes.

2. YCo

Accounting carrying value = 120.

Jurisdiction Y CIT tax basis = 200.

For accounting purposes, YCo will record a deferred tax asset of 20 (i.e., 25% x (200 – 120)).

However, due to Art. 3.2.3, GloBE carrying value = 200.

Therefore, YCo will not record any deferred tax asset for GloBE purposes upon acquisition.

YCo will amortise the asset, under the relevant accounting standard, based on its GloBE carrying value. Thus, annual amortisation expense for GloBE purposes will be 20 (i.e., 200 x 10%).

Annual amortisation deduction for jurisdiction Y CIT purposes will be 40 (i.e., 200 x 20%).

Annual deferred tax expense for GloBE purposes will be 3 (i.e., 20 x 15%), after applying recasting at 15%, because the jurisdiction Y CIT rate is 25%.

DTL recapture under Art. 4.4.4 will apply, unless the DTL is a Recapture Exception Accrual in Art. 4.4.5.

If the asset qualifies for the tangible asset carve-out in the Substance-based Income Exclusion, the tangible asset carve-out will be computed based on YCo’s accounting carrying value of 120: see para. 49 of Comm to Art. 5.3.5.

Do you agree?

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