GloBE Rules Series

ITQ G-

112

August 30, 2024

Question

XCo, a company located in jurisdiction X, is a 100%-owned Constituent Entity in MNE Group 1, which is "within scope" of the GloBE rules.

XCo owns plant and equipment ("assets") with accounting carrying value, jurisdiction X corporate income tax (CIT) basis, and GloBE carrying value all equal to 100.

MNE Group 1 sells 100% of the shares in XCo to unrelated MNE Group 2, for a price of 250. This price reflects the fact that MNE Group 2 places a market value of 250 on XCo's assets.

XCo is the only Constituent Entity (in MNE Group 2) located in jurisdiction X.

Based on these limited facts, after the acquisition by MNE Group 2, what is: (i) the GloBE carrying value of XCo's assets?; and (ii) the carrying value of XCo's assets for the purposes of the tangible asset carve-out under the Substance-based Income Exclusion?

Answer

This question was inspired by Example 6.2.1(e)-1 in the Inclusive Framework's Examples document.

Q(i)

Art. 6.2.2 does not apply, because jurisdiction X does not treat the sale of shares as a transfer of assets.

The GloBE carrying value of XCo's assets, after the acquisition by MNE Group 2, is 100: Art. 6.2.1(c).

Q(ii)

The computation of the carrying value of Eligible Tangible Assets for purposes of Art. 5.3.4 must be based on the average of the carrying value (net of depreciation, etc.) at the beginning and end of the Fiscal Year as recorded for the purposes of preparing the UPE's consolidated financial statements: Art. 5.3.5. Also, a proportional reduction in accordance with Art. 6.2.1(e) must be made (see below).

The relevant consolidated financial statements are those of MNE Group 2.

At the beginning of the Fiscal Year, the carrying value is zero.

At the end of the Fiscal Year, the carrying value is 250 (i.e., fair value), less current year depreciation. Fair value (as recorded for purposes of preparing the consolidated financial statements - i.e., after taking into account purchase accounting adjustments) must be used for the purposes of the tangible asset carve-out: para. 49 of Comm to Art. 5.3.5.

The question does not provide information on the depreciation rate used for the assets for financial accounting purposes. For convenience, I will assume that the rate is 10%. Also, the question does not provide information on the timing of the sale. Again, for convenience, I will assume that the sale occurred on 30 September in a Fiscal Year which uses the calendar year.

Based on those assumptions, the end of Fiscal Year carrying value is: 250 - (250 x 10% x 25%) = 243.75. See Notes below.

Thus, the carrying value (for the Fiscal Year in which the sale occurs) for the purposes of the tangible asset carve-out is computed as: (0 + 243.75) x 50% x 25% = 30.47 (see Notes).

Notes

Note 1: Example 6.2.1(e)-1 does not take current year depreciation into account. I think that is incorrect. What do you think?

Note 2: 50% is used to compute the average between 0 and 243.75.

Note 3: 25% is used to effect the proportional reduction, in accordance with Art. 6.2.1(e).

Do you agree?

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