GloBE Rules Series

ITQ G-

113

September 13, 2024

Question

MNE Group A owns 100% of the shares in YCo, a Constituent Entity located in jurisdiction Y.

MNE Group A sells 100% of the shares to unrelated MNE Group B for a price of 180.

Both MNE Group A and MNE Group B are "within scope" of the GloBE rules.

For jurisdiction Y corporate income tax purposes:

The share sale is treated in the same manner as the transfer of YCo's assets.
A capital gains tax is imposed on the seller based on the difference between the price of 180 and the jurisdiction Y CIT tax basis of YCo's assets (100).

Please assume that the GloBE carrying value of YCo's assets, at the time of the share sale, was also 100.

Based on this limited information, what is the GloBE carrying value of the assets for MNE Group B?

Answer

The share sale satisfies Art. 6.2.2, which will treat the share sale (for GloBE purposes) as a transfer of assets.

Under Art. 6.3.1:

MNE Group A will recognise a gain of 80 on the transfer of assets. The gain is computed as the difference between (i) price of 180, and (ii) GloBE carrying value of assets (100) – i.e., 80.
MNE Group B's carrying value for GloBE purposes will be: "fair value [of the assets] to the extent gain or loss on those assets … was included in the GloBE Income or Loss computation of the disposing Constituent Entity" (para. 72 of Comm to Art. 6.3.1).

What does "to the extent" mean in this context? Does it mean that MNE Group B's GloBE carrying value will be 80 (i.e., the amount of MNE Group A’s gain, which was included in its GloBE Income or Loss computation)? Or alternatively, does it mean that MNE Group B's GloBE carrying value will be 180 (i.e., the fair value of the assets, because the whole amount of the fair value was taken into account in computing the gain, which was included in MNE Group A's GloBE Income or Loss computation)?

My preference is for 180 (i.e., the alternative meaning). If the first meaning applied, there could be absurd outcomes – for example, if MNE Group A's GloBE carrying value was 178, and thus its gain was 2, MNE Group B's GloBE carrying value would be 2!

Do you agree?

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