GloBE Rules Series

ITQ G-

114

September 27, 2024

Question

The UPE of an MNE Group has these figures in its consolidated income statement for each of years 1 to 4 (in EUR millions):

Interest income: 1,200

Interest expense: (900)

Net interest income: 300

Net fee and commission income: 100

Other income: 40

Total operating income: 440

This presentation is in accordance with the Acceptable Financial Accounting Standard (as defined in Art. 10.1.1) which applies in the UPE’s home jurisdiction.

Based on this limited information, does the MNE Group satisfy the revenue threshold test in Art. 1.1.1, in respect of year 5?

Answer

The key issue is the interpretation of para. 10.5 in the Comm to Art. 1.1.1:

"For financial entities, which may not record gross amounts from transactions in their financial statements with respect to certain items, the item(s) considered similar to revenue under the [UPE's] financial accounting standards should be used in the context of financial activities. Those items could be labelled as 'net banking product', 'net revenues', or others depending on the financial accounting standard. For example, if the income or gains from a financial transaction, such as an interest rate swap, is appropriately reported on a net basis under the [UPE's] financial accounting standards, the term 'revenue' means the net amount from the transaction."

Based on para. 10.5, the net fee and commission income of 100 should be counted on a net basis - i.e., 100. Clearly, the other income of 40 should also be counted.

But what about interest? The UPE's consolidated income statement (1) does not report only gross interest income and (2) does not report only net interest income: it reports BOTH gross and net. How does para. 10.5 apply when a bank reports both gross and net interest income? The Comm on Art. 1.1.1 does not provide a clear answer.

The IF's Guidance on Implementation of CbC Reporting (May 2024) says:

"For example, if the income statement prepared in accordance with the applicable accounting rules shows sales revenue, net capital gains from sales of assets, unrealized gains, interest received, and extraordinary income, the amount of those items reported in the income statement should be aggregated and reported as Revenues in Table 1. … The amount of any income items shown on the income statement need not be adjusted from a net amount."

This guidance was not clearly written with financial entities in mind. Also, the last sentence does not address the situation where both gross and net interest income is reported.

I don't think we can definitively say whether this UPE should count gross or net interest income, for the purposes of Art. 1.1.1.

If I had to express a preference for one view or the other, I would prefer the view that the net interest income should be counted.

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