GloBE Rules Series

ITQ G-

115

October 4, 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 moves its place of effective management to jurisdiction Y. This has the effect of causing XCo to cease to be a resident under jurisdiction X corporate income tax (CIT) law, and it also causes XCo to become a resident under jurisdiction Y CIT law.

Under the jurisdiction X CIT law, XCo is deemed to sell and re-acquire all its assets for fair market value (FMV) at the time of the residence change. Also, under the jurisdiction Y CIT law, XCo is deemed to acquire all its assets for FMV at the time of the residence change.

Please assume that, at the time of the residence change, XCo's assets had:

FMV of 300
Accounting carrying value of 220
GloBE carrying value of 200
Jurisdiction X tax basis of 180

Based on these limited facts, what will be the GloBE impact of the residence change?

Answer

(1) GloBE impact of jurisdiction X CIT on residence change

XCo will derive profit of 300 – 180 = 120 for jurisdiction X CIT purposes.

Depending on jurisdiction X CIT law, this will likely increase XCo's Adjusted Covered Taxes in 202X, and reduce its Adjusted Covered Taxes (by virtue of tax depreciation or similar) in future years.

(2) GloBE impact of residence change

XCo will cease to be located in jurisdiction X, and it will commence to be located in jurisdiction Y, effective the year immediately following 202X: Art. 10.3.1 and Art. 10.3.6.

There will be no other GloBE impact, unless an election is made under Art. 6.3.4 …

(3) GloBE impact if election is made under Art. 6.3.4

The change of residence from jurisdiction X to jurisdiction Y is a situation which is covered by Art. 6.3.4: para. 78 of Comm on Art. 6.3.4.

If the election is made, XCo will include 300 – 220 = 80 in its GloBE Income. That amount is either included in GloBE Income in 202X, or is included in 5 equal instalments in 202X and in the 4 immediately subsequent years (subject to an acceleration if XCo leaves the MNE Group within this period).

XCo's deferred tax assets and deferred tax liabilities which existed prior to the residence change, must be fully reversed: para. 81.1 of Comm to Art. 6.3.4.

XCo's GloBE carrying value of its assets after the residence change will be 300.

As the jurisdiction Y tax basis and the GloBE carrying value are both 300, XCo will not recognise any deferred tax assets or liabilities (for GloBE purposes) on the residence change.

Do you agree?

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