GloBE Rules Series

ITQ G-

116

October 11, 2024

Question

On 1 January 2021, MNE Group 1 sells all the shares in ACo (a company located in jurisdiction A) to unrelated MNE Group 2 for a price of 300.

ACo owns a single asset and has no liabilities. That asset has accounting and tax carrying values of 120 at the time of sale.

The jurisdiction A corporate income tax (CIT) rate is 15%.

For jurisdiction A CIT purposes, the share sale is treated in the same manner as the sale of ACo's single asset. Thus, MNE Group 1 is subject to tax on 300 – 120 = 180, and MNE Group 2 acquires a tax basis of 300.

The relevant accounting standard permits "push down" accounting. Thus, in ACo's financial statements after the transaction, the asset is recognised with an accounting carrying value of 300.

For both accounting purposes and jurisdiction A CIT purposes, the asset is depreciated on a straight line basis over 10 years.

ACo's Transition Year is the year commencing 1 January 2024.

Based on these limited facts, what is the GloBE carrying value of the asset as at 1 January 2024?

Answer

As the sale occurred on 1 January 2021 (i.e., before the Transition Year), Art. 6.2.1(c) applies, and Art. 6.2.2 does not apply: para. 46.1 of Comm to Art. 6.2.

Thus, in accordance with Art. 6.2.1(c), "in the acquisition year [i.e., the year which commenced on 1 January 2021] and each succeeding year, [ACo] shall determine its GloBE Income or Loss and Adjusted Covered Taxes using its historical carrying value of the assets and liabilities".

Prior to the sale, ACo's asset had an historical accounting carrying value of 120. In ACo's financial statements after the sale, the asset is recognised with an accounting carrying value of 300. Under paras. 50 & 51 of Comm to Art. 6.2.1(c), the GloBE carrying value as at 1 January 2021 would be 120, unless "the MNE Group [i.e., MNE Group 2] does not have sufficient records to determine [ACo’s FANIL] with reasonable accuracy based on the unadjusted carrying values of the acquired assets and liabilities". Based on the limited information, it appears that this exception would not apply.

If, therefore, the asset's GloBE carrying value was 120 as at 1 January 2021, its GloBE carrying value as at 1 January 2024 (i.e., after 3 years of 10% per annum depreciation) would be 120 x 70% = 84.

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