GloBE Rules Series

ITQ G-

117

November 8, 2024

Question

ACo, a company located in jurisdiction X, is a Constituent Entity in an MNE Group which is "within scope" of the GloBE rules. The UPE of the MNE Group is located in jurisdiction U, which implemented an IIR effective 1 January 2024. Please assume that all Fiscal Years are calendar years.

On 1 January 2026, ACo moves its place of effective management to jurisdiction Y. This has the effect of causing ACo to cease to be a resident under jurisdiction X corporate income tax (CIT) law, and it also causes ACo to become a resident under jurisdiction Y CIT law.

Under the jurisdiction X CIT law, ACo 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, ACo 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, ACo's assets had:

FMV of 500
Accounting carrying value of 280
GloBE carrying value of 250
Jurisdiction X tax basis of 200

Please also assume that all of ACo's assets are depreciated at 10% per annum for accounting purposes.

Neither jurisdiction X nor jurisdiction Y has implemented a QDMTT.

In regard to both jurisdiction X and jurisdiction Y, the MNE Group qualifies for the Transitional CbCR Safe Harbour in 2024, 2025, and 2026.

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

Answer

The change of residence is treated as a "transfer of assets" for the purposes of Art. 9.1.3: para. 10.3 of Comm to Art. 9.1.3.

The Transitional CbCR Safe Harbour (TCSH) applies in jurisdictions X and Y in 2024, 2025, and 2026. This means that the "Transition Year" for both jurisdictions is 2027: para. 25 of TCSH chapter in Annex A of Comm.

At the time of the residence change (1 January 2026), the GloBE carrying value of the assets is 250. That carrying value is then depreciated at 10% per annum straight line: para. 10 of Comm to Art. 9.1.3. Thus, at 1 January 2027 (the start of the Transition Year), the GloBE carrying value will be 250 x 90% = 225.

For juris. X CIT purposes, the residence change causes ACo to recognise a taxable gain of 500 – 200 = 300. The resulting tax liability gives ACo the right to recognise a deferred tax asset (DTA) at the time of the residence change: para. 10.8.1 of Comm to Art. 9.1.3. Prima facie, the amount of the DTA will be equal to the juris. X tax paid on the residence change, plus any DTA which was reversed or not created by ACo because of the gain. However, the amount of the DTA will be capped at 15% x (difference between (1) "local tax basis", and (2) GloBE carrying value): para. 10.8.2 of Comm to Art. 9.1.3. Based on the IF's Examples document, "local tax basis" refers to the stepped-up tax basis (500). If this is correct, then the cap will be: 15% x 250 = 37.5.

Assuming the DTA is 37.5 as at 1 January 2026, it will be reduced by 10% per annum. Thus, at 1 January 2027, the DTA will be 37.5 x 90% = 33.75.

Final answer: At 1 January 2027 (start of the Transition Year): (1) GloBE carrying value = 225; (2) DTA = 33.75.

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