GloBE Rules Series

ITQ G-

118

November 15, 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. 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.

XCo has a significant business located in jurisdiction X. Also, for many years, XCo has had a branch located in jurisdiction Y. The branch has a significant business located in jurisdiction Y. The branch constitutes a PE under the X/Y double tax treaty. Please assume that the corporate income tax (CIT) rate in both jurisdiction X and jurisdiction Y is 15%.

Neither jurisdiction X nor jurisdiction Y has implemented a QDMTT.

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

On 1 July 2024, XCo’s head office “transferred” valuable IP to the branch. The “transaction” was reflected in the financial accounts of both the head office and the branch as occurring for a consideration equal to fair market value (which was 1,000 on 1 July 2024). For accounting and tax purposes, the branch depreciates the IP at 10% p.a.

At the time of the “transaction”, the IP had (1) accounting carrying value, (2) GloBE carrying value, and (3) jurisdiction X tax basis, all equal to nil.

Under the jurisdiction Y CIT law, the branch obtains a tax basis of 1,000 in the IP. The jurisdiction X CIT law does not tax capital gains – thus, the “transaction” is not taxable for the XCo head office.

Based on these limited facts, what is the GloBE carrying value of the IP as at 31 December 2024?

Answer

For GloBE purposes: (1) XCo’s head office is a “Main Entity”; (2) the branch is a “Permanent Establishment” (PE); and (3) the Main Entity and the PE are both Constituent Entities.

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

As the TCSH does not apply in jurisdiction Y, the Transition Year for jurisdiction Y is 2024.

Art. 6.3.2 (GloBE Reorganisation) does not apply, due to the “transfer” occurring before jurisdiction X’s Transition Year: para. 70.1 of Comm on Art. 6.3.

However, as 2024 is before jurisdiction X’s Transition Year, Art. 9.1.3 can apply: para. 10.1.1 of Comm to Art. 9.1.3.

The issue is: is the “transfer” of IP from the Main Entity to the PE (i.e., an intra-entity “transfer”) a “transfer of assets”, for the purposes of Art. 9.1.3?

Such a “transfer” is not expressly referred to in the Comm on Art. 9.1.3. However, para. 10.3 of that Comm says that “Article 9.1.3 also applies to a transfer or deemed transfer of assets within the same Entity”. As the “transfer” is accounted for as a transfer by both the head office and the branch (see para. 10.2 of that Comm), the “transfer” should qualify as a “transfer of assets”, for the purposes of Art. 9.1.3.

If that is correct, then Art. 9.1.3 would apply to treat the GloBE carrying value of the IP, immediately after the “transfer” (i.e., 1 July 2024), as nil. As no further facts are provided in the question, the GloBE carrying value as at 31 December 2024 would also be nil.

Do you agree?

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