GloBE Rules Series

ITQ G-

137

June 27, 2025

Question

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is "within scope" of the GloBE rules. It is the only Constituent Entity located in jurisdiction A.

ACo uses the calendar year as its Fiscal Year. ACo owns and operates a large manufacturing plant in jurisdiction A.

In 2023, ACo made a significant capital investment in expanding the size of the plant. Under the jurisdiction A CIT law, if a company makes a large capital investment and that investment is pre-approved by a government agency, the company is given a choice of tax treatment: either (1) a reduced CIT rate for 5 years, or (2) tax depreciation based on 200% of the capital investment.

ACo initially chose option (1). However, it then sought approval from the government agency (which was granted) to change to option (2). Despite the tax depreciation, ACo did not incur a tax loss (for jurisdiction A CIT purposes) in any of the relevant years.

For financial accounting purposes, ACo established a deferred tax asset of 2,000 at the beginning of 2024. The 2,000 reflected the jurisdiction A standard CIT rate of 10%. ACo then reversed that deferred tax asset by 200 in each of the years 2024 to 2033.

Please assume that ACo does not qualify for the Transitional CbCR Safe Harbour.

Jurisdiction A has not implemented a QDMTT.

In the residence jurisdiction of the UPE of the MNE Group, the GloBE rules have been implemented, effective 1 January 2025.

Based on this information, what impact will the annual reversals of the deferred tax asset have on ACo's Adjusted Covered Taxes in each of 2025, 2026, and 2027?

Answer

Transition Year, for jurisdiction A, is 2025.

For financial accounting purposes, at the beginning of 2025 ACo discloses a deferred tax asset of 1,800 (i.e., the original 2,000, minus 200 reversal in 2024).

Prima facie, that deferred tax asset would be taken into account in determining ACo’s Adjusted Covered Taxes.

However, the key issue is: what is the impact of Art. 9.1.2? See paras. 8.2 to 8.12 of Comm to Art. 9.1.2.

Pre-approval of investment by government agency: The facts suggest that the pre-approval falls within subpara. (a) of para. 8.5. That is, the facts do not indicate that “the grant of [the] relief [merely] requires a decision or acknowledgement that the taxpayer has satisfied or is obligated to satisfy the statutory criteria for that [tax relief].”

Initial exercise of choice by ACo: This would not fall within subpara. (b) of para. 8.5, because the “retroactively” limb would not be satisfied.

Approval from government agency to change to option (2): The “approval” aspect of the change to option (2) does not fit neatly into either subpara. (a) or (b) of para. 8.5.

ACo’s change to option (2): This might fall within subpara. (b) of para. 8.5, depending on whether an assessment had been made or a tax return was already filed at the time ACo exercised its change to option (2).

The following assumes: (1) that the facts fall within either or both of subpara. (a) & (b) of para. 8.5; and (2) the 2 government approvals, ACo’s initial exercise of choice, and ACo’s change to option (2) all occur on or before 18 November 2024 …

The “Grace Period” is 2025. The “Grace Period Limitation” is 400 (i.e., 2,000 x 20%).

2025: 200 reversal. As this is within the Grace Period Limitation, the full 200 qualifies as ACo’s Adjusted Covered Taxes for 2025.

2026 & 2027: Grace Period has ended. Thus, no part of 200 reversal qualifies as ACo’s Adjusted Covered Taxes for each year.

Do you agree?

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