Pillar 2 GloBE rules technical series: Addressing MNE group complexities under Pillar 2 GloBE

Following on from article two in our technical series on Pillar 2 GloBE, this article aims to peel away further layers of how the GloBE rules define MNE groups. In particular, we will look at some of the more complex situations likely to arise in determining an MNE group.

As discussed in our previous article, the starting point for GloBE reporting is to determine the MNE group by identifying constituent entities (CEs), their locations and the ultimate parent entity (UPE). For MNEs that have achieved this exercise, top-up tax calculations should be relatively straightforward, particularly in the early years where the transitional safe harbour relief delays the need for full GloBE calculations. 

However, complexities can arise when it’s unclear who the UPE is or when dealing with less common MNE group structures. To ensure that any obstacles that complicate GloBE reporting are minimised, MNE groups should improve their understanding of GloBE rules definitions that apply, particularly in relation to more complex MNE group structures.

Understanding UPEs and controlling interest definitions

A UPE is an entity that sits at the top of the ownership chain in that it directly or indirectly owns a controlling interest in any other entity and is not owned directly or indirectly through a controlling interest by another entity. Equally, a UPE could be the main entity of a group that owns one or more permanent establishments (PEs). In this case, a main entity includes the financial accounting net income or loss of a PE in its financial statements.

So, an essential step in determining the UPE is establishing what constitutes a controlling interest. By way of a reminder, a controlling interest is an ownership interest in an entity where the interest holder is required to consolidate the entity’s assets, liabilities, income, expenses, and cash flows on a line-by-line basis in accordance with an acceptable financial accounting standard, or would have been required if the interest holder had prepared the consolidated financial statements.

Challenges relating to unexpected results and deemed consolidated tests 

Complexities can arise where the UPE identified under GloBE rules is not the expected entity. In this case, necessary information may be required from an entity where high-level data has previously not been collected. This can result in data sourcing delays at a critical reporting stage. 

In addition, under the deemed consolidation test, if the UPE does not prepare financial statements, but would be required to if the application of applicable accounting standards were compulsory by law or regulation in the UPE jurisdiction, then it is necessary to assess the implications of consolidation. In such cases, an acceptable financial accounting standard or another financial accounting standard that is adjusted to prevent any material competitive distortions would be used.

Let’s take the example of a US trust structure that does not file consolidated accounts, yet it owns or has a controlling interest in multiple businesses outside of the US that are deemed in-scope due to the GloBE revenue threshold of €750m. If applicable accounting standards were applied to the trust and it produced consolidated financial statements exceeding the relevant Pillar 2 thresholds, then the US trust would be the UPE and subject to GloBE rules.

However, it’s important to bear in mind that similar situations can achieve very different outcomes, depending on which accounting standard is being used, particularly in relation to the treatment of subsidiaries. This not only sits at odds with the unified approach the GloBE rules aim for, but makes complying with the model rules much more complex. 

Dealing with multi-parented MNE groups

Under the model rules, a multi-parented MNE group refers to a situation in which two or more groups prepare consolidated financial statements yet financial performance is presented as a single economic unit in accordance with a stapled structure or dual-listed arrangement. In addition, at least one entity or PE of the combined group is located in a different jurisdiction from the other entities in the combined group.

A stapled structure is an arrangement between two or more UPEs of a separate group, whereby:

• 50% of the ownership interest of the UPEs is combined and cannot be transferred or traded independently and
• One of the UPEs prepares consolidated financial statements including the assets and liabilities of all entities.

By contrast, a dual-listed arrangement is an agreement between one or more UPEs whereby two or more separate legal entities are managed as a single economic unit, and where they make distributions to shareholders, this is based on a fixed ratio. 

In terms of practicalities, the UPEs of the separate groups shall be considered the UPEs of the multi-parented group. The UPEs of the multi-parented group shall apply the income inclusion rule (IIR) with respect to their allocable share of the top-up tax of any low-taxed CE. Where applicable, all of the CEs shall apply the undertaxed payments rule (UTPR), taking into account the top-up tax of each low-taxed CE of the multi-parented group.

In addition, the UPEs must submit the GloBE Information Return unless a single designated filing entity is appointed to file information concerning each group.

Dealing with less common structures

The structure of entities plays a key role in determining how the GloBE rules are approached.  In article two of this technical series, we looked briefly at how to approach the rules when a joint venture is involved. So, how are less common structures treated, such as cooperatives where a deductible dividend regime (DDR) applies? The DDR gives the UPE the right to deduct dividends paid to shareholders from its own tax liability. A DDR is one where a tax deduction is given to a company paying a dividend, with the dividend then being fully taxable in the hands of the recipient.

In practical terms, the DDR only applies where certain conditions are met. The first is that the dividend must be taxable in the hands of the recipient within 12 months of the end of the MNE group’s fiscal year. The dividend must also be taxed at a rate that is the same or higher than the 15% minimum rate specified by the GloBE rules. The OECD expects that the combined amount of the adjustment-covered taxes paid by the UPE and the dividend recipients to be at least equal to 15%. In addition, certain conditions apply to the recipient, namely, that the recipient is:

• a natural person tax resident in the UPE’s jurisdiction and holds ownership interests that, on aggregate, give a right to 5% or less of the UPE’s profits and assets, or
• a resident of the UPE’s jurisdiction and is a governmental entity, an international or non-profit organisation, or a pension fund that is not a pension services entity, which holds ownership interests that, on aggregate, give a right to 5% or less of the UPE’s profits and assets.

Identifying entity exclusions such as non-material CEs

Certain entities, such as non-material CEs (NMCEs), are included in the MNE group, even though they are excluded from the consolidated financial statements based solely on size or materiality. Materiality relies on the audited financial statements and is not a judgement made by the UPE appointed to report GloBE calculations. To qualify as an NMCE:

• an external auditor must agree that the entity does not meet materiality standards and is properly excluded from the consolidation process, and
• Where total revenue exceeds €50m, its financial accounts used to complete country-by-country reporting (CbCR) are prepared in accordance with an acceptable financial accounting standard.

An MNE group that is composed exclusively of a main entity and PEs cannot, by definition, have non-material CEs. It is important not to forget the safe-harbour provisions that can be available for NMCEs. The application of the safe harbours and the simplified calculations may well reduce the overall compliance burden and data gathering requirements for the GloBE calculations.

These simplified calculations for the safe harbour provisions assess the GloBE net income as the revenue as determined under the (CbCR) rules. As there are no deductions applicable, it is just simply a measure of revenue for that NMCE. In addition, covered taxes that apply are those included in the CbCR rules, which means any deferred tax expense adjustments normally required under the model rules  to not need to be performed.

In terms of applying simplified calculations of the NMCE, they are determined on an entity-by-entity basis, rather than at a jurisdictional level. The filing entity must make an annual election for each NMCE to determine the GloBE income or loss, GloBE revenue, and adjusted covered taxes of the NMCE using the simplified calculation. Given the broader definition of income, the narrower definition of taxes, and the simplified income, revenue, and tax calculations, it would generally result in a higher income and lower effective tax rate for NMCEs than that provided under the GloBE rules. 

Next steps

While the Pillar 2 GloBE rules aim to provide a unified approach to taxation, it’s clear that different MNE group structures and varying jurisdictional approaches can muddy the waters. How effectively the safe harbour relief or full GloBE calculations are applied in practice, depends on how well the MNE group structures are understood and the rules interpreted and applied.

Keeping abreast of OECD guidance and leaning on expert opinion that can help address MNE group complexities under Pillar Two GloBE is vital. 

For a more comprehensive explanation of MNE group structure complexities please listen to our webcast #3: Pillar Two Technical Series: Pillar Two Technical Series: Complex MNE Groups | Forvis Mazars, where you can hear more in-depth analysis and download technical slides giving examples.

For a recap on previous topics covered, please see 1. Getting to know Top-up Taxes and Safe Harbours and 2. Understanding MNE group structures through the lens of the GloBE rules. You can also contact us directly to discuss your GloBE issues