Pillar 2 GloBE rules technical series: how complex structures and reorganisations impact GloBE 

The ninth session of series on Pillar 2 GloBE model rules focuses on the challenges posed by complex structures and reorganisations and how they impact Global Anti-Base Erosion (GloBE) income.

The GloBE rules apply to multi-national enterprise (MNE) groups that have consolidated revenue of EUR750m or more in at least two of the four fiscal years immediately preceding the tested fiscal year. However, there are specific scenarios detailed in Article 6 that provide additional rules to this revenue threshold regarding the treatment of mergers, demergers and their impact on MNE groups. There are also a number of adjustments required to calculate GloBE income or loss.

Firstly, let’s take the scenario of applying the revenue threshold where there is a merger between two or more groups. Article 6.1.2 defines a merger as an arrangement where all, or substantially all, of the group entities of two or more separate groups are brought under common control. Also, where an entity that is not a member of any group is brought under common control with another entity or group to form a combined group.

If two or more groups merge to form a single group in any of the four fiscal years prior to the tested fiscal year, then the consolidated revenue threshold of the MNE group for any fiscal year prior to the merger is deemed to be met for that year if the sum of the consolidated revenue of the respective groups is equal to or greater than EUR750m.

Secondly, a situation could arise whereby an entity that is not a member of a target group merges with an entity or acquiring group in the tested fiscal year. However, the target or acquirer does not have consolidated financial statements in any of the four fiscal years prior to the tested fiscal year because it was not a member of any group in that year. In this case, the consolidated revenue threshold of the MNE group for the periods prior to the acquisition is deemed to be met for that year if the sum of the respective revenues of the target and the acquirer for that year is equal to or greater than EUR750m.

Where there is a demerger of an MNE group into two or more groups Article 6.1.3 applies. It defines a demerger as any arrangement where the group entities of a single group are separated into two or more groups and no longer consolidated by the same ultimate parent entity (UPE). A demerged group is within the scope of the GloBE rules if it has annual revenues of EUR750m or more in the first tested fiscal year after the demerger. In the second to fourth years following demerger, a demerged group is within the scope of the GloBE rules if it has annual revenues of EUR750m in at least two of the fiscal years following the demerger.

Where a some, but not substantially all, entities of a vendor group are acquired, and those that are acquired did not on their own produce consolidated financial statements (but were included in the consolidated financial statements of the vendor UPE), one might wonder how to assess the turnover threshold of the purchaser group. The approach to this is that the revenue of the target entities prior to the acquisition do not get added to the revenue of the purchaser in assessing the revenue threshold test.

Smoothing the pathway with GloBE adjustments

Article 6.2 provide rules on how to adjust GloBE income and loss calculations if you have an acquisition or disposition of a controlling interest in a constituent entity (CE) during the tax year. These adjustments help provide a smooth separation of the target entity from the seller and a smooth integration of that target entity into the acquiring group. For example, a target entity may join or leave an MNE group due to a transfer of direct or indirect ownership interests during the acquisition year. The target entity will be treated as a member of a group for GloBE purposes if its activity is included in the acquiring UPE’s consolidated financial statements in the acquisition year.

In practice, it is likely that a portion of the targets entity’s income and expenses will be included in the consolidated financial statements of the disposing MNE group based on the period that it was a member of that group.

In the acquisition year and each succeeding year, the target entity determines its GloBE income or loss and adjusted covered taxes using the historical carrying value of assets and liabilities.  So under Article 6.2.1 an MNE group that acquires a controlling interest in a CE does not take into account the effect of purchase accounting consolidated adjustments that are attributable to the acquisition. The result will be no change in the carry value of the target entity’s assets and liabilities when determining GloBE income or loss.

These adjustments need to be made, irrespective of whether a controlling interest in the CE was acquired before the GloBE rules were enacted. On a practical note, the commentary to Article 6.2 provides an exception if the acquisition occurred prior to 1 December 2021 and the MNE group does not have sufficient records. In this case, the carrying value should be used and special consideration given to the target entity’s deferred tax assets and liabilities.

When considering eligible payroll costs only those reflected in the consolidated financial statements of the UPE should be used. Eligible tangible assets are adjusted to correspond with the length of time the target was a member of the MNE group. Further, adjustments will be required related to when the acquiring MNE group includes deferred tax assets and liabilities of the acquired CE, reversing deferred tax adjustments previously taken into account by the disposing MNE group. Also, if the target is itself a parent entity of an MNE group, it should apply the income include rule (IIR) separately to its allocable shares of top-up tax.

However, if the acquisition or disposal of a controlling interest in the CE’s jurisdiction is treated as the acquisition or disposal of the underlying assets and liabilities, with covered taxes imposed in respect of them on the seller, that forms the basis of how those assets and liabilities are accounted for, for GloBE purposes for the vendor and acquirer (article 6.2.2) .

The impact of transferring assets and liabilities

In terms of the impact to GloBE income or loss computation, under Article 6.3 a disposing CE will include the gain or loss on disposition in the computation of its GloBE income or loss. An acquiring CE determines its GloBE income or loss using the acquiring CEs carrying value of acquired assets and liabilities determined under the accounting standard used in preparing the UPE’s consolidated financial statements.

A GloBE reorganisation occurs where there is a transfer of assets and liabilities in a merger, demerger, liquidation or similar transaction and the following situation is present:

•  the consideration is comprised of equity interests issued by the acquiring CE or equity interest of the target.
• the disposing CE’s gain or loss is not subject to tax, and
• after the disposition or acquisition the acquiring CE jurisdiction’s tax laws require taxable income to be computed using the disposing CE’s tax basis on the assets.

The impact of a GloBE reorganisation means that the disposing CE excludes a gain or loss from GloBE income or loss. The acquiring CE determines GloBE income or loss after acquisition using the disposing entity’s carrying values of acquired assets and liabilities.

A non-qualifying gain or loss means the lesser of the gain or loss of the disposing CE arising in connection with a GloBE Reorganisation that is subject to tax in the disposing CE’s location and the financial accounting gain or loss arising in connection with the GloBE Reorganisation.

If a disposition or acquisition of assets and liabilities is part of a GloBE reorganisation and the disposing CE recognises a non-qualifying gain or loss, the disposing CE will include a gain or loss in GloBE income or loss to the extent of the non-qualifying gain or loss. In this situation, an acquiring CE will determine its GloBE income or loss using the disposing entity’s carrying value of the acquired assets and liabilities adjusted to be consistent with local tax rules.

However, there is a fair value adjustment election under Article 6.3.4 whereby a filing CE of an MNE group is required or permitted to include a gain or loss in its GloBE computation equal to the difference between carrying value and fair value at the time the tax adjustment was required. The filing CE is also permitted to decrease or increase its GloBE income or loss by any non-qualifying gain or loss that arose at the time the tax adjustment was required.

A filing CE can also elect to use the fair value of the asset or liability for financial accounting purposes to determine GloBE income or loss.

The importance of P2 elections

A number of elections can be applied to complex structures. These include:

Fair value basis adjustment election. This applies to GloBE income or loss earned from the sale of an asset. Under Article 6.3.4 an entity of an MNE group can adjust the basis of its assets and liabilities to fair value for tax purposes only in the jurisdiction it is located in. The election does not apply to an ordinary sale of assets, such as inventory, by a CE, or transfer pricing adjustments. If an election is made under this Article in connection with the acquisition of a controlling interest in a CE that is governed by Article 6.2.1, the election does not affect the application of Article 3.2.1(c) to the seller (which requires the adjustment of GloBE income/loss to exclude fair value gains and losses).

In terms of impact, when an election is made under Article 6.3.4, the CE recognises any gain or loss in the year in which the triggering event occurs and adjusts the carrying value of its assets and liabilities for GloBE rule purposes. Alternatively, the recognition of net total gain or loss will be split equally over five subsequent fiscal years unless the CE leaves the MNE group. The remaining amount will be wholly included in the year in which the CE leaves the MNE group. This election is filed on the GloBE information return (GIR) on a jurisdictional basis.

Aggregate asset gain election. Under Article 3.2.6, this election permits a MNE group to spread gains and losses from the sale of local tangible assets over a period of up to five previous years to mitigate the effect of recognising the entire gain in a single year on the MNE Group’s jurisdictional effective tax rate (ETR) computation. It applies to gains and losses attributable to the disposition of local tangible assets that relate to immovable property located in the same jurisdiction as the CE. When sourcing a method for how to allocate a gain or loss over the five-year period, ordering rules can be considered.

The election provides the ability to mitigate lopsided top-up tax exposure to a particular jurisdiction for a particular fiscal year. It also matches the increase in value of the asset likely accumulated over a period of years to the period in which the gain should be spread. This is an annual election made on a jurisdictional basis. However, it may be combined with an election under Article 3.2.5 in respect of tangible assets (an election to recognise gains on fair valued assets on the realisation basis).

Adjustment to equity gain or loss. The OECD Commentary Ch 3, ¶ 57.4 includes an adjustment for equity investment gain or loss to ETR calculations for GloBE purposes. This election neutralises the impact of a loss as well as a gain with respect to an equity investment that is included in a jurisdiction’s domestic tax base. It is limited to equity investments other than those that create a gain, loss, or profit from changes in fair value or from the disposition of investments, as well as a profit or loss from equity interests that are accounted for under the equity method of accounting.

An ownership Interest must include the accounting gain, profit, or loss with respect to any fair value gains, losses or impairments on that ownership interest, and all current and deferred tax expense or benefits associated, in GloBE income or loss. This is a five-year election on a jurisdictional basis of all ownership interests owned by CEs. Also, it cannot be revoked with regard to an ownership interest loss.

For a more comprehensive explanation of GloBE reporting and accounting considerations, please listen to our webcast #9: Pillar 2 Technical Series: Complex Structures, Reorganisations & GloBE| Forvis Mazars, where you can download technical slides giving more in-depth details and examples.

For a recap of previous topics covered, please see previous articles

For a recap of previous topics covered, please refer to previous articles:

1. Pillar 2 GloBE rules technical series: unpacking and applying GloBE model rule adjustments
2. Pillar 2 GloBE rules technical series: getting to know top-up taxes and safe harbours
3. Pillar 2 GloBE rules technical series: understanding MNE group structures through the lens of the GloBE rules
4. Pillar 2 GloBE rules technical series: addressing MNE group complexities under Pillar 2 GloBE
5. Pillar 2 GloBE rules technical series: understanding how Pillar 2 GloBE impacts tax accounting
6. Pillar 2 GloBE rules technical series: navigating adjusted covered taxes
7. Pillar 2 GloBE rules technical series: using elections to align and simplify GloBE computations

You can also contact us directly to discuss the above topics or other GloBE issues.