Pillar Two - Is There An MNE Group?

Groups and MNE Groups

The Pillar Two GloBE Rules apply to MNE Groups. Both the terms ‘MNE Group’ and ‘Group’ are defined in Article 1.2 of the OECD Model Rules.

The first step is to determine if there is a ‘group’. This is based on the accounting test as to whether consolidated financial accounts need to be prepared.

The definition here is wide and applies to entities that are subject to consolidation under the relevant account standard.

However, even entities that aren’t consolidated due to being subject to special reporting treatment (eg if it was excluded due to a materiality threshold or because they were held for sale) are within the definition of a group.

If a UPE doesn’t prepare consolidated financial accounts, then accounts need to be prepared if they would have been required to prepare these under a relevant accounting standard.

An MNE group is a group that has companies or permanent establishments (PEs) in jurisdictions other than where the UPE is based. The inclusion of PEs here means that a single company with a permanent establishment in another jurisdiction could come within the definition of an MNE Group (and therefore the Pillar Two GloBE rules).

This also applies even if the PE doesn’t actually generate any income.

Ultimate Parent Entity (UPE)

Determining which company is the UPE is an important aspect of the Pillar Two GloBE rules.

Key aspects include:

• The charging rules apply the Income Inclusion Rule to the jurisdiction of the UPE, and then flow down in priority order;
• The accounting standard of the UPE is usually the basis for calculating the Pillar Two GloBE effective tax rate; and
• The definition of the MNE group is based on the UPE.

Article 1.4 of the OECD Model Rules provides that the Pillar Two GloBE Rules broadly apply to two different types of UPE scenarios, one where the MNE group is comprised of two or more entities, and second where there is an entity and at least one Permanent Establishment.

In the first case, again an accounting consolidation test is used. Generally, a UPE is an entity that is required to consolidate on a line-by-line basis interests in other entities under a relevant accounting standard (or would have been required).

In addition, no other entity must be required (or would be required) to consolidate the interest in the subsidiary.

In the second case, where an entity has a PE in another jurisdiction, the UPE is the main entity.