Pillar Two: Intra-Group Asset Transfers

The Pillar Two treatment of intra-group asset transfers generally follows the financial accounting treatment.

This generally values the transfer of assets at fair value.

Therefore any gain or loss recognised for accounting purposes would also flow through to the GloBE income calculation.

However, the Article 9.1.3 of the OECD Model Rules provides that if an asset is transferred between group entities after November 30, 2021 and before the first year the GloBE rules apply to the group, the asset is recorded at its historic cost providing the entities would have been subject to the Pillar Two GloBE rules had they been in-scope (ie there is no ‘step-up’).

The reason for this is to prevent an uplift in the base cost of assets (with potentially additional tax relief and reduced gains on a future disposal) when any original gain on the intra-group transfer was not taken into account for Pillar Two GloBE purposes as the group was not subject to the rules.

This would also mean that any deferred tax assets or liabilities would also need to be recast to the historic value (eg if tax relief for the assets was given over a shorter period than for financial accounting purposes).

Note that under the Model Rules this applies to ‘assets’ not just fixed assets.

This would, therefore, include current assets, however, stock is specifically excluded.

Article 4.2 of the OECD Administrative Guidance provides that  all transactions and corporate restructurings that are accounted for similar to an asset transfer (eg where the MNE Group creates or increases the carrying value of an asset), regardless of their form are to be classed as an “transfer of asset” for the purposes of Article 9.1.3.

Step-Up Denial

Preventing a step-up in the value of an intra-group asset transfer could impact on the top-up tax calculation as for tax purposes the step-up basis would generally apply.

Example

A Co. holds an asset with a book value of 20 Million and a Market Value of 100 Million. It is depreciated over 5 years and is transferred to B Co in 2024. A Co and B Co are group entities within the scope of Pillar Two.

B Co has other income of 120 Million and its tax rate is 15%.

For tax purposes, B Co obtains a step-up to market value, but not for financial accounting purposes.

As such depreciation is 20 million for tax purposes (100 million /5). For Pillar Two purposes, depreciation would be 4 million (20 million/5) as this follows the financial accounts.

GloBE Income would be 116 million (120 Million – 4 million).

Adjusted covered taxes would be 15 million (120 million – 20 million * 15%)

GloBE ETR = 12.93% (15 million/116 million).

The top-up tax percentage is therefore 2.07%.

Any deferred tax asset or liability arising in the MNE Group’s financial accounts as a result of the transaction is generally ignored under the GloBE Rules.

However, Article 4.3 of the February 2023 OECD Administrative Guidance provides additional rules relating to asset carrying values and deferred taxes.

It states that an acquiring entity can either: