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Pillar Two: Corporate Reorganisations – Share Purchases and Disposals

Pillar Two: Corporate Reorganisations


The Pillar Two Rules include specific provisions in Article 6.2 of the OECD Model Rules  that apply to share acquisitions and disposals of group companies.

Transfers of assets are subject to different rules at: Intra-Group Asset Transfers. 

Accounting Treatment 

The general rule, as is often the case with the Pillar Two rules, is that the accounting treatment is followed.

As such, if any part of a companies assets, liabilities, income of expenses are included in the UPE consolidated accounts, it is treated as part of the MNE group.

Under Article 6.2.1(a) of the OECD Model Rules, The amount of the profits or losses included for the Pillar Two calculation is the amount included in the consolidated accounts.

For accounting purposes, the consolidated accounts include the group’s share of the post-acquisition profits of the subsidiary. 

Purchase Accounting/Deferred Tax

Purchase accounting adjustments are ignored. Therefore, there is no rebasing of assets and liabilities on a share acquisition.

Similarly, any deferred tax entries relating to this are removed.

If, for instance, for accounting purposes, the consideration for the share purchase exceeded the market value of the assets and liabilities, goodwill would be created. This would be a Dr to the balance sheet and a Cr to deferred tax liabilities.

The amortization of the goodwill would be offset by the deferred tax credit as the deferred tax liability was released.

The deferred tax entries would need to be eliminated for Pillar Two purposes. 

Where pushdown accounting applies so that adjustments to the value of assets and liabilities are reflected in the accounts of the acquired company, the Pillar Two rules allow the acquisition entity to use these values for Pillar Two purposes, providing the acquisition occurred before 1 December 2021 and the MNE Group does not have sufficient records to determine its Financial Accounting Net Income or Loss with reasonable accuracy based on the unadjusted carrying values of the acquired assets and liabilities.

Where this applies, the acquired entity would also need to take into account any deferred tax assets and liabilities arising in connection with the purchase.

Under FRS 102 for instance, on a share-for share exchange either merger accounting or acquisition accounting could be used.

Under merger accounting there is no increase in the fair value of the asset in the acquired entity (and therefore no additional adjustments for Pillar Two purposes).

If acquisition accounting was used, the assets and liabilities of the target entity would need to be revalued and there would then be GloBE adjustments.

Substance-Based Income Exclusion

When calculating the substance-based income exclusion, Articles 6.2.1(d) and 6.2.1(e) of the OECD Model Rules provide that there is also an adjustment to the amount of payroll costs and tangible fixed assets that are taken into account. 

Payroll costs are included to the extent they are included in the consolidated financial accounts. As such there would be an apportionment of the payroll costs so that only costs incurred during the period the acquired company was part of the MNE group would be taken into account. 

For accounting purposes there is no apportionment of the fixed assets. However, for Pillar Two purposes the qualifying local tangible assets for the purposes of the substance-based income exclusion are apportioned to reflect just the period that the acquired entity was part of the group.

What’s interesting here is that purchase accounting adjustments are taken into account when calculating the qualifying local assets for the substance-based income exclusion – even if they aren’t included for calculating Pillar Two income. 

Transfers of Deferred Tax Assets and Liabilities

The transfer of companies within a group via share disposals also means that deferred tax assets and liabilities are transferred within the group.

Article 6.2.1(f) of the Pillar Two OECD Model Rules generally respect the treatment so that they are treated the same way in the new MNE group if they would have been taken into account had they controlled the acquired entity when they arose.

This means, for instance, that deferred tax assets arising from losses would be taken into account in the acquired entity (ie the Dr the P&L on the utilisation of the losses would increase covered taxes, reducing any potential top-up tax).

However, this does not apply to a Pillar Two loss deferred tax asset election. This does not arise under accountancy principles but under the Pillar Two GloBE rules.

As such, it is treated as a jurisdictional attribute and therefore can’t be transferred to another MNE Group.

The Pillar Two rules also include some specific provisions to ease compliance burdens that arise from the fact that deferred tax attributes in the new group are generally respected.

The deferred tax recapture rule requires an MNE to monitor deferred tax liabilities and (unless an exception applies) if they aren’t reversed within five years, they are ‘recaptured’ and the Pillar Two GloBE calculation for the year needs to be recalculated with the inclusion of the deferred tax liability (which would be a Cr to the P&L and therefore reduced covered taxes – potentially increasing top-up tax). 

Article 6.2.1(g) of the Pillar Two Rules provide that where a company leaves an MNE group, the deferred tax liability is treated as reversed and a new five-year period begins.

This, therefore, resets the five-year clock and prevents the new MNE group having to monitor periods before the acquired company was part of the MNE group. 

In addition, if a deferred tax liability doesn’t reverse within the new five year period, the recalculation of the Pillar Two GloBE Income calculation is made in that (fifth) year.

Deemed Asset Deal

The final rule in the Pillar Two arsenal that applies to share acquisitions and disposals is to treat an acquisition or disposal of an interest in company shareholding as the acquisition or disposal of assets where that is the local tax treatment. This is provided in Article 6.2.2 of the OECD Model Rules

This means that the location of gain or loss or loss changes. In a stock acquisition, the gain or loss is in the jurisdiction of the holder of the shares, whereas in an asset transfer the gain arises  in the company disposing of the assets.

As such the gain or loss is included in the jurisdiction of the entity disposing of the assets and liabilities for the purpose of calculating the Pillar Two GloBE effective tax rate.

This applies where two conditions are met:

1. the jurisdiction of the target entity treats the transaction as, or similar to, an asset acquisition or disposal for tax purposes; and

2. That jurisdiction applies tax based on the difference in value between the consideration received (or market value) and the base cost of the assets for tax purposes.

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