Trending Now

Luxembourg Parliament Approves Global Minimum Tax Amendment Law for OECD Administrative Guidance

Isle of Man Issues the Cessation Form for Pillar 2 Domestic Top-Up Tax

Kenya Enacts a Domestic Minimum Tax in its Tax Laws (Amendment) Act, 2024

The Netherlands Parliament Approves Law to Amend its Global Minimum Tax Law for OECD Administrative Guidance

Pillar Two Tracker

Pillar Two: GloBE Deferred Tax Recalculations Based on GloBE Carrying Values

Section 2 of the Fourth Set of OECD Administrative Guidance (issued on June 17, 2024) provides details on the use of GloBE carrying values and the impact that these will have on the GloBE ETR calculation.
 
In particular, when calculating the deferred tax expense for GloBE purposes (which is included in adjusted covered taxes to determine the GloBE ETR), the deferred tax expense in the accounts will be excluded and a separate GloBE deferred tax calculation is required. This will be based on the substituted GloBE carrying value and determined using the financial accounting standard used for GloBE purposes.
 
Constituent Entities will therefore be required to maintain accounting records to support the computation of GloBE Income or Loss and Total Deferred Tax Adjustment Amount by reference to the GloBE carrying values.
 
General
 
The GloBE Rules generally rely on the amounts reflected in the financial accounts of a Constituent Entity used in the preparation of Consolidated Financial Statements of the UPE.
 
As such, when calculating the adjusted covered taxes of an entity the deferred tax is based on deferred tax expense accrued in the financial accounts.
 
However, there are cases where the GloBE Rules require/permit a Constituent Entity to:
 
-determine its GloBE Income or Loss and Adjusted Covered Taxes using a GloBE carrying value that is different from the carrying value reflected in the financial accounts; or
 
-determine its GloBE income or loss by substituting an amount contained in the financial accounts for another amount (eg under the Stock-based compensation election where the tax deductible amount is included for GloBE purposes rather than the amount expensed in the financial accounts).
 
In both of these circumstances there will be a requirement to consider a recalculation of the deferred tax expense based on the values used for GloBE purposes.  
The following Articles in the OECD Model Rules are affected:
 
-Article 3.2.1(i), which adjusts a Constituent Entity’s Financial Accounting Net Income or Loss for accrued pension expense;
 
-Article 3.2.2, which provides for the of stock-based compensation election (substituting the deduction in the computation of a Constituent Entity’s taxable income for the amount of stock-based compensation expense reported in the financial accounts);
 
-Article 3.2.3, which applies the Arm’s Length Principle to certain intra-group;
 
-Article 3.2.5, which provides for the realisation method election (to determine gains and losses using the realisation principle instead of fair value accounting);
 
-Article 6.2.1(c), which provides that a target in the acquisition year and each succeeding year shall determine its GloBE Income or Loss and Adjusted Covered Taxes using its historical carrying value of the assets and liabilities;
 
-Article 6.2.2, which provides that certain acquisitions or disposals of a Controlling Interest in a Constituent Entity shall be treated as an acquisition or disposal of the underlying assets and liabilities;
 
-Article 6.3.1, where asset transfers are not recorded at arm’s length or are not recorded in the same amount in the financial accounts of both Constituent Entities a transaction between Constituent Entities located in different jurisdictions is to be adjusted so as to be in the same amount and consistent with the Arm’s Length Principle;
 
-Article 6.3.2, which requires an acquiring Constituent Entity in a GloBE Reorganisation to determine its GloBE Income or Loss after the acquisition using the disposing Entity’s carrying values of the acquired assets and liabilities upon disposition (ie the historical basis);
 
-Article 6.3.3, applies where only part of the gain arises from a qualifying GloBE Reorganisation. This requires an acquiring Constituent Entity to determine its GloBE Income or Loss after the acquisition using the disposing Entity’s carrying value of the acquired assets and liabilities upon disposition adjusted consistent with local tax rules to account for the Non-qualifying Gain or Loss.; and
 
-Article 6.3.4, this allows an MNE Group to make an election to reflect the domestic tax treatment where the jurisdiction applies a deemed disposal of assets for tax purposes. The company is treated as though it had disposed of and immediately reacquired its assets.
 
GloBE Deferred Tax Recalculation
 
If the GloBE Income or Loss of a Constituent Entity is calculated based on an asset or liability’s carrying value that differs from that used to determine the deferred tax expense accrued in the financial accounts of a Constituent Entity, then any deferred tax expense accrued in connection with a deferred tax asset or deferred tax liability related to the asset or liability is no longer appropriate for computing the GloBE Total Deferred Tax Adjustment. This is because the timing differences in respect of the asset or liability under the GloBE Rules will not correspond to the timing differences reflected in the financial accounting deferred tax assets and liabilities.
 
As such, the deferred tax asset or liability must be calculated based on the GloBE carrying value and then adjusted in accordance with the relevant accounting standard and the deferred tax expense or benefit in respect of such deferred tax asset or liability and its subsequent adjustments must be used to compute the Total Deferred Tax Adjustment Amount for GloBE purposes.
 
Movements in the deferred tax asset or liability calculated based on the accounting carrying value are ignored for GloBE purposes when deferred tax assets and liabilities are calculated based on the GloBE carrying value, including any amortisation or depreciation of the relevant asset or liability with the relevant financial accounting standard for GloBE purposes in future Fiscal Years.
 
The recognition and measurement of any deferred tax asset or liability and adjustments based on the GloBE carrying value applies for all GloBE purposes, and therefore the deferred tax expense or benefit of a Constituent Entity for GloBE purposes must be recalculated based on the GloBE carrying value of the relevant assets and liabilities in accordance with the Acceptable Financial Accounting Standard (or Authorised Financial Accounting Standard, if applicable), unless otherwise specified under the GloBE Rules.
 
For example, a recalculated GloBE deferred tax liability based on a GloBE carrying value of an asset or liability is still subject to recasting under Article 4.4.1.
 
The OECD Guidance includes a useful example of how this operates by reference to an Article 3.2.3 adjustment which requires the arms-length amount to be used for GloBE purposes.  Under this, if the constituent entities financial accounts used the cost basis on an intra-group asset transfer, for GloBE purposes this would need to be replaced with the market value of the asset transferred. Any deferred related to the transfer would also need to be reassessed based on the GloBE value/tax treatment.
 
Example
 
A Constituent Entity (Entity A) in Jurisdiction A transfers an asset to another Constituent Entity (Entity B) in Jurisdiction B (corporate tax rate of 20%). The carrying value of the asset for Entity A is 50 and the fair market value of the asset is 150. The transfer is recorded at cost (50) for accounting purposes in accordance with the financial accounting standard used by Entity A for purposes of Article 3.1.2.
 
Entity A reports no gain on the transaction and Entity B records a deferred tax asset in its accounts of 20 (the difference between the accounting carrying value of 50 and the tax basis of 150 multiplied by the tax rate) in accordance with Entity A’s financial accounting standard.
 
Ordinarily this deferred tax asset would be recast to 15 for GloBE purposes in accordance with Article 4.4.1.
 
However, Entity A is required to include 100 of gain from the sale in its GloBE Income due to the application of Article 3.2.3. Because the transaction is subject to Article 3.2.3, Entity B will have a GloBE carrying value for the asset of 150 based on the asset’s fair market value.
 
As such, Entity B would not record any deferred tax asset for GloBE purposes upon acquisition. After recognition, the asset would be amortised under the relevant accounting standard based on its GloBE carrying value for the Fiscal Year and subsequent Fiscal Years.
 
Thus, if the asset is amortised for accounting purposes on a straight-line basis over 10 years, the annual amortisation expense for GloBE purposes will be equal to 15 (150/10).
 
However, if the asset is amortised for tax purposes over a different period, e.g. five years, a deferred tax liability shall be determined for GloBE purposes based on the timing differences that arise after the acquisition and the corresponding deferred tax expense shall be included in the computation of Entity B’s Adjusted Covered Taxes (subject to recasting at the Minimum Rate because the corporate tax rate in Jurisdiction B is above 15%).
 
Further, the deferred tax liability determined for GloBE purposes is subject to recapture for the purposes of Article 4.4.4, unless the deferred tax liability meets the definition of a Recapture Exception Accrual in Article 4.4.5.
 
Note that determining deferred tax assets/liabilities based on GloBE carrying values does not displace the application of the relevant accounting standard.
 
As such, if the relevant accounting standard does not allow the recognition of the deferred tax asset or liability on certain transfers (e.g. if the Initial Recognition Exemption in IAS 12 would continue to be applicable in light of the required GloBE adjustments), no deferred tax expense will be taken into account for GloBE purposes, except in cases where the GloBE Rules specifically create a GloBE deferred tax asset.
 
Specific Application

This requirement to exclude the deferred tax treatment used in the financial accounts and instead determine deferred tax based on the GloBE carrying value/substituted GloBE amount applies in numerous cases, for instance:

Stock based compensation election – Any deferred tax expense must be calculated by reference to the stock based compensation amount included in the Constituent Entity’s GloBE Income or Loss

Intragroup transactions at cost – As noted above, any deferred tax asset or liability in relation to the acquired asset (or liability) must be calculated for GloBE based on the acquired asset’s (or liability’s) carrying value for GloBE purposes, and the acquiring Constituent Entity’s tax basis.

Realisation basis election – Any deferred tax expense for the purposes of determining the Constituent Entity’s Adjusted Covered Taxes must be determined by reference to the GloBE carrying value of the relevant assets at the commencement of the Fiscal Year in which the election is made. For assets acquired after the first day of Fiscal Year in which election is made, Adjusted Covered Taxes must be determined by reference to the carrying value of the asset (determined in accordance with the GloBE Rules, including the election to use the realisation method).

Chapter 6/7 Adjustments (for group restructuring), generally – where a Constituent Entity’s FANIL is adjusted to reflect Chapters 6 (or 7), its Adjusted Covered Taxes, including its Total Deferred Tax Adjustment Amount must be calculated reflecting equivalent adjustments to the carrying value of the assets or liabilities.

Article 6.2.1(c)

This provides that a target in the acquisition year and each succeeding year shall determine its GloBE Income or Loss and Adjusted Covered Taxes using its historical carrying value of the assets and liabilities.

GloBE Impact: The computation of a Constituent Entity’s Total Deferred Tax Adjustment Amount for the Fiscal Year in relation to assets and liabilities to which this applies must be calculated based on the carrying value of those assets or liabilities for GloBE purposes (corresponding to the historical carrying value, as of the year of the acquisition, and adjusted for depreciation, amortisation as well additions, capitalised expenditure and disposals of the assets and liabilities of the acquired Constituent Entity for each subsequent Fiscal Year) and accounted for in subsequent Fiscal Years in accordance with the relevant accounting standard.

Article 6.2.2

This treats 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 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.

GloBE Impact: The calculation of the acquiring Constituent Entity’s Total Deferred Tax Adjustment Amount for the Fiscal Year and subsequent Fiscal Years in relation to assets and/or liabilities to which Article 6.2.2 applies must be calculated based on their carrying value for GloBE purposes (fair value to the extent a gain or loss on those assets and liabilities was included in the GloBE Income or Loss computation of the disposing Constituent Entity).

Article 6.3.1

Where asset transfers are not recorded at arm’s length or are not recorded in the same amount in the financial accounts of both Constituent Entities a transaction between Constituent Entities located in different jurisdictions is to be adjusted so as to be in the same amount and consistent with the Arm’s Length Principle.

GloBE Impact: the computation of a Constituent Entity’s Total Deferred Tax Adjustment Amount for the Fiscal Year and subsequent Fiscal Years in relation to assets and liabilities which have been adjusted to the arm’s-length basis must be calculated based on their carrying value for GloBE purposes.

Article 6.3.2

This requires an acquiring Constituent Entity in a GloBE Reorganisation to determine its GloBE Income or Loss after the acquisition using the disposing Entity’s carrying values of the acquired assets and liabilities upon disposition.

GloBE Impact: The calculation of the acquiring Constituent Entity’s Total Deferred Tax Adjustment Amount for the Fiscal Year and subsequent Fiscal Years in relation to assets and/or liabilities to which this applies must be calculated based on their carrying value for GloBE purposes (historical carrying value). The GloBE carrying value of the assets and liabilities at the end of the Fiscal Year and subsequent Fiscal Years is determined by applying the relevant accounting standard to the GloBE carrying value.

This would exclude any deferred tax asset or deferred tax liability from the GloBE calculations on acquisition to the extent the GloBE and tax carrying values of the asset or liability are aligned.

Article 6.3.3

This applies where only part of the gain arises from a qualifying GloBE Reorganisation. This requires an acquiring Constituent Entity to determine its GloBE Income or Loss after the acquisition using the disposing Entity’s carrying value of the acquired assets and liabilities upon disposition adjusted consistent with local tax rules to account for the Non-qualifying Gain or Loss.

GloBE Impact: The computation of a Constituent Entity’s Total Deferred Tax Adjustment Amount for the Fiscal Year and subsequent Fiscal Years in relation to assets and/or liabilities to which this applies must be calculated based on their carrying value for GloBE purposes.

The GloBE carrying value of the assets and liabilities at the end of the Fiscal Year and subsequent Fiscal Years is determined by applying the relevant accounting standard to the GloBE carrying value initially determined. This would exclude any deferred tax asset or deferred tax liability from the GloBE calculations on acquisition to the extent the GloBE and tax carrying values of the asset or liability are aligned.

Article 6.3.4

This allows an MNE Group to make an election to reflect the domestic tax treatment where the jurisdiction applies a deemed disposal of assets for tax purposes. The company is treated as though it had disposed of and immediately reacquired its assets. This could crystallise gains or losses on its assets and would uplift the base cost of the assets to the market value for tax purposes.

GloBE Impact:  The computation of a Constituent Entity’s Total Deferred Tax Adjustment Amount for the Fiscal Year and subsequent Fiscal Years in relation to assets and/or liabilities to which this applies must be calculated based on their carrying value for GloBE purposes. The GloBE carrying value of the assets and liabilities at the end of the Fiscal Year and subsequent Fiscal Years is determined by applying the relevant accounting standard to the GloBE carrying value initially determined.

Impairment

Where a relevant accounting standard requires assets and liabilities to be tested for impairment purposes, this will not require a separate impairment testing requirement for the GloBE carrying value.

Impairment of an asset or liabilities’ GloBE carrying value will only occur if the accounting value (attributable to the same asset or liability) is subject to an impairment in accordance with the relevant financial accounting standard. In this case, the GloBE carrying value will be reduced to match the accounting carrying value, with the corresponding consequences included in the Constituent Entity’s GloBE Income or Loss and Adjusted Covered Taxes.

Carrying values and the SBIE

The OECD guidance confirms that the use of GloBE carrying values does not apply for the purposes of the tangible asset carve out for the substance-based income exclusion (SBIE).

The SBIE is based on the average of the carrying value (net of accumulated depreciation, amortisation, or depletion and including any amount attributable to capitalisation of payroll expense) at the beginning and ending of the Reporting Fiscal Year for the purposes of preparing the Consolidated Financial Statements of the UPE.

FAQs

As with most aspects of the GloBE Rules, Article 6.3.1 of the OECD Model Rules provides that the GloBE treatment of intra-group transfers of assets follows the accounting treatment.

The accounting treatment generally values the transfer of assets at fair value (eg FRS 102 requires the total fair value of any consideration as well as the assets, liabilities and contingent liabilities of the acquirer to be determined).

Given many domestic tax regimes permit gains and losses to be deferred on intra-group transfers, Article 6.3.2 of the OECD Model Rules include a similar rule which applies where there is a ‘GloBE Reorganisation’.

A Globe Reorganisation occurs where there is a transfer of assets and:

(a) the consideration for the transfer is, in whole or in significant part, equity interests

(b) the transferors gain or loss on the assets is not wholly or partly subject to tax; and

(c) the tax law applicable to the transferee entity requires them to use the transferor’s tax base as the carrying value of the assets (the so-called ‘stand in the shoes’ principle).

 

Picture of Lee Hadnum
Lee Hadnum
Lee is a qualified Chartered Accountant and Chartered Tax Adviser. A former Senior Tax Analyst at Bloomberg Tax, Lee began his career in Ernst & Young's Entrepreneurial Services department and has 20 years of international tax planning experience. Lee's books have been recommended by The Times, The Guardian and The Telegraph.

Latest Articles

This website is not affiliated with or related to the OECD. We provide independent insights and analysis on the OECD Two-Pillar Solution

image showing 'OECDpillars.com logo'
s2Member®

© 2024 OECDPillars 

All Rights Reserved