Pillar Two: Investment Property

Whilst the treatment of investment property for financial accounting purposes is important when determining the GloBE treatment, of even more importance are any differences between the financial accounting treatment and the domestic tax treatment. In many cases, it is these differences that (subject to GloBE adjustments) will be a determining factor for a low GloBE ETR.

A number of different accounting standards apply to investment property under IFRS. In particular, the acquisition and construction of real estate that is held as investment property is governed by:

IAS 40 (Investment property);

IAS 16 (Property, plant and equipment);

IAS 23 (Borrowing costs); and

IFRS 13 (Fair Value Measurement)

Under IAS 40, entities can adopt either the fair value model or the cost model as their accounting policy for subsequent measurement of investment property. The policy selected must be applied to all their investment property.

Under the fair value model investment property is revalued at the end of each accounting period with unrealised gains and impairment losses being taken directly to the profit and loss account. When a property is sold the base cost for calculating the gain or loss for financial accounting purposes is this carrying value.

This differs significantly from the tax treatment with most jurisdictions using a cost model with changes in fair value ignored.

The fair value model can lead to temporary differences that would result in deferred tax assets or liabilities. Fair value increases for financial accounting purposes would result in a deferred tax liability (ie Dr Deferred Tax P&L, Cr Deferred Tax Liability) that would increase the tax charge in the P&L.  Impairment losses would result in a deferred tax asset.

Similarly, enhanced tax depreciation rates can also result in deferred tax liabilities. 

GloBE Adjustments