1. Non-Consolidation
1.1 Overview of Accounting Treatment
1.2 Pillar Two – Non-Consolidated JVs
1.3 How the Pillar Two Rules Apply to JVs
2. Consolidated JVs
2.1 General Rule
2.2 Top-Up Tax
For accounting purposes, the key criterion is whether there is significant influence.
For instance, under IAS 28, it is presumed that if an investor controls 20%-50% of the voting rights of the JV that there is significant influence, but there can be cases where significant influence can apply even below this threshold (eg significant transactions between the entities or participation in board meetings etc).
Under accounting rules such entities are usually classed as ‘associates’.
Where there is significant influence, the interest in the JV is accounted for under the equity method and the results are not consolidated.
Essentially the initial investment is recorded at cost and then adjusted for the actual performance of the JV.
Note that there is still an impact on the consolidated accounts.
In the consolidated statement of profit or loss, dividend income received from the JV is replaced by bringing in one line that shows the parent’s share of the JV results immediately before the consolidated profit before tax.
If by contrast, the investor controlled the investee then the results of the investee would be consolidated on a line-by-line basis in the consolidated financial statements.
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The treatment of joint ventures (JVs) under the Pillar Two rules depends on whether the interest in the JV is consolidated on a line-by-line basis in the consolidated accounts. If it is, the general rules apply. If not, special rules apply to treat the JV separately from other jurisdictional entities.
Joint Ventures (JVs) that aren’t consolidated are treated as follows:
1. The JV and any of its subsidiaries are treated as a separate MNE group for Pillar Two purposes, and the JV is treated as the UPE, under Article 6.4.1(a) of the OECD Model Rules.
This means that for the purposes of jurisdictional blending the JV group income and covered tax is not included with other entities in the jurisdiction.
2. The JV itself does not apply the income inclusion rule or the under-taxed payments rule, under Article 6.4.1(b) of the OECD Model Rules.
The standard rules apply and the UPE or other parent entity would apply an IIR.
3. The UPE or parent entity is subject to top-up tax on its allocable share of the JV group under Article 6.4.1(c) of the OECD Model Rules.
This takes into account both direct and indirect holdings.
The Transitional CbCR Safe Harbour is a short-term measure that will allow an MNE to avoid undertaking detailed GloBE calculations for a jurisdiction if certain requirements are met. Data will need to be extracted from the CbC Report, financial statements and ERP and EPM systems. Group structure information will also be required.
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The Pillar Two rules include specific rules for Joint Ventures (JVs) that would otherwise not be within the scope of Pillar Two due to not being consolidated in the financial accounts of the MNE group. However, of more interest is how the amount of top-tax tax (and by implication the amount not collected) varies depending on the JV group structure. Read more in this article.
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