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Consolidation Election

Consolidation Election

Whilst consolidated financial accounts are used for determining whether MNE groups are in scope (see our Scope analysis), Pillar Two GloBE income is based on the entity-level financial accounts before any consolidation adjustments.

As such, transactions between group entities are taken into account when determining the Pillar Two GloBE income or loss of constituent entities.

However, for tax purposes, if there is a domestic group relief or consolidation regime, this may ignore in-country intra-group transactions or provide for another form of relief for sharing intra-group losses.

A consolidation election adopts an amended form of accounting/tax consolidation and applies to constituent entities of an MNE group in the same jurisdiction that are included in a tax consolidation group in the jurisdiction.

If the election is made income, expenses, gains and losses between the constituent entities are eliminated. It does not impact on the carrying value of assets.

The election does not apply to investment entities or minority-owned entities given they are treated on a standalone basis for the jurisdictional blending calculation.

Note that this election is not available for transactions between constituent entities in different jurisdictions.

This is a five-year jurisdictional election.

The aim of the election is to make the accounting (and therefore Pillar Two GloBE) treatment more aligned with the local tax treatment. The greater the disparity the greater the risk of adverse consequences under the Pillar Two GloBE rules, particularly as the tax expense in the accounts is used as a starting point and then adjusted.

For instance, if for domestic tax purposes intra-group transactions were ignored this would represent a difference in the taxable income of each constituent entity in the jurisdiction from the financial accounting income (assuming intra-group transactions and no consolidation election is made). The current tax in the P&L which flows through into adjusted covered taxes would be based on the domestic tax treatment.

This could lead to a distorted ETR depending on whether the entity was a net recipient or payee.

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.



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