Equity Investment Inclusion Election

Article 3.2.1(c) of the Model Rules excludes the following from the GloBE Income or Loss:

• Gains and losses from changes in fair value of an Ownership Interest, except for a Portfolio Shareholding;
• Profit or loss in respect of an Ownership Interest included under the equity method of accounting; and
• Gains and losses from disposition of an Ownership Interest, except for the disposition of a Portfolio Shareholding.

The exemption applies irrespective of whether any gain or loss is included in the owner’s taxable income for domestic tax purposes.

For GloBE purposes if the above conditions are met, there is therefore an exemption from GloBE income.

The corollary to this is that Article 4.1.3(a) of the OECD Model Rules also eliminates  “the amount of current tax expense with respect to income excluded from the computation of GloBE Income” from the covered tax expense.  This is required to align the GloBE ETR calculation. 

However, in the case of an equity method investment, while for GloBE income purposes, both income and losses arising from an equity method investment are excluded,  when excluding the tax charge from covered taxes the GloBE rules only exclude taxes related to “income excluded from the computation of GloBE Income or Loss” (ie it does not explicitly refer to an excluded loss).

The equity method of accounting is a method of accounting for holdings in entities that are not subject to consolidation. Generally, this applies when the equity interest is less than 50%. These entities aren’t generally controlled by the MNE group and therefore aren’t constituent entities (aside from certain Joint Ventures).

If an in-scope MNE group owned a minority interest in a Tax Transparent Entity that
is accounted for using the equity method any loss of the Tax Transparent Entity’s would flow through to the parent entity under the net basis of tax and reduce its taxable income (and therefore its tax liability).  However, for GloBE purposes, the share of the loss is not included in the Parent Co’s computation of its GloBE Income or Loss.

This would therefore reduce the Parent Co’s GloBE ETR as the tax loss has reduced the current tax expense but has not reduced GloBE income. 

To remedy this, the OECD allows MNEs to make an Equity Investment Inclusion Election.

This then includes gains, profits, and losses from equity investments in the computation of GloBE Income or Loss (ie they are no longer excluded) but the related current and deferred tax expenses are also included. 

The election is a five-year election made on a jurisdictional basis.