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Pillar One Amount A: Adjusted Profits

Amount A: Adjusted Profits

Contents

General

Amount A allocates a proportion of the adjusted profit before tax of the MNE group or segment to market jurisdictions.

The adjusted profit before tax is based on the financial accounting profit or loss of the UPE as reported in its consolidated financial accounts, which is then subject to a number of adjustments under Article 5 of the Progress Report on Amount A of Pillar One.

Amount A Adjustments

The key adjustments are as follows:

Tax Expense

Just as for Pillar Two, the starting point of the adjusted profit calculation is the financial accounting income or loss.

As this is an after tax figure, the tax expense in the P&L needs to be added back to avoid any double taxation (as otherwise the profits that were allocated would have already been subject to tax).

The net tax expense is the total current tax expense and deferred tax expense included in the consolidated P&L.

Excluded Dividends

This includes dividends or other distributions included in calculating the Financial Accounting Profit (or Loss). 

Note that this does not tie into the Pillar Two exclusion for ‘Excluded Equity Dividends‘. For Pillar Two purposes, excluded dividends are generally dividends (or other distributions on shares) where the MNE group holds 10% or more of the ownership or had held full ownership for more than 12 months.

Excluded Equity Gains or Losses

This includes:

  • Changes in the fair value of an ownership interest. This relates to accounting policies that apply to financial instruments which revalue assets and liabilities at their current market value.

These are excluded from the Amount A adjusted profit under Article 5.2(c) of the Progress Report on Amount A of Pillar One if they were taken through the profit and loss account. If the fair value gains or losses were included in Other Comprehensive Income they would have been excluded anyway.

  • Profits or losses from an ownership interest under an equity method of accounting.

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).

As the equity method of accounting brings in the proportionate share of the entity’s income or loss into the parent company’s financial accounts, this needs to be excluded.

Note that this does not apply to profit or loss derived from a Joint Venture in which the MNE group has joint control. This would not be included for Pillar Two purposes.

  • Gains and losses from the sale of an ownership interest
Policy Disallowed Expenses

Illegal payments, including bribes and kickbacks, are added back in the Pillar Two GloBE income calculation under Article 5.2(d) of the Progress Report on Amount A of Pillar One, just as they generally would be under a country’s domestic tax law. A payment is illegal if it is illegal under the domestic law of the country of the constituent entity or the UPE.

Fines and penalties are only added back if they are 50,000 euros or more (or an equivalent amount in local currency). Note that interest on late payment of tax is not considered a fine or penalty.

This is the same as for Pillar Two.

Prior Period Errors and Changes in Accounting Principles

Just as for Pillar Two, if there was an error in the accounts (or a change in accounting policy) in a previous year that impacts on the Amount A adjusted income or loss, Article 5.2.(e) of the Progress Report on Amount A of Pillar One provides that this must be adjusted in the Amount A adjusted profit calculation.

For accounting purposes, the adjustment would generally be by way of an amendment to the opening equity in the balance sheet.

For Pillar One, Amount A purposes,  the adjusted profits are amended. For instance, if deductible expenses were not included, this would be represented as a decrease in opening equity and a decrease in Pillar One adjusted profits.

Financial Accounting Profit (or Loss) of Excluded Entities 

Just as this would be excluded for the Pillar Two GloBE income calculation, any profit or loss of Excluded Entities is excluded from the Pillar One adjusted profit.

Asset Fair Value or Impairment Adjustments 

Where an entity values assets under a revaluation method for accounting purposes, its value in the balance sheet is revalued to the current market value (less accumulated depreciation and impairment losses).

For Pillar One, Amount A purposes, Article 5.2(g) and Schedule F of the Progress Report on Amount A of Pillar One provides that assets and liabilities that are subject to fair value or impairment accounting in the Consolidated Financial Statements are taxed on a realisation basis – not fair value basis. Therefore any gain or loss on revaluation is excluded and the carrying value is the historic cost.

It’s worthwhile noting that this is different to Pillar Two. Under Pillar Two, revaluation gains and losses are included in GloBE income, although there is a requirement to include gains and losses that are booked to other comprehensive income given they wouldn’t usually be included in the consolidated profit or loss before tax. 

Pillar Two does permit an MNE group to make an election to use the realisation basis. 

Acquired Equity Basis Adjustments

Article 5.2(h) and Schedule G of the Progress Report on Amount A of Pillar One provide that where an entity is acquired and it becomes a group entity, the MNE group determines its tax basis for Amount A as the carrying value of the assets in the accounts for the entity immediately before the acquisition. This applies for determining depreciation, amortisation, impairment or any gain or loss on a disposal by the MNE group.

This is different from both the standard financial accounting treatment and the default treatment under Pillar Two.

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).

Pillar Two generally follows the accounting treatment unless there is a GloBE reorganisation, in which case the historic carrying value can be used. 

Asset Gain/Loss Spreading Adjustments

Under Article 5(2)(i) of the Progress Report on Amount A of Pillar One gains on assets or losses on assets (excluding inventory) are evenly spread between the period of disposal and the next four fiscal years. 

This is unlike Pillar Two which includes the gain or loss in the fiscal year of disposal. However, an election can be made to carry back a capital gain to the previous four fiscal years. This is not possible under the Pillar One Amount A calculation.

Profits attributable to non-controlling interests

These rules for Pillar One Amount A purposes have not yet been developed, but there will need to be some method of excluding these where part of the profit is allocated to non-group members. The Pillar Two rules accommodate this under the income inclusion rule (for partially-owned parent entities) and directly as part of the top-up tax calculation for investment entities

Losses

The treatment of losses for Pillar One Amount A purposes is different to Pillar Two. Pillar Two uses the deferred tax figure in the financial accounts (subject to a number of adjustments). As such, losses are taken into account as deferred tax assets. 

The Pillar One Amount A calculation does not need to bring tax (either current or deferred tax) into account and just excludes it from adjusted profits. Nevertheless there needs to be a mechanism to take losses into account when calculating adjusted profits. 

Therefore, for Amount A, losses are carried forward and deducted against adjusted profits in chronological order.  However, there is a restriction for pre and post implementation losses.

Post implementation losses are carried forward for 10 years. Pre implementation losses are losses incurred up to three years before the Amount A implementation and they can also be carried forward for up to ten years.

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