Key Takeaways from the OECD's Consolidated Commentary to the GLoBE Model Rules. Part 4.
In today's article, we'll dive into discussing the key takeaways from the OECD's consolidated commentary (referred herein after as "the commentary"). This, as it relates to Chapter 6 of the consolidated commentary (Part 4 of 6).
Let's recall from our initial article, the 6-article-series plan that we established as being the manner through which we will uncover the key takeaways from the commentary.
The format of the six-article series plan initially discussed is laid out below as follows:
Let's start! Shall we?
Purchase Accounting & Business Acquisition
Purchase accounting for asset acquisition is usually reflected on the individual balance sheet of each entity concerned by the transaction. Whereas purchase accounting adjustments related to share acquisition are usually only reflected at the consolidated level. This, in order to allow the consolidated financial statements to carry the full impact of the transaction.
Adjustments to the carrying value of assets and liabilities related to purchase accounting for a business combination are generally not taken into account in the computation of GLoBE Income or Loss. To be exact, in cases of share transfers in or out of an MNE group, purchase accounting adjustments are generally not taken into account. Here, similar to local tax treatments, "historical" carrying values of assets and liabilities continue to be used by the buyer to calculate GLoBE Income or Loss. To that effect, even deferred tax assets ("DTAs") and deferred tax liabilities ("DTLs") associated with purchase accounting adjustments will be excluded from the computation of GLoBE Income or Loss. The same is true for DTAs and DTLs related to purchase accounting adjustments related to an article 6.3.2 GLoBE reorganization.
There are however cases where purchase price accounting adjustment are included in the GLoBE Income or Loss of an MNE Group and its Constituent entities ("CEs"). These cases are usually cases where there is "actual domestic taxation" of third-party acquisition of assets and liabilities (Articles 6.2.2, 6.3.1, & 6.3.4). Or, of actual domestic taxation of intra-MNE group asset and liabilities' purchase (article 6.3.3). The similar characteristics found in the types of transactions for which purchase price is allowed are: direct asset and liabilities' disposal; and taxability of the gains or losses tied to the assets and liabilities disposed of.
Para 19 thru 36 Article 6.1.1
When two groups merge into a single group, for purposes of testing the two out of four year of revenues preceding the fiscal year in question, one considers the threshold met if the sum of revenues included in each merged group's financial statements is equal to or greater than 750M Euro.
When MNE group experiences a split-off into two or more groups, the consolidated threshold for revenues is met if after the year of demerging, a demerged group has annual revenues of 750M Euros or more. Or, if, during the second to fourth year following the demerging year, its revenues are 750M Euros or more.
We have decided not to cover articles 6.1.2 and 6.1.3, as these provisions only cover minimal (definitional) aspects of Chapter 6.
Para 47 thru 63 Article 6.2.1
Article 6.2.1(a) provides that if an entity is acquired by an MNE group and that target entity's assets, liabilities, income, expenses, and cash flows are included in the UPE's consolidated financial statements, then it is considered a member of the acquiring MNE group in that year. Further, a portion of income for the period during which the target was a member of the disposing MNE group will be allocated to the disposing MNE group. The remaining portion of the target's income for the year will be allocated to the acquiring MNE group. Whilst all of the assets and liabilities of the target are reported on the consolidated financial statements of the acquiring MNE group.
Article 6.2.1(b) provides that the FANIL and adjusted covered taxes of the target entity in the acquisition year shall be the amounts reported in each MNE's consolidated financial statements.
In the acquisition year and in subsequent years, in cases of ownership interest sale transactions, the acquiring MNE is allowed to use the historical value of assets and liabilities when calculating its GLoBE Income or Loss. Article 6.2.1(c). Here, the effects of purchase price accounting are barred from having any effect as it relates to the computation of GLoBE Income or Loss of the acquiring MNE group. The use of historical value or basis is the only one allowed. This treatment is equally applicable to the carrying value of intangible assets.
Generally, push down accounting practices related to pillar two's GLoBE Income or Loss Calculations are not allowed. However, in certain cases of business purchase, there may be allowance for push down accounting adjustments to assets and liabilities of the target entity. For such to occur, 1) the financial accounting standards of the UPE must permit pushdown accounting adjustments to the separate accounts of the acquired constituent entity (step-up or down in basis in assets.); 2) the business purchase must have happened before December 1, 2021; 3) and there is a lack of data to determine FANIL based on the unadjusted values of the acquired assets and liabilities. Here, purchase accounting adjustments to DTAs and DTLs are equally allowed in the computation of the acquiring MNE's GLoBE Income or Loss and its Adjusted Covered Taxes.
The length of days during which the target is part of the MNE group divided by the 365 is used as the proration needed to measure the Tangible Assets' Substance Based Income Exclusion carveout. That proration percentage is multiplied by the stepped-up basis in the tangible assets in the hands of the acquirer MNE group during the acquisition year. It is important to note that stepped-up basis in assets occurs in the hands of the buyer for purposes of the SBIE only. It does not similarly occur for purposes of computing GLoBE Income or Loss of the acquirer MNE group.
All DTAs and DTLs transferred under an article 6.2.1 transaction will keep their character and amount (no purchase price accounting adjustments allowed). This, except for GLoBE Loss DTA arising in respect of a GLoBE Loss of a jurisdiction pursuant to article 4.5.1 election. Here, this type of attribute tacks unto the transferor group; and, unto a specific jurisdiction.
Para 64 thru 68 Article 6.2.2
Article 6.2.2 deals with acquisition or disposal of a controlling ownership interests of a constituent entity ("CE"), whereby the jurisdiction of the target CE treats the ownership interest acquisition as an asset and liabilities' acquisition. Plus, the same jurisdiction taxes the seller's gain on the transaction (FMV minus Inside basis in assets). Note here that the controlling aspect of the Acquistion does not signify an Acquistion of all of the ownership interests. Rather, it just means the acquisition of a significant portion of the interests (greater than 50%). This means that a series of gradual ownership acquisitions will eventually give rise to an acquisition of controlling interests. Here, once controlling interest is established, no other subsequent acquisitions can be considered a controlling interest acquisition. Note however that some jurisdictions' tax regimes treat transactions as sale of assets only when control is acquired in a "single" transaction or a series of "related" transactions.
Para 69 thru 73.1 Article 6.3.1
Article 6.3.1 discusses third party acquisition of or disposition of assets and liabilities. Here, the disposing MNE includes the gain or loss on the disposition in its GLoBE Income or Loss. Whereas the target or purchasing entity will record a step-up in basis of the asset acquired up to fair market value (acquisition price). This adjusted carrying value used by the acquiring entity, which is based on fair market value to the extent gain or loss and was included in the seller's GLoBE Income or Loss, has to be prescribed by the accounting standard used in the consolidated statements of the UPE. If there are bargain purchase gains (loss in the hands of the seller), then the buyer entity, under certain standards, may be required to recognize bargain purchase gains. In such cases, the amortization of the new intangible asset created will be included in the computation of the GLoBE Income or Loss to the extent included in the acquiring entity's FANIL.
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Article 6.3.1 also covers taxable intra-MNE acquisition of or disposition of assets and liabilities. Here, the disposing entity's gain or loss arising in relation to an article 6.3.1 transaction is determined in accordance with the arm's length principle of article 3.2.3. As such any amount of gain in non-accordance with the arm's length principle will not be deemed to be pillar two compliant. This applies regardless of whether the gain calculated by the MNE used as reference "carrying values or fair value". Further guidance on buyer's treatment of such transaction to come from the IF.
Para 74 thru 75 Article 6.3.2
When an acquisition or disposition of assets or liabilities is done as part of a GLoBE reorganization, the disposing entity excludes any gain or loss on the disposition from the computation of its GLoBE Income or Loss. Added unto it, the acquiring entity uses, to calculate its GLoBE Income or Loss, the historical asset basis of the selling entity.
Para 76 & 77 Article 6.3.3
When an acquisition or disposition of assets or liabilities is done as part of a GLoBE reorganization, and the gain or loss on the transaction is partially taxed, the disposing entity includes as gain or loss on the disposition in the computation of its GLoBE Income or Loss the lesser of financial accounting gain or taxable gain. Added unto it, the acquiring entity, to calculate its GLoBE Income or Loss, will increase or decrease the historical carrying value basis of the assets by the non-qualifying gain or loss.
Para 79 thru 82 Article 6.3.4
Article 6.3.4 applies in situations where an election (made by acquiring MNE) for tax purposes exists to step up the assets and liabilities of a CE (U.S. IRC 338 G election equivalent). Here, the acquiring entity, if originally an article 6.2.1, recognizes a gain in its GLoBE income or Loss to the extent of the difference between the assets' FMV and the historical basis of the assets. The gain is however reduced by the seller's non-qualifying gain (lesser of accounting or tax gain). Which may be inexistant if the seller is subject to article 3.2.1(c)'s exclusion of equity gain or loss. Next, the acquiring MNE group will use the fair value of the assets and liabilities to compute its GLoBE Income or Loss. Lastly, just as under article 3.2.6 - aggregate asset gain, the gain to be included in the GLoBE information return can either be included at once or spread over five consecutive years, including the year of the triggering event (tax election). If the latter reporting method is chosen, and the CEs related to the gain are disposed of within the prescribed five-year period, acceleration of gain recognition will occur in an amount equal to the remaining gain of the acquiring entity.
Para 83 thru 94 Article 6.4.1
Under article 6.4, JV entities that are owned at least 50% and are reported in the consolidated financial statements under the equity method are treated as JV constituent entities. Absent article 6.4, they would not be treated so. This, again, though they are not consolidated on a line-by-line basis. Thus, under the Model rules, entities owned less than 50% are not JV constituent entities. And, so would be an entity referred to as an "associate". It is important to note that the subsidiaries of JVs are treated as JV constituent entities as well.
Article 6.4.1 brings JVs and their subsidiaries into scope of the GLoBE Rules; but only to the extent of the MNE's share of the JV and its subsidiaries. JVs and their subsidiaries are subject to Chapters 3 thru 7 of the Model Rules; And, chapters 8.2, 9.1, and 9.2.
Para 90 and 91 discuss the calculation of the allocation of the top-up tax of a JV and a JV subsidiary under the IIR regime.
The portion of top up tax collected under article 6.4.1(b) can be less than the total top up tax of the JV group. In that case, the remainder will be collected under article 6.4.1(c). If all the top-up tax of the JV Group is collected under article 6.4.1(b), then article 6.4.1(c) has no effect.
Para 95 thru 110 Article 6.5
Constituent entities of each MNE groups, part of a stapled structure or of a dual arrangement, are also constituent entities of the single Multi-parented MNE group. This includes permanent establishments.
Entities are treated as constituent entities of the Multi-Parented MNE Group if it is consolidated on a line-by-line basis by such group or its controlling interests are held by the group. Here, entities that would not meet the definition of constituent entities under a single ownership test now can as they are now consolidated on a line-by-line basis in the F/S of the Multi-Parented Group. There are other cases where the entities would not be consolidated on a line-by-line basis initially. But, its aggregated ownership provides a controlling interest to the new single Multi-Parented MNE Group.
Away from the above, under article 6.5.1(c), the consolidated financial statements of the Multi-Parented MNE Group created under a stapled structure are those referred to in paragraph (b) of the definition of staple structure, found in article 10.1 of the Model rules. Also, the reference to the accounting standard of the UPE should be deemed to be the accounting standard that has been used by the multi-parented MNE Group to prepare the combined Consolidated financial statements of the Multi-Parented MNE Group.
UPEs of the different groups that comprise the Multi-Parented Group are still considered as UPEs of the Multi-Parented MNE Group. This confirms that when dealing with Multi-Parented MNE Groups, there will exists multiple UPEs.
The IIR discussed under articles 2.1 thru 2.3 is applicable to each of the UPEs of the Multi-Parented MNE Group. With the top-down approach being generally prioritized.
There are situations where only one of the UPEs will be subject to the IIR. This is the case where an intermediate parent entity is owned by two UPEs; and, here, only one of the the UPE is in a qualified IIR jurisdiction. The result? The intermediate parent entity applies the IIR. And, the UPE that is in a qualified IIR jurisdiction reduces its allocable share of top up tax in the LTCE in accordance with Article 2.3.
As with the IIR provisions, article 6.5.1(f) confirms that constituent entities of the Multi-Parented MNE Group are required to apply the UTPR in accordance with Articles 2.4 to 2.6. Under these conditions, an entity that would otherwise be a constituent entity of one the groups within the Multi-Parented MNE group can be required to apply the UTPR unto another constituent entity that would otherwise be a constituent entity of another Group.
Lastly, except where a UPE has elected a Single Designated filing Entity, all UPEs will be required to submit a GLoBE Information return in accordance with article 8.1. And, this return shall include all the information of all groups that are part of the Multi-Parented MNE Group. All in all, article 6.5.1(g) does not alter the application of article 8.1.
This does it as far as part 4 of the key takeaways from the OECD's recently published consolidated commentary to the GLoBE Model Rules is concerned.
To the extent to which any contribution can be made in the comment section, they are welcomed!
As usual, in the meantime, stay well. Stay safe.