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Key takeaways from M&A perspective from commentary on Global Anti-Base Erosion Model Rules, 2023


The Global Base Erosion rules (GloBE Rules) have been developed as part of the solution for addressing tax challenges of the digital economy. They have been developed to ensure large multinational enterprises (MNEs) pay a minimum level of tax on the income arising in each jurisdiction where they operate.

EU, Japan, Canada, Australia and the UK have committed to adopt GloBE rules by 2025. Countries have started adopting GloBE Rules by proposing changes in their domestic tax laws, such as New Zealand.

The GloBE Rules apply a system of Top-up Taxes which include the following:

  • Income Inclusion Rule (IIR)
  • Undertaxed Profits Rule (UTPR)

that brings the total amount of taxes paid on an MNE’s Excess Profit in a jurisdiction up to the Minimum Rate.

The GloBE Rules apply to the Constituent Entities of an MNE Group with consolidated revenues of at least EUR 750 million in at least two of the four prior Fiscal Years.

Where an entity is brought under common control with another entity to form a Group, the consolidated revenue threshold for a prior year is met if the sum of the revenues in the financial statements of each entity is equal or greater than EUR 750 million.

Key definitions

Constituent Entity: The Constituent Entities of an MNE Group include all the entities within the Group with any permanent establishment of a group entity being treated as a separate Constituent Entity. The location of each Constituent Entity is determined based on its local tax treatment.

IIR: The IIR is the primary rule that is applied by a Parent Entity within the MNE Group to that Parent Entity’s Allocable Share of Top-up Tax of any LTCE. The IIR incorporates a top-down approach which ensures priority in the application of the IIR is given to the Parent Entity at the highest point in the ownership chain. Under this approach, an Intermediate Parent Entity shall not apply the IIR where it is controlled by another parent entity further up the ownership chain that is subject to a Qualified IIR.

UTPR: The UTPR operates as a backstop to the IIR, applying only in specific circumstances where the Top-up Tax is not brought into charge under an IIR. The application of a UTPR in a UTPR Jurisdiction shall result in that jurisdiction imposing an additional cash tax expense on the Constituent Entities of an MNE Group that is equal to the UTPR Top-up Tax Amount.

GloBE Reorganisation: A GloBE Reorganisation includes transformation or transfer of assets and liabilities such as in a merger, demerger, liquidation, or similar transaction may qualify as a GloBE Reorganisation. A transformation is a change in the form of an Entity, for example a change from a partnership to a corporation. The definition also includes, contribution of assets to the capital of an existing Entity where the Entity does not issue new or additional Ownership Interests in exchange for the contributed property because the transaction does not result in a change in the relative ownership of the Entity.

To qualify as a GloBE Reorganisation, the consideration for a transfer of assets and liabilities must be, in whole or in significant part, equity interests issued by the acquiring Constituent Entity or by a person connected with the acquiring Constituent Entity.

Permanent Establishment:

In case of a tax treaty ~ a place of business (including a deemed place of business) situated in a jurisdiction and treated as a PE in accordance with an applicable Tax Treaty in force provided that such jurisdiction taxes the income attributable to it in accordance with a provision similar to Article 7 of the OECD Model Tax Convention on Income and on Capital. For example, a Constituent Entity resident in Country R is dedicated to the operation of aircraft in international traffic and has an office in Country S through which it carries on part of its business. Assume that the R-S treaty follows the OECD Model Tax Convention. In accordance with Article 5 of the treaty, this Constituent Entity has a PE in Country S. However, by virtue of Article 7(4) and Article 8 of the treaty, Country S is not able to tax the profits of the PE. In that case, a PE does not exist for purposes of the GloBE Rules.

In case there is no tax treaty ~ The GloBE Rules recognize their existence and treatment under domestic law, and therefore, considers them as Pes. For example, A Co and B Co are Constituent Entities resident in Country A and B respectively, and the sole partners of a partnership organized in Country C. Under the domestic law of Country C, the partnership is considered as tax transparent, and A Co and B Co are treated each as having a PE in Country C. In this case, the GloBE Rules follow the domestic law of Country C by recognizing the existenceof the two PEs as two separate Constituent Entities.

In case where income is exempted ~ The PE is cosidered stateless for the purposes of the GloBE Rules, accordingly the income of the PE would be subject to the GloBE Rules on a standalone basis without the ability to blend its income with other Constituent Entities located in the jurisdiction

Exempt entities:

  • Governmental Entities, International Organisations, Non-profit Organisations, and Pension Funds.
  • Investment funds and real estate investment vehicles that are UPE of MNE group are also excluded from the GloBE Rules in order to protect their status as tax neutral investment vehicles. If an Investment Fund or Real Estate Investment Vehicle is not the UPE of the MNE Group it can still be treated as a Constituent Entity of the MNE Group provided it otherwise meets the consolidation requirements.

Effect on corporate restructuring in case of share acquisitions and asset acquisitions

In a share acquisition, the individual entity position is often unaffected as all that has changed from the entity’s perspective is the shareholder. Accordingly, the purchase accounting adjustments to fair value are only reflected as a consolidation adjustment to get to the full consolidated position. However, in case of an asset acquisition new assets and liabilities will be brought onto the balance sheet. Accordingly, the purchase accounting adjustments to fair value are usually reflected in the individual entity position.

For example, MNE Group 1 owns all of the Ownership Interests of A Co which is resident in jurisdiction A. A Co holds a standalone business and has assets with total carrying value of USD 100 and a tax basis of USD 100, the tax rate in jurisdiction A is 15%. MNE Group 1 decides to sell its Ownership Interest of A Co to MNE Group 2. MNE Group 2 agrees to pay USD 300 for A Co on the basis that it considers the assets of A Co to be worth USD 300. In this scenario, the tax basis of the underlying assets is unaffected by the acquisition. As a result, there is now a difference between the financial accounting carrying value in the consolidated financial statements (USD 300) and the tax carrying value (USD 100) of A Co’s assets, and deferred tax liabilities should be recognised in relation to these temporary differences (USD 30 = (USD 300 – USD 100) * 15%)).

When MNE Group 2 sells the asset for USD 300, this gives rise to a taxable gain of USD 200 and a tax charge of USD 30 (= USD 200 * 15%), however this is offset by a reversal of the deferred tax liability of USD 30 recognised on the original acquisition.

Effect on corporate restructuring in case of mergers and demergers

When the Groups were separate and not part of a merged Group in prior years, the consolidated revenue threshold is to be applied by deeming the revenue threshold to be met in a given preceding year if the sum of the revenue included in each Group’s Consolidated Financial Statements for that year is equal to or greater than EUR 750 million. Neither Group’s pre-merger revenues are adjusted for transactions that occurred between the Groups in the preceding years, notwithstanding that transactions between Entities will be eliminated in consolidation after the merger. This determination has to be made for each of the Fiscal Years that are tested under the consolidated revenue test.

The four-year revenue test is applicable in the following three scenarios:

  • where two or more Groups merge to form a single Group;
  • where a single Entity acquires another Entity or a Group, or vice versa (referred to as a “merger” for GloBE purposes); and
  • where an MNE Group within the scope of the GloBE Rules demerges into two or more Groups

For example, A Group and B Group reported separately consolidated revenue of EUR 400 million, EUR 300 million, EUR 300 million and EUR 400 million each for Years 1 to 4 respectively. The A Group and B Group merge in Year 5 into the AB MNE Group. The AB MNE Group is subject to the GloBE Rules in Year 5 because in two of the four preceding Fiscal Years the sum of their consolidated revenue was EUR 750 Mn or more (i.e. in Year 1 = EUR 800 million & in Year 4 = EUR 800 million).

For example, Group A has a Fiscal Year that is the same as the calendar year. The UPE of Group A distributed all of the shares of subgroup B to its shareholders in 30th June of Year 1. This distribution will be considered a demerger and result in the creation of Group B. The Fiscal Year of Group A ends on the 31 December of Year 1. In this case, Group A’s consolidated revenue is tested for Year 1 because it is the first tested Fiscal Year that ends after the demerger. It also tests Group B’s consolidated revenue for its first tested Fiscal Year that ends after the demerger. If Group B adopts or retains the calendar year as its Fiscal Year, Group B’s first tested Fiscal Year is composed of a period other than 12 months, then the EUR 750 million threshold has to be adjusted proportionally.

Effect on corporate restructuring in case of slump sale

In case of an acquisition (or disposition) of a Controlling Interest where the jurisdiction of the target Constituent Entity treats the transaction as an acquisition and disposition of the underlying assets and liabilities for tax purposes and imposes a Covered Tax on the gain or loss from the deemed disposition of assets by the seller. This provision includes situations where the target jurisdiction imposes a Covered Tax on the seller based on the difference between the tax basis of the assets and the tax amounts of the liabilities and the consideration paid or fair value. The carrying value of the acquired assets and liabilities for GloBE purposes is based on their fair value to the extent gain or loss on those assets and liabilities was included in the GloBE Income or Loss computation of the selling MNE Group. The fair value must be used in the computation of the acquiring Entity’s computation of GloBE Income or Loss in the acquisition year and subsequent Fiscal Years irrespective of whether the fair value adjustments are reflected in the Entity’s financial accounts or the MNE Group’s consolidated financial accounts.

Effect on corporate restructuring in case of asset transfer

The disposing Entity must include gain or loss from the disposition of assets and liabilities in its computation of GloBE Income or Loss and the acquiring Entity must use the adjusted carrying value as determined under the financial accounting standard used in preparing the Consolidated Financial Statements of the UPE. The disposing Constituent Entity will not recognise the gain or loss from the transfer of the assets and liabilities for GloBE purposes. The future profit or loss of the acquiring Constituent Entity will be determined on the basis of the historical carrying amounts of the acquired assets and liabilities. The disposing Constituent Entity will include a gain or loss to the extent of the Non-Qualifying Gain or Loss. This means that the computation of GloBE Income or Loss will include the lesser of the amount of gain or loss reflected in the financial accounts or the amount of the taxable gain or loss arising from the GloBE Reorganisation. Further, the acquiring Constituent Entity will increase or decrease the carrying amounts of the acquired assets and liabilities to account for the Non-qualifying Gain or Loss.

The net gain or loss on all of the Constituent Entity’s assets and liabilities can be included in the computation of GloBE Income or Loss in the Fiscal Year in which the triggering event occurs or can be spread pro rata over five consecutive Fiscal Years starting with the Fiscal Year in which the triggering event occurs. If the total net gain or loss is spread over five Fiscal Years and the Constituent Entity leaves the MNE Group before the end of the five-year period, the remainder of the gain or loss must be accelerated and taken into account in the Fiscal Year that the Constituent Entity leaves the MNE Group.

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June 2024