Article 2.2.1

28. Article 2.2.1 provides the formula for the allocation of Top-up Tax. The Article allocates to the Parent Entity applying the IIR (as determined by Article 2.1) its Allocable Share of Top-up Tax liability. The Allocable Share is the amount of Top-up Tax owed in respect of an LTCE, determined by reference to the Parent Entity’s Ownership Interest in the income of the LTCE. This is achieved by multiplying the Top-up Tax of the LTCE by the Parent Entity’s Inclusion Ratio.

Article 2.2.2

29. Article 2.2.2 defines the Parent Entity’s Inclusion Ratio for the purposes of applying the IIR. The Inclusion Ratio is, in essence, the ratio of the Parent Entity’s share of an LTCE’s GloBE Income to its total GloBE Income for the Fiscal Year. Where a subsidiary is wholly owned, the Inclusion Ratio will always be 1 and no additional computations are required. However, Article 2.2.2 achieves that result by subtracting the amount of GloBE Income allocable to Ownership Interests held by other owners from the total GloBE Income and dividing the difference by the total GloBE Income of the Entity. The determination of the amount of GloBE Income allocable to Ownership Interests held by other owners is determined under Article 2.2.3.

Article 2.2.3

30. Article 2.2.3 provides the mechanism by which GloBE Income attributable to other owners as set out in Article 2.2.2(a) is computed. The starting point to determine such amount is the GloBE Income or Loss computation for a Constituent Entity in Chapter 3, which starts with the Entity’s Financial Accounting Net Income or Loss and makes adjustments from there. The Constituent Entity’s income is determined on a separate entity basis and transactions between Group Entities are generally respected; the GloBE Income computation generally does not take into account elimination adjustments that would be made in the financial statement consolidation process. Article 3.2.8 allows the MNE Group to apply its consolidated accounting elimination adjustments, but only in respect of transactions between Group Entities in the same jurisdiction. Thus, in most cases, it is unlikely that an LTCE’s GloBE Income will exactly equal the accounting income that is ultimately reflected in the Consolidated Financial Statements. In some cases, the Financial Accounting Net Income or Loss of an LTCE may be zero after consolidation adjustments. However, it is the GloBE Income, not the Financial Accounting Net Income, that must be allocated to the Parent Entity applying the IIR.

31. Consolidated Financial Statements generally reflect all of the assets, liabilities, income, expenses and cash flows of controlled subsidiaries. However, the owners of the UPE do not have an interest in 100% of those items if the subsidiary is partially owned by third parties. Thus, the UPE must evaluate the extent to which the assets, liabilities, income, expenses and cash flows of its subsidiaries belong to minority interest holders in order to properly report the portion that belongs to its owners in the Consolidated Financial Statements. The consolidated profit and loss statement will include a reduction to the total income for the portion that belongs to minority owners in arriving at the UPE’s consolidated net income. Similarly, the consolidated balance sheet includes a line item reflecting the cumulative equity of the minority owners in the total assets of the consolidated group. Without these adjustments, the Consolidated Financial Statements would overstate the portion of the income of the consolidated group that belongs to or inures to the benefit of the owners of the UPE.

32. The GloBE Rules leverage the principles that the UPE applies, or would need to apply, in its Consolidated Financial Statements to determine the share of income of the Financial Accounting Net Income or Loss that belongs to other owners of an LTCE that it does not wholly own. When the IIR is applied by an Intermediate Parent Entity or a POPE, the rules further require that Parent Entity to apply the principles that the UPE applies to minority owners to their separate ownership interests in LTCEs. To this end, Article 2.2.3 requires a hypothetical allocation (in accordance with those principles) of an amount of financial accounting income that is equal to the LTCE’s GloBE Income based on the assumptions in paragraphs (a) to (d).

33. The first assumption, contained in paragraph (a), is that the Parent Entity performing this hypothetical allocation, prepared Consolidated Financial Statements using the same accounting standard used in the UPE’s Consolidated Financial Statements (the hypothetical Consolidated Financial Statements). This assumption is necessary where the Parent Entity is not the UPE. Although the UPE actually prepared Consolidated Financial Statements, those statements are the hypothetical Consolidated Financial Statements for purposes of Article 2.2.3. The assumption sets a uniform accounting standard to properly allocate the LTCE’s GloBE Income, and in turn Top-up Tax, among Parent Entities applying the IIR. Because all Parent Entities will be applying the same accounting standard to determine their Inclusion Ratio, there will be no leakage (or duplication) of Top-up Tax liability and there will be a proper coordination under Article 2.3 between the application of the IIR by a Parent Entity and a POPE in respect of the same LTCE.

34. The second assumption, contained in paragraph (b), is that the Parent Entity owned a Controlling Interest in the LTCE such that the income and expenses of the LTCE were consolidated on a line-by-line basis with those of the Parent Entity in the hypothetical Consolidated Financial Statements (i.e. the amount of each item of income and expense of the LTCE accrued under the accounting standard for the Fiscal Year is included in the consolidated amount of each item of income and expense reflected in the hypothetical Consolidated Financial Statement). The LTCE is a Constituent Entity because the UPE owns a Controlling Interest in it. However, the UPE’s Controlling Interest may not be held through the Parent Entity required to apply the IIR. That Parent Entity may only hold a minority interest in the LTCE, in which case the Parent Entity would not be required to consolidate its accounts on a line-by-line basis with the LTCE. The Parent Entity might otherwise, for example, include only the net profit or loss of the LTCE under the equity method in the Consolidated Financial Statements if it only took into account its Ownership Interests for this purpose. The assumption in paragraph (b) is intended to clarify that the LTCE is treated as if it were controlled by the Parent Entity preparing these hypothetical Consolidated Financial Statements even if it does not own a Controlling Interest in the LTCE. This brings all of the LTCE’s income and expenses into the Parent Entity’s hypothetical Consolidated Financial Statements on a line-by-line basis so that it would be necessary to determine the share of its income allocable to other owners under the relevant accounting standard. This assumption is limited to the consolidation of the income and expense of the LTCE. This limitation is intended to avoid any confusion that might arise as a result of the assumption that its income were equal to GloBE Income. For example, substitution of the GloBE Income in the profit and loss statement may not carry through properly to a balance sheet or statement of cash flows, but this is not relevant for purposes of the exercise in Article 2.2.3.

35. The third assumption in paragraph (c), is that all of the LTCE’s GloBE Income is attributable to transactions with persons that are not Group Entities. The normal process of preparing Consolidated Financial Statements eliminates income and expenses attributable to transactions between group members. This assumption is intended to clarify that the amount that should be allocated in the hypothetical allocation is the total GloBE Income of the LTCE, irrespective of whether some or all of that income was earned through transactions with Group Entities and would have been eliminated in preparing actual Consolidated Financial Statements. The entire amount of GloBE Income needs to be allocated in the hypothetical allocation, even if some or all of it is in fact derived from transactions with other Group Entities.

36. The final assumption in paragraph (d), is that all other owners (including other Constituent Entities) are treated as not holding any Controlling Interests in the LTCE. This assumption treats other Constituent Entities of the MNE Group that own an interest in the LTCE in the same manner as persons that are not Group Entities. Thus the income attributable to other Constituent Entities is treated as income attributable to a non-Group Entity. This ensures that only the income attributable to direct and indirect Ownership Interests owned by the Parent Entity is included in the Parent Entity’s Inclusion Ratio.

Article 2.2.4

37. Article 2.2.4 clarifies that in the case of a Flow-through Entity, the total GloBE income for purposes of the Inclusion Ratio is the total GloBE Income that is attributable to Ownership Interests held by Constituent Entities of the MNE Group. Thus, any amount that is allocated to a person that is not a Group Entity pursuant to Article 3.5.3 is excluded for purposes of determining a Parent Entity’s Inclusion Ratio.