Article 3.2.1

20. Article 3.2.1 sets out the adjustments to the Financial Accounting Net Income or Loss that are required in the computation of each Constituent Entity’s GloBE Income or Loss. These adjustments bring the Constituent Entity’s GloBE Income or Loss more into alignment with the computation of taxable income under a typical CIT (for example, exclusion of equity method income or loss from a non-Controlling Interest in a corporation) and prevent double taxation of the MNE Group’s income under the GloBE Rules (for example, exclusion of dividends received from Constituent Entities).

21. Each Inclusive Framework jurisdiction has its own unique combination of additions to and exclusions from financial accounting net income or loss to arrive at taxable income under its domestic tax law. Because financial accounts are utilised as the starting point for determining the GloBE Income or Loss for all Constituent Entities wherever located, certain permanent differences will arise between the taxable income and the GloBE Income or Loss computed for some Constituent Entities. Such permanent differences are to be expected as a natural consequence of a common tax base for the GloBE Rules, and it would not be possible or desirable, from either a policy or a design perspective, to develop a comprehensive set of adjustments to bring the GloBE Income or Loss fully into line with the taxable income calculation rules of all Inclusive Framework members. Indeed, many permanent differences, such as the exclusion of income from the tax base, will give rise to the types of low-tax outcomes that the GloBE Rules are intended to address. Nevertheless, some adjustments to financial accounts are appropriately based on the policies of the GloBE Rules and tax policy more generally, such as the treatment of bribes and fines. While the number of adjustments have been kept at a minimum to minimise complexity, the adjustments set out in Article 3.2 reflect cases that are sufficiently material and widely accepted in Inclusive Framework jurisdictions. Nine adjustments are required by Article 3.2.1. Each adjustment is discussed in turn.

Paragraph (a) – Net Taxes Expense

22. Paragraph (a) adds back the Net Taxes Expense to the Constituent Entity’s Financial Accounting Net Income or Loss. The definition of Net Taxes Expense is in Article 10.1. The definition covers a range of different types of tax expense items (or adjustments to those items) that would ordinarily be taken into account in the calculation of net income for accounting purposes but which must be added-back to GloBE Income or Loss in order to produce a reliable ETR calculation for GloBE purposes. For example, while income taxes and other covered tax liabilities that accrue during the Fiscal Year can be expected to reduce net income for financial reporting purposes, these tax expenses must be added-back to income in order to accurately calculate the tax on total income for the year for GloBE purposes. An entity that incurs Covered Taxes of 20 on 100 of income has an ETR of 20% (=20/100) for GloBE purposes and not an ETR of 25% (=20/80).

23. The adjustment for Net Taxes Expense will typically be a positive amount (i.e. an increase to GloBE income) because it adds back taxes in respect of net income. As explained below, however, the adjustment will be a negative amount where the Constituent Entity incurs a net loss that results in the creation of a deferred tax asset.

24. Article 10.1 provides that a Constituent Entity’s Net Taxes Expense is the net amount of:

a) any Covered Taxes accrued as an expense and any current and deferred Covered Taxes included in the income tax expense, including Covered Taxes on income that is excluded from the GloBE Income or Loss computation;

b) any deferred tax asset attributable to a loss for the Fiscal Year;

c) any Qualified Domestic Minimum Top-up Tax accrued as an expense;

d) any taxes arising under the GloBE Rules accrued as an expense; and

e) any Disqualified Refundable Imputation Tax accrued as an expense.

25. Paragraphs (a) and (b) of this definition describe tax items that will generally be taken into account in determining an entity’s net income but should generally be added back to income for GloBE purposes. Items (c) and (d) describe tax liabilities accrued under a Qualified Domestic Minimum Top-up Tax or the GloBE Rules themselves which should not be treated as expenses in determining the GloBE tax base. Item (e) specifically identifies Disqualified Refundable Imputation Taxes as an item that needs to be added back to the calculation of GloBE Income. As described further in the Commentary to Article 10.1, a Disqualified Refundable Imputation Tax is a tax that is initially imposed on the income of a Constituent Entity but is excluded from the definition of Covered Taxes because the tax is refunded (or refundable) upon distribution of that income to the owner.

Covered Taxes

26. Any Covered Taxes that were deducted in the computation of Financial Accounting Net Income or Loss whether as an above-the-line expense or as a below-the-line income tax, must be added back to the determination of GloBE Income or Loss. As a matter of general tax policy, creditable taxes are generally not deductible against taxable income. Allowing a deduction and a credit for the same taxes would effectively provide a double benefit for the same taxes. Covered Taxes are included in the numerator of the ETR fraction, which reduces the potential tax liability under the GloBE Rules in the same manner as a tax credit. It would be inconsistent with the policy of the GloBE Rules to also allow them as a deduction in the computation of the GloBE Income or Loss because GloBE Income or Loss is tantamount to taxable income under an ordinary income tax and also serves as the denominator of the ETR fraction. This adjustment is a positive amount that increases the Net Taxes Expense adjustment.

27. Covered Taxes attributable to income that is excluded from the computation of GloBE Income or Loss must also be added back to Financial Accounting Net Income or Loss to prevent the tax attributable to the excluded income from being allowed as a deduction in the computation of the GloBE Income or Loss.

28. For example, assume that a Constituent Entity has 120 of income in Year 1 and pays 12 of Covered Taxes on that income pursuant to a 10% statutory tax rate. The Constituent Entity’s Financial Accounting Net Income or Loss is 108 (= 120 – 12). Assume further that 20 of income is excluded from the computation of GloBE Income and 2 of the Covered Taxes is attributable to the excluded income. Thus, the Constituent Entity’s GloBE Income should be 100 and the Adjusted Covered Taxes should be 10, which produces a 10% ETR. If only the 10 of tax attributable to the GloBE Income were added back to the 108 of net income, the GloBE Income would be 98 (= 108 + 10 – 20) after the excluded income is removed from the computation. The 2 of tax attributable to the excluded income would essentially be allowed as a deduction in the computation of GloBE Income and would produce a 10.2% ETR. By adding back all 12 of the Covered Taxes for the Fiscal Year, the GloBE Income is correctly determined as 100 (= 108 + 12 – 20) and the ETR is correctly determined as 10%.

29. Covered Taxes of a Constituent Entity generally refer to Taxes accrued in the financial accounts with respect to that Constituent Entity’s taxable income, or in some cases, its retained earnings or equity. For the avoidance of doubt, an amount withheld by a Constituent Entity in respect of Taxes imposed on another person (i.e. the foreign payee) in lieu of a generally applicable CIT, is an expense and not Covered Taxes of the Constituent Entity. Accordingly, there is no need to make an adjustment in respect of such an amount in the determination of the Constituent Entity’s GloBE Income. This is the case regardless of whether a foreign payee requires a Constituent Entity, being the payer, to gross-up the payment to reimburse the foreign payee for the withholding tax imposed by the jurisdiction of the Constituent Entity on the foreign payee’s income.

Deferred Tax Asset

30. A deferred tax asset arising in respect of a loss does not represent Tax paid in advance of the recognition of income for tax purposes. Instead, it arises because a portion of the total loss, i.e. the excess of expenses over income, effectively creates an asset that can be used against tax liability on income arising in the future. As such, it reduces the economic effect of the business loss. The deferred tax asset is determined by reference to the pre-tax accounting loss. Accordingly, the amount of the deferred tax asset must be treated as a negative amount in the computation of the Net Taxes Expense adjustment. For example, A Co incurs an economic loss of 100 in Year 1 and records a deferred tax asset of 15 (assuming a 15% corporate tax rate). The net loss recorded for financial accounting purposes will be 85, given that an asset of 15 has been generated in the same year by virtue of the local tax loss carry-forward. In order to accurately reflect the loss for GloBE purposes, the 15 is taken into account in the Net Taxes Expense adjustment as a negative amount. However, to the extent a deferred tax asset is taken into account in the adjustment for Covered Taxes pursuant to paragraph (a) of the definition of Net Taxes Expense, it is not taken into account under paragraph (b).

Qualified Domestic Minimum Top-up Taxes

31. The same reasoning against allowing a deduction for Covered Taxes applies in the case of Qualified Domestic Minimum Top-up Taxes because those taxes also reduce the MNE Group’s potential Top-up Tax liability, albeit as a direct reduction to Top-up Tax liability under Article 5.2.3 rather than as part of the ETR computation under Article 5.2.1. These Taxes are positive amounts that increase the Net Taxes Expense adjustment. A domestic minimum tax that is not a Qualified Domestic Minimum Top-up Tax but that meets the definition of a Covered Tax and that is deducted in the computation of Financial Accounting Net Income or Loss must be added back under paragraph (a).

GloBE Taxes

32. Top-up Taxes arising under the GloBE Rules that have been accrued in the financial statements must be added back to the Financial Accounting Net Income or Loss. The amount of tax paid under a Tax regime does not reduce the base on which that Tax is levied. The adjustment for Top-up Taxes arising under the GloBE Rules applies irrespective of whether the taxes are due to an accrual of the estimated liability for the current Fiscal Year or an adjustment to the actual liability for a previous Fiscal Year. These Taxes are positive amounts that increase the Net Taxes Expense adjustment. For example, an MNE Group may report its expected Top-up Tax liability for a Fiscal Year in its financial statements. Such amount must be added back to prevent overstating the ETR, as the amount of GloBE Income would otherwise be understated.

Disqualified Refundable Imputation Taxes

33. Disqualified Refundable Imputation Taxes are not Covered Taxes. However, they must be added back to the Financial Accounting Net Income or Loss because such Taxes are essentially deposits that the MNE Group can have refunded at the time of its choosing by simply distributing a dividend. As such, they are not properly treated as an expense in the computation of GloBE Income or Loss. When Disqualified Refundable Imputation Taxes are paid or accrued and included as an expense in the Financial Accounting Net Income or Loss, they must be added back. This would be a positive amount that increases the Net Taxes Expense adjustment. If on the other hand, Disqualified Refundable Imputation Taxes are refunded or credited to the MNE group in a Fiscal Year and treated as an income item or a reduction to a tax expense in the Financial Accounting Net Income or Loss, the amount must be removed from income or added back to the tax expense. This would be a negative amount that decreases the Net Taxes Expense adjustment.

Paragraph (b) – Excluded Dividends

34. Dividends and distributions from controlled Entities and Entities reported under the equity method will generally be excluded from the calculation of the group’s consolidated income. The underlying income or loss of Entities that are consolidated on a line-by-line basis and Entities that are accounted for under the equity method is included directly in the Group’s income. Consolidated Financial Statements exclude distributions from these Entities to avoid double-counting of the same income. The GloBE Rules, however, generally require the GloBE Income or Loss and Covered Taxes of Constituent Entities to be determined starting with the separate Financial Accounting Net Income or Loss of the Constituent Entity. Accordingly, the starting point for a Constituent Entity’s income for financial accounting purposes would be to include intra-group dividends, including distributions received or accrued in respect of an Ownership Interest held in a Flow-Through Entity, as well as dividends received in respect of Ownership Interests in JVs, associated Entities, and other Entities, including dividends on Portfolio Shareholdings.

35. The taxation of these dividends and other distributions received by a Constituent Entity varies from one jurisdiction to the next. A significant number of Inclusive Framework jurisdictions provide for a credit, exemption or some other form of tax relief for dividends under local law. In many cases the availability of this relief depends on the size of the shareholding, the duration of the shareholding period, or both. The precise tax treatment may also depend on the residence and nature of the distributing and receiving Entity as well as the nature of the distribution itself. For example, a dividend received from a non-resident may be taxed differently from a dividend received from a resident and a receipt of a distribution may be taxed differently from a share buyback. In order to ensure consistency and avoid the significant complexity that would result from reconciling these differences in treatment, the GloBE Rules require MNE Groups to apply a consistently bright-line test that builds on the components found in the participation exemptions applied by a number of Inclusive Framework jurisdictions.

36. Article 3.2.1(b) adjusts a Constituent Entity’s Financial Accounting Net Income or Loss by reducing that Net Income (or increasing the Loss) by the amount of any Excluded Dividends received during the Fiscal Year. In general terms, Excluded Dividends are dividends or other distributions paid on shares or other equity interests where (i) the MNE Group holds 10% or more of the Ownership Interests in the issuer or (ii) the Constituent Entity has held full economic ownership of the Ownership Interest for a period of 12 months or more. Paragraph (b) is intended to provide for a broad exemption for dividends that aligns with the operation and scope of participation exemptions in many IF jurisdictions and covers both substantial and long terms shareholdings, while, at the same time, ensuring that the exclusion does not provide unintended benefits for dividend income received by a Constituent Entity as part of its trading activity. Where a movement in an insurance company’s reserves economically matches an Excluded Dividend (net of the investment management fee) from a security held on behalf of a policyholder (for example, unit linked insurance), the movement in the insurance reserves is not allowed as an expense in the computation of GloBE Income or Loss.

37. Excluded Dividends are defined in Article 10.1 as dividends or other distributions received or accrued in respect of an Ownership Interest, except for a Short-term Portfolio Shareholding and an Ownership Interest in an Investment Entity subject to an election under Article 7.6. The exception that applies to these two categories of Ownership Interest is further described below. Further, where a dividend or other distribution is received or accrued in respect of an Ownership Interest which is a compound financial instrument (i.e. having both equity and liability components under the Acceptable Financial Accounting Standard), only the amounts received or accrued in respect of the equity component of the Ownership Interest shall be treated as an Excluded Dividend.

38. The dividend exclusion rule under the GloBE Rules provides an exception for dividends received from an Entity (i) in which the MNE Group owns a low percentage of that Entity’s Ownership Interests (i.e. a “Portfolio Shareholding”), where (ii) the Constituent Entity has economically owned such Ownership Interest for a short period of time (referred to as “Short-term Portfolio Shareholdings”). This means that dividends received or accrued from Short-term Portfolio Shareholding are included in the GloBE Income or Loss of the Constituent Entity. The following table summarises which dividends or other distributions received or accrued in respect of an Ownership Interest (other than an Ownership Interest in an Investment Entity that is subject to an election under Article 7.6, which is addressed in the next section), are includible in the GloBE Income or Loss of the Constituent Entity that received oraccrued them:

39. A Portfolio Shareholding in a corporation is defined in Article 10.1 as an Ownership Interest that carries rights to less than 10% of the profit, capital, reserves or voting rights of that Entity at the date of the distribution or disposition. This means that only an Ownership Interest that carries right to at least 10% of the profit, capital, reserves and voting rights of that Entity is considered as a non-portfolio shareholding. Voting rights, in addition to rights to profits, capital and reserves are taken into account for purposes of defining whether an Ownership Interest is a Portfolio Shareholding because they may reflect the involvement of the shareholder in the Entity.

40. All of the Ownership Interests which carry the same rights (i.e. profit, capital reserves or voting rights) in an Entity held by the MNE Group are aggregated for purposes of applying the 10% threshold test in respect of those Ownership Interests. The definition of Ownership Interest provided in Article 10.1 further requires that the interest in the underlying right is an equity interest, i.e. any shares, interests, participation, or other equivalents of that Entity which are characterised as equity under the Acceptable or Authorised Financial Accounting Standard used in the Consolidated Financial Statements.

41. A Portfolio Shareholding is a Short-term Portfolio Shareholding if the Constituent Entity that receives or accrues the dividends or other distributions has economically held the Ownership Interest for less than one year at the date of the distribution. A Constituent Entity is considered as holding “economically” a Portfolio Shareholding when it has (or is entitled to) all or substantially all the benefits and burdens of ownership, including rights to profits, capital, reserves, or voting carried by its Ownership Interests, and has not renounced or transferred such rights under another arrangement over the tested period. Whether a Constituent Entity has (or is entitled to) all or substantially all the benefits and burdens of ownership is determined on the basis of facts and circumstances.

42. There could be a discrepancy between the extent of the ownership held throughout the holding period and at the date of the distribution, whereby the dividend received at the date of the distribution may not necessarily reflect the extent of the rights that were held during the holding period. Ordinarily, the dividends or other distributions that are accrued at the date of the distribution reflect the economic ownership of the shareholding that is held at that date. Therefore, the economically held test addresses the potential discrepancy that could arise during the period and at the date of the distribution and provide a requirement that those Portfolio Shareholding are economically held for at least one year to be excluded from the GloBE Income or Loss.

43. Whether the Constituent Entity has economically held the Portfolio Shareholding for one year is tested on the date of the distribution of the dividends. Fluctuations of the Ownership Interest held in an Entity should be taken into account for that purpose. In this respect, the disposition of an Ownership Interest in a particular class of shares is deemed to be a disposition of the most recently acquired Ownership Interests of the same class that were acquired the last, for simplification purposes. For that purpose, a class of shares means the shares issued by the distributing entity that carry the same rights such that they are inter-changeable with each other. For example, an Entity that has issued common shares with rights to profits and net assets upon dissolution and preferred shares that are entitled to a dividend of EUR 100 each year and redeemable in 10 Years for EUR 2 000 has two classes of stock. Accordingly, dispositions of preferred shares do not affect the determination of the holding period of the common shares.

44. The Constituent Entity is considered as having held the relevant Ownership Interest for one year if it has held that Ownership Interest for an uninterrupted period of at least 12 months. The requirement only relates to the Ownership Interest in respect of which a distribution is received or accrued and does not require a further determination of whether the distribution was funded by another distribution to which the same condition would apply. For example, a Constituent Entity that receives a distribution in respect of an Ownership Interest in a mutual fund must determine its holding period for that interest, but need not determine how long the mutual fund held the equity interest that was the source of the distributed profits. This condition applies to each Constituent Entity holder separately and in respect of the same class of shares such that the dividends received or accrued in respect of the same class of shares that were held for a year or more are exempted, whereas other dividends are not. Unlike the 10% threshold test, the ownership period requirement applies on a Constituent Entity-by-Constituent Entity basis, which means that an intra-group transfer of shares would be considered as an interruption of the holding period. The holding period would not be considered as interrupted, however, in the case of a GloBE Reorganisation between Constituent Entities.

45. In relation to Short-term Portfolio Shareholdings, the dividend income is not included in the adjustment for Excluded Dividends and thus would be included in the GloBE Income or Loss. Any Taxes paid under local law in respect of those dividends would be included in the Adjusted Covered Taxes (the numerator) of the ETR calculation under Article 4.1.1. The treatment of dividends on Short-term Portfolio Shareholdings applies equally to dividends on stock in domestic and foreign corporations. Including dividends on Short-term Portfolio Shareholdings in the GloBE Income or Loss eliminates the need to exclude the related expenses and the need for rules to determine the scope and amount of those related expenses. Although local tax rules typically disallow deductions for expenses associated with income that is excluded from taxable income, for simplicity, the GloBE Rules do not disallow expenses related to Excluded Dividends (except that movements in insurance reserves related to Excluded Dividends from securities held on behalf of policyholders (for example, unit linked insurance) are not allowed as a deduction in the computation of GloBE Income or Loss) and therefore rules to determine the scope and amount of those related expenses are unnecessary. Alternatively, a Filing Constituent Entity can (for each Constituent Entity) make a Five-Year Election to include in the computation of GloBE Income all dividends received by the Constituent Entity with respect to Portfolio Shareholdings, regardless of whether these are Short-term Portfolio Shareholdings, notwithstanding the adjustment for Excluded Dividends that would apply in the absence of the election. This means that in this situation, after the election, all dividends on Portfolio Shareholdings of the elected Constituent Entities will be included in the computation of the Constituent Entity’s GloBE Income or Loss.

Ownership Interest in an Investment Entity that is subject to an election under Article 7.6

46. The definition of Excluded Dividends in Article 10.1 provides that dividends or other distributions received or accrued in respect of an Ownership Interest in an Investment Entity that is subject to an election under the Taxable Distribution Method set out in Article 7.6 are not Excluded Dividends. Accordingly, those dividends or other distributions must be included in the computation of GloBE Income or Loss of the Constituent Entity-owner pursuant to the election since such dividends are not Excluded Dividends once the election has been made. The election is discussed in greater detail in the Commentary to Article 7.6.

Paragraph (c) – Excluded Equity Gains or Losses

47. Paragraph (c) adjusts for a Constituent Entity’s Excluded Equity Gain or Loss.

48. Excluded Equity Gains or Losses are defined in Article 10.1. The term encompasses three categories of gain or loss attributable to an Ownership Interest: a. gains and losses from changes in fair value of an Ownership Interest (except for a Portfolio Shareholding); b. profit or loss in respect of an Ownership Interest that is included in Financial Accounting Net Income or Loss under the equity method of accounting; and c. gains and losses from disposition of an Ownership Interest, except a Portfolio Shareholding.

Changes in fair value

49. The first type of Excluded Equity Gain or Loss is attributable to changes in fair value of an Ownership Interest that is accounted for using a fair value accounting method, including mark-to-market. A fair value method re-values the Ownership Interest periodically and changes in its value are reported as gain or loss, either in the profit and loss statement or in the OCI section of the balance sheet. Fair value method gains or losses on Ownership Interests other than Portfolio Shareholdings are excluded from the GloBE Income or Loss computation. Accordingly, excluded fair value gains require a negative adjustment and excluded fair value losses require a positive adjustment to the Financial Accounting Net Income or Loss. The fair value gain or loss for a Fiscal Year, however, must be adjusted to reflect any distributions on that Ownership Interest that were excluded from the computation of GloBE Income or Loss pursuant to Article 3.2.1(b). To the extent such fair value gains and losses are recorded in OCI or equity instead of the profit and loss statement, they may already have been excluded from the GloBE Income or Loss and no adjustment is necessary under Article 3.2.1(c).

Equity method accounting

50. The second type of Excluded Equity Gain or Loss is attributable to income or loss arising from an Ownership Interest accounted for using the equity method. Financial accounting standards typically require equity method accounting when the MNE Group holds a significant but non-Controlling Interest in an Entity, ordinarily between 20% and 50% of the equity interests in an Entity. These Entities are referred to as joint ventures or associates under financial accounting standards. As explained in the Commentary to Chapter 1, Entities that are joint ventures and associates for accounting purposes are not Constituent Entities under the definition in Article 1.3 because they are not controlled by the MNE Group. Under the equity method, the owner includes its proportionate share of the Entity’s after-tax income or loss in the computation of its Financial Accounting Net Income or Loss.

51. The adjustment required in respect of Ownership Interests accounted for under the equity method may be a positive or negative amount depending upon whether the Entity reported net income or net loss. Equity method net income is a negative adjustment to the Financial Accounting Net Income or Loss. An equity method loss is a positive adjustment to the Financial Accounting Net Income or Loss. Equity method income or loss is excluded from the computation of GloBE Income or Loss irrespective of whether that income or loss, or a portion thereof, is included in the owner’s taxable income computation under the laws of the jurisdiction in which the owner is located. Thus, if an Entity accounted for under the equity method is treated as a Tax Transparent Entity in the owner’s tax jurisdiction, the annual income or loss is nevertheless removed from the owner’s GloBE Income or Loss computation.

52. In general, entities whose Ownership Interests are accounted for under the equity method are not Constituent Entities. However, pursuant to Article 6.4, JVs as defined in Article 10.1 will be treated as if they were Constituent Entities. A JV subject to Article 6.4 is an Entity in which the UPE holds directly or indirectly at least 50% of its Ownership Interests. This definition encompasses Entities that are considered joint ventures for accounting purpose and some that are considered associates for accounting purposes. The adjustment required by Article 3.2.1(c) also applies to Ownership Interests in JVs as defined in Article 10.1 because they too are accounted for using the equity method.

Gains or losses on disposition

53. The last type of Excluded Equity Gain or Loss are those gains and losses arising from a disposition of an Ownership Interest in any Entity where the MNE Group holds, in the aggregate, 10% or more of the Ownership Interests at the time of the transfer, i.e. Ownership Interests other than a Portfolio Shareholding. This category includes gains and losses from the sale of Ownership Interests in a Constituent Entity, JVs as defined in Article 10.1, as well as non-Portfolio Shareholdings in Entities that are not Constituent Entities or JVs. See Article 6.2.2 with respect to transfers of Ownership Interests that are treated as transfers of assets and liabilities of a Constituent Entity.

54. In many Inclusive Framework jurisdictions, gains arising from the disposition of Ownership Interests are wholly or partially exempt from tax or subject to taxation at reduced rates, and losses arising from the disposition of Ownership Interests may not be tax deductible. As with the taxation of dividends, there is significant variance in the way gain or loss from the disposal of an Ownership Interest is taxed under local law. Local tax treatment depends on the nature (and residence) of the issuer of the Ownership Interest and the way the sale transaction is structured. As discussed above, many Inclusive Framework jurisdictions fully or partially exempt from the tax base gains and losses arising from the disposition of Ownership Interests. Gain or loss arising on the disposition of an Ownership Interest, whether measured by reference to the carrying cost of the equity interest or the underlying assets, that is included in the financial accounting income of the seller but excluded from the seller’s taxable income, would represent a permanent difference. If the difference is not adjusted for in the GloBE Income or Loss computation, gains on sales of Ownership Interests will result in a lower GloBE ETR for the seller (and potential tax liability under the GloBE Rules). Losses, on the other hand, will result in a higher GloBE ETR for the seller (and potentially shield other income from GloBE tax liability). The GloBE Rules eliminate most of these permanent differences by generally excluding gains and losses from dispositions of Ownership Interests from the seller’s GloBE Income or Loss computation. However, gains and losses from the disposition of a Portfolio Shareholding are included in the GloBE Income or Loss. For simplicity, the GloBE Rules do not disallow expenses related to Excluded Equity Gains or Losses in the computation of GloBE Income or Loss (except the expenses from movements in insurance reserves related to Excluded Equity Gains or Losses from securities held on behalf of policyholders (for example, unit linked insurance) are not allowed as a deduction in the computation of GloBE Income or Loss).

55. The definition of Portfolio Shareholding is used both in the context of Excluded Dividends and in the context of Excluded Equity Gain or Loss (see above). In the context of Excluded Dividends, the potential scope of excluded income is broader than in the context of excluded gains, because the ownership period requirement limits the categories of dividends for which an exception to the exclusion is provided. In the context of Excluded Equity Gain or Loss, the following table summarises which gains and losses from the disposition of an Ownership Interest are includible in the GloBE Income or Loss of the Constituent Entity that disposed of that interest:

56. Unlike the rule that applies for purposes of Excluded Dividends, the period during which the Portfolio Shareholding is held is not relevant for determining whether gains and losses arising from the disposition of that shareholding are includible in GloBE Income or Loss.

57.1. MNE Groups commonly hedge foreign currency movements in Ownership Interests in Constituent Entities. The hedged risk, in particular, is the foreign currency exposure arising between the functional currency of the Constituent Entity in which a Parent Entity holds an Ownership Interest and the functional currency of the Parent Entity. Under Acceptable Financial Accounting Standards, foreign exchange gains or losses on hedging instruments that are determined to be an effective hedge of the currency risk attributable to a net investment in a foreign operation (a net investment hedge) are recognised in other comprehensive income at the level of the Consolidated Financial Statements.

57.2. The treatment of a net investment hedge should follow the treatment of the investment it is hedging. Therefore, a Filing Constituent Entity may make a Five-Year Election to treat foreign exchange gains or losses reflected in a Constituent Entity’s Financial Accounting Net Income or Loss as also an Excluded Equity Gain or Loss for the purposes of Article 3.2.1(c) to the extent that: (a) such foreign exchange gains or losses are attributable to hedging instruments that hedge the currency risk in Ownership Interests other than Portfolio Shareholdings; (b) such gain or loss is recognised in other comprehensive income at the level of the Consolidated Financial Statements; and (c) the hedging instrument is considered an effective hedge under the Authorised Financial Accounting Standard used in the preparation of the Consolidated Financial Statements. As a consequence, any taxes arising on the foreign exchange gains described in the preceding sentence shall be treated as a reduction to Covered Taxes under Article 4.1.3 (a).

57.3 The rule set out in the previous paragraph relies heavily on the treatment of a hedging transaction in the Consolidated Financial Statements. Paragraph (a) distinguishes between hedges that are reported in the profit and loss of the Consolidated Financial Statements and those that are reported in other comprehensive income. Gains and losses from hedges reported in the profit and loss statement are properly taken into account in the computation of GloBE Income or Loss. The excluded gains and losses are those that relate to the net investments in a foreign operation reflected in the other comprehensive income because gains or losses from disposition of those net investments would be Excluded Equity Gains and Losses. Paragraph (b) limits the scope of the rule to transactions that are considered effective hedges under the accounting standard used to prepare the Consolidated Financial Statements.

57.4 The net investment hedge may be issued by a Constituent Entity that performs a treasury or finance function for the MNE Group (the issuing Constituent Entity) and that does not itself hold the Ownership Interest that is being hedged. This Constituent Entity may transfer the economic and accounting effect of the hedge to the Constituent Entity that holds the Ownership Interest through intercompany loans or other instruments. Consequently, if the hedging instrument is held by an issuing Constituent Entity that transfers the effect of the hedge to the Constituent Entity that holds the hedged Ownership Interest through intercompany loans or other instrument, the foreign exchange gain or loss on the net investment hedge shall be treated as an Excluded Equity Gain or Loss under Article 3.2.1(c) of the Constituent Entity that holds the Ownership Interest and no adjustment shall be made to the GloBE Income or Loss of the issuing Constituent Entity.

Equity Investment Inclusion Election

57.5 Many of the income items excluded from a Constituent Entity’s computation of GloBE Income or Loss will relate to returns, including dividends and gains, on share or equity investments. Such items often benefit from full or partial exemption regimes, however, these and other excluded income items may be subject to Covered Taxes in certain jurisdictions or circumstances. In such cases, an adjustment may be necessary to prevent understatement of the MNE Group’s Effective Tax Rate when losses from such investments reduce the total amount of tax in a jurisdiction for a Fiscal Year. Allowing for such an adjustment ensures that the computation of the MNE Group’s Effective Tax Rate in the relevant jurisdiction is not distorted by the excluded income or loss, or the tax expense or benefit associated with such item. To neutralize the impact of a loss (as well as a gain) with respect to an equity investment that is included in the domestic tax base in a jurisdiction, a Filing Constituent Entity may make an Equity Investment Inclusion Election. Absent this election, no adjustment attributable to such losses shall be made to the ETR computation.

57.6 An Equity Investment Inclusion Election applies on a jurisdictional basis to all Ownership Interests (other than a Portfolio Shareholding) owned by Constituent Entities located in the jurisdiction with respect to which the election is made. An Equity Investment Inclusion Election is a Five-Year Election, except that it cannot be revoked with respect to an Ownership Interest if a loss with respect to that Ownership interest has been taken into account in the computation of the GloBE Income or Loss during the period in which the Equity Investment Inclusion Election was in effect. When an Equity Investment Inclusion Election is made, an owner of an Ownership Interest other than a Qualified Ownership Interest under paragraph 57.12:

a.) includes in its GloBE Income or Loss the accounting gain, profit, or loss (adjusted as required by the provisions of Article 3.2 other than Article 3.2.1(c)) with respect to any: i. fair value gains and losses and impairments on that Ownership Interest where the owner is taxable on a mark-to-market basis or on the impairment (and the tax consequences of the mark-to-market movements or impairments on Ownership Interest are reflected in Income tax expense) or the owner is taxable on a realization basis and the Income tax expense includes deferred tax expense on the mark to market movement or impairments on the Ownership Interest ii. profit and loss attributable to that Ownership Interest where the interest is in a Tax Transparent Entity and the owner accounts for the interest using the equity method; and iii. the dispositions of that Ownership Interest which give rise to gains or losses that are included in the owner’s domestic taxable income, excluding any gain fully offset, and the proportionate share of any gain partially offset, by any deduction or other similar relief particular to the type of gain (such as a participation exemption directly attributable to the disposition of the Ownership Interest); and

b.) notwithstanding Articles 4.1.3(a) and 4.4.1(a), includes all current and deferred tax expense or benefits associated with these items in the computation of its Adjusted Covered Taxes subject to the relevant provisions of the GloBE Rules.

Treatment of tax credits derived through a Tax Transparent Entity

57.7 The direct or indirect owner of an Ownership Interest in a Tax Transparent Entity shall treat any tax credits that flow through the Tax Transparent Entity in accordance with the ordinary requirements of the GloBE Rules based on the character of the credit received. For example, in the case of a Qualified Refundable Tax Credit (QRTC), the amount of the credit that flows through a Tax Transparent Entity to an owner shall be treated as income in the owner’s GloBE Income or Loss. On the other hand, a non-QRTC or a non-refundable tax credit that flows through a Tax Transparent Entity to the owner shall not be treated as GloBE Income but rather as a reduction to Adjusted Covered Taxes of the owner (unless such credit is a Qualified Flow-through Tax Benefit as described further below).

Treatment of Qualified Flow-through Tax Benefits of Qualified Ownership Interests (tooltip wrong numbering i AAG)

57.8 An owner that is subject to an Equity Investment Inclusion Election shall apply the treatment described in paragraphs 57.9 through 57.12 to Qualified Flow-through Tax Benefits that flow through a Qualified Ownership Interest. The treatment provided in paragraph 57.6 does not apply to a Qualified Ownership Interest; accordingly, where income flows through a Qualified Ownership Interest, the owner’s GloBE Income or Loss is not increased to reflect such income and the owner’s Covered Taxes are reduced by the amount of any tax expense with respect to such income. Similarly, where losses flow through a Qualified Ownership Interest the owner’s GloBE Income or Loss is not reduced to reflect such loss and, to the extent provided in paragraph 57.9, the amount of any tax benefit of the owner with respect to such loss is effectively excluded from the owner’s Adjusted Covered Taxes through being treated as a positive amount in the Adjusted Covered Taxes of the owner.

57.8.1 However, an investor in a Qualified Ownership Interest that uses the proportional amortization method of accounting for the interest for financial accounting purposes must apply the proportional amortization method of determining the amount of the investment that is recovered each year. An investor in a Qualified Ownership Interest that does not use the proportional amortization method of accounting for the interest for financial accounting purposes may irrevocably elect to use this methodology for determining the amount of the investment that is recovered each year, in line with paragraph 57.8.2. The election must be made by the Filing Constituent Entity for a Qualified Ownership Interest in the first Fiscal Year in which the investor acquires the interest or is subject to the GloBE Rules.

57.8.2. Under the proportional amortization method as applied under the GloBE Rules, any of the items described in paragraphs 57.10(a) through (d) that flow through or are received in respect of the Qualified Ownership Interest shall be treated as a reduction to the investment in proportion to the Expected Tax Benefits Ratio. The Expected Tax Benefits Ratio is the ratio of the items described in paragraphs 57.10(a) and (b) that flowed through or are received in the Fiscal Year to the total of such items that are expected to flow through or be received in respect of the Qualified Ownership Interest over the term of the investment. The amount of the items described in paragraphs 57.10(a) through (d) that flow through or are received in respect of the Qualified Ownership Interest in excess of the reduction to the investment shall not be included as a positive amount in the investor’s Adjusted Covered Taxes.

57.8.3 The proportional amortization method can be illustrated with the following example. Assume that the investor is subject to tax at a 20% rate and expects to receive 100 of tax benefits over a five-year period from the investment and invests 90 in a Qualified Ownership Interest. Assume further that the investor’s current income tax expense with respect to the investment for financial accounting purposes each year is determined by netting the proportional amortization of the investment against the amount of the tax benefit from the investment. Assume also that the Expected Tax Benefit and the actual tax benefits are equal and the proportional amortization of the investment determined for financial accounting purposes is equal to the proportional amortization amount determined under paragraph 57.8.2. The chart below shows the proportional amortization computations for each year based on the amount of tax benefits that flow through the Qualified Ownership Interest each year.

In determining the investor’s Adjusted Covered Tax expense each year, no adjustment is necessary to the investor’s current tax expense for financial accounting purposes because it used the same proportional amortization amount in determining current tax expense as the amount allowed under paragraph 57.8.2.

57.9 Qualified Flow-through Tax Benefits will be allowed as a positive amount in the Adjusted Covered Taxes of the direct owner of a Qualified Ownership Interest or an indirect owner of such an interest through a chain of Tax Transparent Entities that are not Constituent Entities of the MNE Group of a Qualified Ownership Interest to the extent the Qualified Flow-through Tax Benefit was treated for financial accounting purposes as reducing tax expense. A Qualified Flow-through Tax Benefit is any amount described in paragraph 57.10(a) or (b) (other than a Qualified Refundable Tax Credit) that flows through a Qualified Ownership Interest to the extent it reduces the owner’s investment in the Qualified Ownership Interest pursuant to paragraph 57.10.’

57.10 An owner’s investment in a Qualified Ownership Interest is treated as being reduced by receipts with respect to the Qualified Ownership Interest of any of the following types:

(a) The amount of tax credits that have flowed through to the owner;

(b) The amount of any tax-deductible losses that have flowed through to the owner multiplied by the statutory tax rate applicable to the owner;

(c) The amount of any distributions (including a return of capital) to the owner; and

(d) The amount of proceeds from a sale of all or part of the Qualified Ownership Interest.

This rule shall in no circumstances cause the owner’s investment to be less than zero, and accordingly no amount shall be treated as reducing the investment to the extent it would reduce the investment below zero.

57.11 Any of the items described in paragraphs 57.9(a) through (d) that flow through or are received in respect of the Qualified Ownership Interest after the owner’s investment has been reduced to zero pursuant to paragraph 57.9 shall be treated as a negative amount in the owner’s Adjusted Covered Taxes. However, an item described in paragraph 57.9(c) or (d) or a Qualified Refundable Tax Credit, shall be treated as a negative amount in the owner’s Adjusted Covered Taxes only to the extent of the amount of any Qualified Flow-through Tax Benefits that flowed through the Qualified Ownership Interest and that were treated as a positive amount in the owner’s Adjusted Covered Taxes.

57.8 A Qualified Ownership Interest is an Ownership Interest:

(a) an investment in a Tax Transparent Entity: (i) that is treated as an equity interest for local tax purposes; (ii) would be treated as an equity interest under an Authorised Financial Accounting Standard in the jurisdiction in which the Tax Transparent Entity operates; and where the assets, liabilities, income, expenses, and cash flows of the Tax Transparent Entity are not consolidated on a line-by-line basis in the Consolidated Financial Statements of the MNE Group; and

(b) the total return with respect to that investment (including distributions and benefits of tax losses and Qualified Refundable Tax Credits derived through the Tax Transparent Entity, but excluding tax credits other than Qualified Refundable Tax Credits) is expected to be less than the total amount invested by the investor in the investment such that a portion of the investment will be returned in the form of tax credits other than Qualified Refundable Tax Credits (regardless of whether such tax credits are expected to be transferred or used to reduce the investor’s Covered Tax liability).

The determination of the expected total return is made at the time the investment is entered into and is based on facts and circumstances, including the terms of the investment. An interest will not be considered a Qualified Ownership Interest unless the investor has a bona fide economic interest in the Flow-Through Entity and is not protected from loss of its investment. Also, an interest will not be considered a Qualified Ownership Interest where a jurisdiction only permits the benefits of tax credits to be transferred through such interests when the developer or investor is subject to the GloBE Rules.

57.9 The provisions of Article 8.3 on Administrative Guidance will apply to ensure consistency of outcomes in respect of the application of the rules related to Flow-through Entities with Qualified Ownership Interests. If those jurisdictions that adopt the common approach identify risks associated with the treatment of interests in Flow-through Entities as Qualified Ownership Interests that lead to unintended outcomes, the relevant jurisdictions could be asked to consider developing further conditions for the Flow-through Entities or Qualified Ownership Interests or, if necessary, explore alternative rules for the treatment of such interests. In this regard, the Inclusive Framework will monitor the features and availability of Flow-through Entities in jurisdictions for projects that produce tax credits. This analysis would be based on empirical and historical data with respect to the tax credit regime as a whole, and not on a taxpayer specific basis.

Paragraph (d) – Included Revaluation Method Gain or Loss

58. Under some financial accounting standards, an Entity can elect either the cost model or the revaluation model as its accounting policy for property, plant and equipment. Under the revaluation model, an asset is carried at a revalued amount, which is its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluation increases are generally recognised in OCI, rather than profit or loss. Revaluation decreases, on the other hand, are generally (but not always) recognised in profit and loss. Absent a corrective measure the revaluation model would impact the computation of GloBE Income because revaluation gains are generally excluded from Financial Accounting Net Income or Loss and depreciation expense is determined based on the revalued amount. Therefore, to eliminate the effect of reporting gains or losses in OCI under the revaluation model on the computation of GloBE Income or Loss, paragraph (d) requires all Included Revaluation Method Gain or Loss for the Fiscal Year to be included in the computation of GloBE Income or Loss. Any revaluation losses or subsequent incremental increase in depreciation are allowed in the computation of GloBE Income or Loss to the extent they are attributable to revaluation increases (gains) included in the computation of GloBE Income or Loss pursuant to Article 3.2.1(d).

59. Article 10.1 defines Included Revaluation Method Gain or Loss as the net gain or loss, increased or decreased by any associated Covered Taxes, for the Fiscal Year in respect of all property, plant and equipment that arises under an accounting method or practice that: a. periodically adjusts the carrying value of such property to its fair value; b. records the changes in value in OCI; and c. does not subsequently report the gains or losses recorded in OCI through profit and loss.

60. The definition requires the amount of the gain or loss recorded in OCI to be increased by the amount of any associated Covered Taxes to the extent that gain or loss was recorded net of Covered Taxes. Any Covered Taxes (current or deferred) associated with Included Revaluation Method Gain or Loss are taken into account in the computation of Adjusted Covered Taxes under Article 4.1. The definition includes the amount of associated Covered Taxes to ensure that Covered Taxes are not both deducted (in effect) and taken into account in the ETR computation.

61. Revaluation gains and losses are brought in to income annually (or upon revaluation, if revaluations occur less frequently than annually) pursuant to Article 3.2.1(d). When gain is recognised on a period-by-period basis pursuant to paragraph (d), an adjustment will also need to be made to pick up taxes recognised in OCI each period, provided the gain is or will be taxable under local law. In some cases, a deferred tax expense can be recognised on revaluation gains in OCI when the gains are exempt from local tax because the deferred tax expense is calculated on the basis that the carrying amount of an item of Property, Plant & Equipment will be realised by using it to generate taxable profits rather than through sale. However, Covered Taxes should not be increased by deferred tax liabilities recognised where the sale of an asset will be exempt from local tax.

62. An election under Article 3.2.5 may be made with respect to tangible property that includes property subject to the revaluation model. If such an election is made, the gains or losses in the OCI would not be included in the computation of GloBE Income or Loss as they arise but would be deferred until the asset is disposed. That election also requires the Constituent Entity to determine its depreciation in respect of the assets subject to the election without regard to increases or decreases in the carrying value of the assets attributable to the revaluation model. And the Covered Taxes associated with the gains and losses in OCI would likewise need to be deferred until disposition of the asset.

Paragraph (e) – Gain or loss from disposition of assets and liabilities excluded under Article 6.3

63. Paragraph (e) requires an adjustment for gain or loss from disposition of assets and liabilities excluded under Article 6.3.

64. Gains and losses from the disposition of assets are generally taken into account under the GloBE Rules, even where the buyer is another Constituent Entity. Financial accounting rules typically include gains and losses from sales of assets. Assets acquired are recorded in the financial accounts at their cost. In the case of sales between members of the Group, however, adjustments to eliminate the intra-group gain or loss and the increase or decrease in the assets cost are made when the company prepares its consolidated financial accounts so that the intra-group transaction does not affect the Group’s income on a consolidated basis. Nevertheless, each Constituent Entity’s separate Financial Accounting Net Income or Loss should reflect the results of the transaction in the same manner as if it were a transaction with a non-Group member.

65. Article 6.3 generally requires inclusion of gain or loss arising from a transfer of assets (other than Ownership Interests that are not Portfolio Shareholdings) and liabilities in the computation of GloBE Income or Loss. Accordingly, a loss from a transfer of Ownership Interests in another Constituent Entity is not included under Article 6.3. As noted, this is the normal result of applying the financial accounting rules on a separate entity basis even for transfers between Constituent Entities. However, if the transfer is pursuant to a GloBE Reorganisation, the gain or loss (in respect of the transferred assets and liabilities) is included in the computation of GloBE Income or Loss only to the extent of Non-qualifying Gain or Loss, defined in Article 10.1 generally as the lesser of the taxable or financial accounting gain or loss on the transfer. In most cases, there will not be any Non-qualifying Loss because jurisdictions typically do not allow losses to be taken into account in connection with a tax-free reorganisation. To the extent gain is excluded under Article 6.3, a negative adjustment is required under Article 3.2.1(e), and to the extent a loss is excluded, a positive adjustment is required.

Paragraph (f) – Asymmetric Foreign Currency Gains or Losses

66. Paragraph (f) adjusts for Asymmetric Foreign Currency Gain or Loss. These are generally foreign currency exchange gains or losses (FXGL) that arise due to differences between the Constituent Entity’s functional currency for accounting purposes and the one used for local tax purposes.

67. The GloBE Rules do not make any adjustments for FXGL when the accounting and tax functional currencies of the Constituent Entity are the same. In those circumstances, any FXGL reflected in the financial accounts are included in the GloBE Income or Loss computation, irrespective of whether the local tax rules impose tax on FXGL. If FXGL is exempt under local tax rules, there will be a permanent difference that does, and should, affect the ETR of the jurisdiction.

68. The GloBE Rules do, however, make adjustments to avoid distortions that could arise when the functional currencies used by a Constituent Entity for accounting and tax differ. The definition of Asymmetric Foreign Currency Gain or Loss in Article 10.1 includes four types of FXGL. The FXGL included in the definition are described based on the relationship between the tax functional currency of the Constituent Entity, the accounting functional currency and a third foreign currency. The tax functional currency is the functional currency used to determine the Constituent Entity’s taxable income or loss for a Covered Tax in the jurisdiction in which it is located. The accounting functional currency is the functional currency of the Constituent Entity for accounting purposes. A third foreign currency is a currency that is not the Constituent Entity’s tax functional currency or accounting functional currency. The adjustments required under Article 3.2.2(f) with respect to each type of Asymmetric Foreign Currency Gain or Loss are explained below.

69. Paragraph (a) of the definition applies to transactions in the accounting functional currency of a Constituent Entity that produce taxable gain or loss because the tax functional currency is different. It brings the tax FXGL into the Financial Accounting Net Income or Loss. Paragraph (a) requires a positive adjustment to Financial Accounting Net Income or Loss in the amount of the tax foreign currency exchange (FX) gain and a negative adjustment to Financial Accounting Net Income or Loss in the amount of the tax FX loss.

70. Paragraph (a) also applies where an asset or liability denominated in the accounting functional currency is retranslated in the tax functional currency so that a tax FXGL arises, despite no FXGL arising for accounting purposes.

71. Paragraph (b) of the definition applies to transactions in the tax functional currency of a Constituent Entity that produce an accounting gain or loss because the accounting functional currency of the Constituent Entity is different. It removes the accounting FXGL from the Financial Accounting Net Income or Loss. Thus, paragraph (b) requires a negative adjustment to Financial Accounting Net Income or Loss in the amount of the accounting FX gain and a positive adjustment to Financial Accounting Net Income or Loss in the amount of the accounting FX Loss.

72. Paragraph (b) also applies where an asset or liability denominated in the tax functional currency is retranslated in the accounting functional currency so that an accounting FXGL arises, but no FXGL arises for tax purposes.

73. Paragraph (c) of the definition is the exclusionary arm of the rule in respect of FXGL arising from transactions in a third foreign currency. These transactions may result in an FXGL vis-à-vis both the accounting currency and tax functional currency of the Constituent Entity. However, paragraph (c) only applies to the FXGL in respect of the accounting functional currency. It excludes these gains and losses from the GloBE Income or Loss computation by requiring a negative adjustment to Financial Accounting Net Income or Loss in the amount of the accounting FX gain and a positive adjustment to Financial Accounting Net Income or Loss in the amount of the accounting FX Loss.

74. Paragraph (d) of the definition is the inclusionary arm of the rules for third foreign currency gains. It includes the gain or loss determined with respect to the tax functional currency by requiring a positive adjustment to Financial Accounting Net Income or Loss in the amount of the tax FX gain and a negative adjustment to Financial Accounting Net Income or Loss in the amount of the tax FX loss. This rule applies irrespective of whether the FXGL in the tax functional currency is includible in taxable income or subject to tax in the Constituent Entity’s location. For purposes of paragraph (d), if the FX gain or loss is not subject to tax under local law, the tax FX gain or loss is the amount that would have arisen for tax purposes if the Constituent Entity had been subject to tax on the gain or loss using the same method for determining FXGL as is used in the financial accounts.

74.1 While the adjustment for Asymmetric Foreign Currency Gains and Losses is determined by reference to the Constituent Entity’s tax functional currency and accounting function currency, the resulting amount of the required adjustment will need to be translated to the presentation currency of the MNE Group’s Consolidated Financial Statements, for the purposes of determining the Constituent Entity’s GloBE Income or Loss. This translation to the presentation currency should be undertaken in accordance with Article 3.1.2 and Article 3.1.3 and the relevant commentary to those Articles.

Paragraph (g) – Policy Disallowed Expenses

75. Paragraph (g) adjusts for Policy Disallowed Expenses which are defined in Article 10.1 to mean expenses accrued by the Constituent Entity for illegal payments, including bribes and kickbacks, and expenses accrued by the Constituent Entity for fines and penalties. There is a materiality threshold that prevents the rule from applying in the case of de minimis fines and because the rule only applies to fines and penalties that equal or exceed EUR 50 000 (or an equivalent amount in the currency in which the Constituent Entity’s Financial Accounting Net Income or Loss was calculated). There is no such threshold for bribes and kickbacks which are always disallowed.

76. Bribes, kickbacks, and other illegal payments are allowed as expenses under financial accounting rules but are not deductible for tax purposes in most Inclusive Framework jurisdictions. For instance, tax deductions for bribes are disallowed for public policy reasons as part of the fight against corruption, and as reflected in the OECD Recommendation of the Council on Tax Measures for Further Combating Bribery of Foreign Public Officials in International Business Transactions (OECD, 2009[3]). 2 For purposes of Article 3.2.1(g), a payment is illegal if it is illegal under the laws applicable to the Constituent Entity that made the payment or the laws applicable to the UPE.

77. Similar to bribes, fines and penalties imposed by a government are commonly disallowed for tax purposes. However, the policy rationale for denying a deduction for fines and penalties is to limit the economic cost to only the person that committed the act. This rationale would be diluted if the taxpayer were allowed to share the burden of the penalty with all taxpayers (by way of tax deduction for it).

78. However, fines and penalties, particularly those for minor offenses such as traffic tickets, are more frequent than bribes and vary widely in amount. For example, they can range from a EUR 50 traffic ticket incurred by a transportation company to a multi-million Euro fine for securities law violations incurred by a large bank. Recognising the de minimis nature of many fines and penalties, the GloBE Income or Loss prohibits deduction only for fines and penalties of EUR 50 000 (or equivalent currency) or more. The disallowance applies also to fines that may be levied in respect of the same activity on a periodic basis (e.g. daily fines) that in the aggregate equal or exceed EUR 50 000 (or equivalent currency) in a single year. A periodic fine or penalty includes a fine or penalty that is assessed periodically until corrective action is taken, but does not include separate fines that are for the same type of offense committed upon multiple occasions, such as traffic tickets. The purpose of the threshold is to continue to allow deductions for smaller fines that may not be specifically recorded as separate items in the accounts of the Constituent Entity. This approach avoids the complexity of tracking small fines and penalties for GloBE purposes while at the same time preventing MNEs from escaping a Top-up Tax because of a few large, non-deductible, fines or penalties. Interest charges for late payment of Tax or other liabilities to a governmental unit are not considered fines or penalties for this purpose, and do not need to be added back to Financial Accounting Net Income or Loss.

Paragraph (h) – Prior Period Errors and Changes in Accounting Principles

79. Paragraph (h) requires an adjustment for Prior Period Errors and Changes in Accounting Principles. Prior Period Errors and Changes in Accounting Principles are defined in Article 10.1 to mean changes in the opening equity, i.e. the equity at the beginning of the Fiscal Year, of a Constituent Entity attributable to a correction of a prior period error generally that affected the computation of GloBE Income or Loss in a previous Fiscal Year or a change in accounting principle or policy that affects income or expenses includible in the computation of GloBE Income or Loss. Paragraph (h) does not apply to an error correction that requires a corresponding decrease in Covered Taxes in a previous Fiscal Year of EUR 1 000 000 or more. Such error corrections are subject to the rules of Article 4.6.1.

80. When an MNE Group corrects an error in the computation of the Financial Accounting Net Income or Loss of a Constituent Entity for a prior Fiscal Year, it will need to re-determine the opening equity of the Entity in the Fiscal Year in which the error was discovered or as soon as practicable. In some cases, the MNE Group may be required to prepare restated Consolidated Financial Statements for the Fiscal Year to which the error relates. However, if the error is attributable to transactions between Group Entities and it resulted in equal offsetting errors in both Group Entities, the error may not have impacted the Consolidated Financial Statements. For purposes of the GloBE Rules, however, the adjustment to the opening equity of each Group Member must be taken into account pursuant to Article 3.2.1(h). The adjustments may increase or decrease the opening equity depending upon the nature of the error. For example, an erroneous exclusion of revenue will generally result in an increase to opening equity and a corresponding increase to income in the computation of the GloBE Income or Loss when the error is corrected.

81. To the extent that the error is attributable to a Fiscal Years prior to the application of the GloBE Rules to the Constituent Entity, the adjustment to opening equity does not result in an adjustment under Article 3.2.1(h) because it did not affect the computation of GloBE Income or Loss. Also, if the adjustment is a decrease that requires re-computation of the ETR and Top-up Tax for a previous Fiscal Year under Article 4.6.1, an adjustment under Article 3.2.1(h) is not required because the adjustment is made in the relevant Fiscal Year pursuant to Article 4.6.1.

82. When an MNE Group changes an accounting principle or policy used in the determination of its Financial Accounting Net Income or Loss it may be required to re-determine its opening equity as if it had used the new accounting principle or policy in previous Fiscal Years. This may be necessary to prevent the amount from being double-counted or omitted from the MNE Group’s income or equity in a subsequent Fiscal Year as a result of the change in principle or policy. In the case of a change in accounting principle or policy, the increase or decrease in equity represents the net income, gain, expense, or loss that under the new accounting principle or policy will be included in the computation of Financial Accounting Net Income or Loss in a future period or that would have been included in that computation in a previous Fiscal Year. The change in accounting principle or policy may require either an increase or decrease in the opening equity. The adjustment under Article 3.2.1(h) should correspond directionally to the adjustment to opening equity. Thus, if a change in accounting principle or policy decreases opening equity, the adjustment under Article 3.2.1(h) would be a negative adjustment that has the same effect as an additional deduction in the computation of GloBE Income or Loss. Conversely, if a change in accounting principle or policy increases opening equity, the adjustment under Article 3.2.1(h) would be a positive adjustment that has the same effect as an additional income in the computation of GloBE Income or Loss.

83. To the extent the equity adjustment is attributable to items of income or expense that were, or would have been, included in the computation of GloBE Income or Loss, it must be treated as an increase or decrease to the Financial Accounting Net Income or Loss of the relevant Constituent Entity or Constituent Entities. To the extent that the adjustment relates to Fiscal Years prior to the application of the GloBE Rules to the Constituent Entity, it is excluded from the computation of GloBE Income or Loss.

84. The amount of the adjustment attributable to Fiscal Years prior to the application of the GloBE to the Constituent Entity should be determined based on all the facts and circumstances.

Paragraph (i) – Accrued Pension Expense

85. Pension liabilities are allowed as expenses in the computation of GloBE Income or Loss to the extent of contributions to a Pension Fund during the Fiscal Year. Calculating the annual expense for pension liabilities based on contributions to a Pension Fund has two benefits. First, the timing rule for deducting pension liabilities under local tax rules is commonly based on the timing of contributions and consequently, will better align the timing of pension expense attributable to Pension Funds from a GloBE Rules perspective with the effect on local tax liability. Second, it avoids complications and potential competitiveness concerns that would arise under some Acceptable Financial Accounting Standards that reflect some of the effects of pension accounting solely in the OCI. However, Article 3.2.1(i) only applies to the pension expenses of pension plans that are provided through a Pension Fund. Thus, pension expenses that are accrued for direct pension payments to former employees are not subject to Article 3.2.1(i) and should be taken into account under the GloBE Rules at the same time and in the same amount as they are accrued as an expense in the computation of Financial Accounting Net Income or Loss.

Treatment of pension income 86. While perhaps unusual, it is possible for the Pension Fund earnings to exceed the pension expense for the Fiscal Year, with the surplus included as income in the profit and loss statement. That surplus, or net income, should be excluded from the GloBE Income or Loss computation to the extent that it is retained by the Pension Fund. Conversely, in cases where the surplus is distributed to the MNE Group, it should be added back to the GloBE Income or Loss computation in the Fiscal

Treatment of pension income

86. While perhaps unusual, it is possible for the Pension Fund earnings to exceed the pension expense for the Fiscal Year, with the surplus included as income in the profit and loss statement. That surplus, or net income, should be excluded from the GloBE Income or Loss computation to the extent that it is retained by the Pension Fund. Conversely, in cases where the surplus is distributed to the MNE Group, it should be added back to the GloBE Income or Loss computation in the Fiscal Year of the distribution. There may also be instances where the overall scheme is in a surplus, rather than deficit, due to unexpectedly high performance of the assets held by the scheme. The adjustment under Article 3.2.1(i) is intended to exclude the entire difference between the amounts included in the Financial Accounting Net Income and Loss for the year and the amounts contributed to the Pension Fund. The adjustment should ensure that the amounts contributed to the pension scheme are the only pension expense amounts included in the computation of GloBE Income or Loss, so that the treatment of pension expenses under the GloBE Rules corresponds to the timing of deduction of pension expenses for Corporate Income Tax purposes. Accordingly, Article 3.2.1(i) also applies in situations where there is a pension surplus or pension income recognised in the Financial Accounting Net Income or Loss. The italicized language below will be inserted into a revised paragraph 86 of the Commentary to Article 3.2.1(i):

86.1 The adjustment for Accrued Pension Expense required by Article 3.2.1(i) depends upon whether the Constituent Entity’s Financial Accounting Net Income or Loss includes an accrued pension expense or pension income with respect to a Pension Fund. In the case of an accrued pension expense, the adjustment is equal to the difference between (a) the amount contributed to a Pension Fund and (b) the amount accrued as an expense with respect to that Pension Fund in the computation of Financial Accounting Net Income or Loss during the Fiscal Year. The adjustment to Financial Accounting Net Income or Loss for this difference will be a positive amount (increasing income) if the amount accrued as an expense in the financial accounts exceeds the contributions for the year. It will be a negative amount (reducing income) in Fiscal Years in which the contributions exceed the expense accrued in the financial accounts. In the case of accrued pension income, the adjustment would be calculated as the sum of the pension income and the amount of pension contributions, if any, during the Fiscal Year. In this case, the adjustment will be a negative amount. This adjustment will also apply when the Pension Fund is in surplus as well as when it is in deficit or liability position. The formula to determine the adjustment (positive or negative) to Financial Accounting Income or Loss for the Accrued Pension Expense is as follows:

GloBE Adjustment = (Accrued Income or Expense for fiscal year + contribution for fiscal year) x (-1)

Where Accrued income is expressed as a positive amount, Accrued expense is expressed as a negative amount and Contribution is expressed as a positive amount. In cases where the Pension Fund is in surplus and the surplus (net income) is distributed to a Constituent Entity, that surplus will be included in the computation of the Constituent Entity’s GloBE Income or Loss in the Fiscal Year of the distribution.

Additional adjustments to determine GloBE Income or Loss (tooltip AAG 2. feb actually says 86.1 but two changes som same paragraphs)

Debt releases under prescribed circumstances

86.2 The Inclusive Framework has agreed that the amount of a debt release included in the Financial Accounting Net Income or Loss shall be excluded from the computation of a Constituent Entity’s GloBE Income or Loss, where the Filing Constituent Entity elects to do so and the debt release:

(a) is undertaken under statutorily provided insolvency or bankruptcy proceedings, that are supervised by a court or other judicial body in the relevant jurisdiction or where an independent insolvency administrator is appointed. Where this is the case, both thirdparty and related-party debts released as part of the same arrangement will be excluded from the computation of GloBE Income or Loss;

(b) arises pursuant to an arrangement where one or more creditors is a person not connected with the debtor (i.e. third-party debt) and it is reasonable to conclude that the debtor would be insolvent within 12 months but for the release of the third-party debts released under the arrangement. Where this is the case, both third-party and related-party debts released as part of the same arrangement will be excluded from the computation of GloBE Income or Loss; or

(c) occurs when the debtor’s liabilities are in excess of the fair market value of its assets determined immediately before the debt release. An amount will only be excluded with respect to debts owed to a creditor that is a person that is not connected with the debtor and only to the extent of the lesser of (i) the excess of the debtor’s liabilities over the fair market value of its assets determined immediately before the debt release, or (ii) the reduction in the debtor’s attributes under the tax laws of the debtor’s jurisdiction resulting from the debt release. Paragraph 86.1(c) only applies in circumstances where paragraphs 86.1(a) or (b) do not apply.

86.3 Where the debtor is not subject to tax on this income under domestic tax law, absent the relief provided in the preceding paragraph, Top-up Tax liabilities could arise for MNE Groups, which may undermine the tax and corporate law policy measures designed to support entities that are insolvent or subject to financial distress. However, where the parties to a debt release are members of the same MNE group, planning opportunities would arise if the impact of the transaction on each party’s GloBE Income or Loss was recognised. Only allowing adjustments to the GloBE Income or Loss computation of a Constituent Entity in the circumstances mentioned above is intended to ensure that only genuine cases of insolvency that are material in size and fundamental to the survival of the Constituent Entity fall within scope.

86.4 Accordingly, where the circumstances fall within scope of paragraph 86.1(a), (b) or (c), income from the debt release in the FANIL, any current tax expense and any related deferred tax expense (arising from a reduction in domestic tax attributes) in relation to the debt release shall be excluded from the borrowing Constituent Entity’s GloBE Income or Loss and Adjusted Covered Taxes, respectively. However, this treatment will only apply in circumstances where the Filing Constituent Entity elects to do so. Further, in the case of debt subject to paragraph 81.6(c), the abovementioned treatment only applies to the proportion of the debt released that is eligible for relief.

86.4 Where a debt release falls within scope of paragraph 86.1(a) or (b), amounts in relation to both related-party and third-party debts released will be excluded from the computation of a Constituent Entity’s GloBE Income or Loss. However, where a debt released falls within scope of paragraph 86.1(c), only amounts in relation to debts owed to a creditor that is a person that is not connected with the debtor will be excluded from the computation of a Constituent Entity’s GloBE Income or Loss. Further, the amount to be excluded from the computation of a Constituent Entity’s GloBE Income or Loss under paragraph 86.1(c) is the lower of the amount of the reduction in the debtor’s tax attributes under local tax law (including tax attributes that are not included in Covered Taxes for GloBE purposes, e.g. foreign tax credits) or the amount required to make the entity solvent on a net asset basis (i.e. the difference between its liabilities and the fair market value of its assets).

86.5 A “statutorily provided insolvency or bankruptcy proceeding… supervised by a court or other judicial body”, for the purposes of 86.1(a) is defined as any procedure provided under the domestic law of a jurisdiction to support companies in financial distress in reorganising and secure their survival or ensure their orderly winding up that is supervised or must be confirmed by a Court or other judicial body. “The appointment of an independent insolvency administrator” extends the scope of the adjustment to situations where an independent administrator is appointed to control the Constituent Entity. In some jurisdictions, while this process is determined by domestic legislation, it is not supervised or confirmed by a court or judicial body. Only debts legally waived after the administrator is appointed will fall within scope of the adjustment. Further, the exemption outlined in 81.6(a) will apply regardless of whether the creditor is ‘connected with’ the debtor or not.

86.6 In the instance described in paragraph 86.1(b) or (c), the creditor will be considered to not be “connected with” the debtor, if the relationship between the two entities does not meet the test set out in Article 5(8) of the OECD Model Tax Convention (OECD, 2017).

86.7 Whether it is reasonable to conclude the debtor would be insolvent within 12 months but for the release of the aggregate amount of any relevant third-party debt under an arrangement should be based on the opinion of a qualified independent party. “Insolvency” in this context refers to its common meaning of “an entity that cannot pay all its debts, as and when they become due and payable”, rather than a strict balance sheet test. In determining whether the entity would be insolvent but for the release on any third-party debt, the qualified independent party should exclude any debt owed to a creditor that is “connected with” the debtor. In order to fulfil this requirement, the Constituent Entity will be required to have sought external professional advice from a qualified independent party. Notwithstanding the requirement that the scope of 86.1(b) requires testing of solvency based on third-party only debt, to the extent that related-party debts are also released under the same arrangement, the related-party debts will also receive the benefit of the adjustments outlined in paragraph 86.3 above. An “arrangement” refers to its ordinary meaning, but should involve a negotiation and agreement between the debtor and the creditor/s. While it is not necessary that all the relevant debts forgiven are part of a single legal agreement, the relevant debt releases should be objectively viewed as being undertaken as part of a single arrangement or plan to ensure the solvency of the debtor.

Article 3.2.2

Stock-based Compensation

87. Article 3.2.2 provides an election to substitute in the computation of GloBE Income or Loss the amount of stock-based compensation allowed as a deduction in the computation of a Constituent Entity’s taxable income in place of the amount expensed in its financial accounts. In many Inclusive Framework jurisdictions, a corporation is entitled to deduct for tax purposes the value of stock-based compensation that it paid based on the market value of the stock when the option is exercised. For example, a corporation may be able to deduct the present value of the stock option at the time of issuance or over the exercise period and then the difference between the amount originally deducted and the market value when the option is exercised by the holder.

88. For financial accounting purposes, companies generally account for stock-based compensation based on the present value of the stock option at the time of issuance and amortise that amount over the exercise period. The company may adjust its estimate of the amount of the stock-based compensation expense and thus the amount taken as an accounting expense based on changes in circumstances during the exercise period. If the market value of the stock increases over the exercise period, the corporation will deduct an amount for tax purposes that is higher than the amount expensed for financial accounting purposes, which is a permanent difference.

89. This disparity between the amount of expense allowed in the computation of financial accounting income and the local tax base would often depress the GloBE ETR, in some cases below the Minimum Rate. The election under Article 3.2.2 brings the GloBE Income or Loss more into line with the local tax rules in those jurisdictions that allow a deduction based on the value of the stock at the exercise date. If the election is not made, the Constituent Entity simply computes its GloBE Income or Loss taking into account the amount of stock-based compensation allowed in the computation of its Financial Accounting Net Income or Loss.

90. The election must be made by the Filing Constituent Entity. The scope of the election is limited to compensation expenditures in the form of stock, stock options, stock warrants (or an equivalent) where the amount allowed as an expense is computed differently for local tax purposes than for financial accounting purposes. In principle, the election applies to stock-based compensation for employees and non-employees. However, if the local tax base applies different rules for employees and non-employees, the election will apply differently to stock-based compensation of employees and non-employees in conformity with those local tax rules.

91. If the election is made in respect of an option that expires without exercise, the Constituent Entity must treat the amount previously included as an expense in the computation of the GloBE Income or Loss pursuant to the election as additional income under the GloBE Rules. This rule prevents the Constituent Entity from retaining the benefit of a deduction for an item that will never be paid.

92. The election is a Five-Year Election and must be applied consistently to the stock-based compensation expense of all Constituent Entities located in the same jurisdiction and for the year in respect of which the election is made and all subsequent Fiscal Years, unless and until the election is revoked. The election is essentially made on a jurisdictional basis and thus can be made for some jurisdictions and not other jurisdictions. Further, revocation of the election is made on a jurisdictional basis.

93. If the election is made in a Fiscal Year after some of the stock-based compensation expense of a transaction has been recorded in the financial accounts but before the exercise date, the Constituent Entity must recapture the stock-based compensation expense allowed in the computation of its GloBE Income or Loss in previous Fiscal Years to the extent it exceeds the amount of the tax deduction that would have been allowed in respect of that compensation in previous Fiscal Years. Thus, a Constituent Entity cannot deduct the amount allowed for financial accounting purposes and then effectively deduct the same amount again based on the tax deduction. If an election under Article 3.2.2 is revoked before the end of the exercise period for some or all of the stock-based compensation paid by Constituent Entities located in the jurisdiction, those Constituent Entities must recapture the excess tax deductions taken in the computation of GloBE Income or Loss up to before the first year to which the revocation applies, but only with respect to stock-based compensation expenses for which an option has not yet been exercised. In other words, revocation of the election only affects stock-based compensation expense for which the final tax deduction has not been determined; it does not affect the amount allowed as a deduction in respect of options that have already been exercised.

94. Regardless of whether an election under Article 3.2.2 is made, the entire amount of the stockbased compensation expense is subject to the condition that the item of expense must be susceptible to being reliably and consistently traced to the Constituent Entity that received the property, use of property, services, etc. for which the stock-based compensation was provided. The election only applies to the Constituent Entity that incurred the expense and received the property (including use of property) or services for which the stock-based compensation was provided. The stock provided does not need to be stock issued by the Constituent Entity that incurred the relevant expense. However, the expense for stockbased compensation is not allowed to the Constituent Entity that issued the shares used as compensation, unless it received the property, services, etc. for which the compensation was paid. Thus, for example, if a Constituent Entity provides stock-based compensation to its executives in the form of UPE stock, the Constituent Entity, not the UPE, deducts the value of the stock.

95. Only one Constituent Entity is allowed to deduct stock-based compensation in excess of the amount allowed in the financial accounts and only if that Constituent Entity is allowed a deduction for such stock-based compensation for local tax purposes. Thus, if the accounting expense needs to be moved from the Entity whose shares are used as the compensation to the Entity that incurred the expense, the expense of the Entity that issued the shares and the reimbursements from the Entity that incurred the expense should be in equal amounts based on the amount of the stock-based compensation expense allowed in the Consolidated Financial Statements.

Article 3.2.3

Arm’s length requirement for cross-border transactions

96. Article 3.2.3 requires transactions between Group Entities to be priced consistently with the Arm’s Length Principle and recorded at the same price for GloBE purposes for all Constituent Entities that are parties to the transaction.

97. Constituent Entities of an MNE Group typically maintain a transfer pricing policy based on the Arm’s Length Principle and this standard is used to determine the transfer price that is reflected in their financial accounts and in computing the local taxable income. Therefore, it is generally expected that Constituent Entities’ financial accounts will reflect transactions between Group Entities based on the Arm’s Length Principle and at the same price. The MNE Group and the tax administrations examining the tax returns of Constituent Entities engaged in the controlled transactions are in the best place to assess compliance with the Arm’s Length Principle. Where the MNE Group has used the transfer price reflected in its financial accounts to compute local taxable income and the relevant tax authorities do not require a transfer pricing adjustment, this price should be used in the computation of GloBE Income or Loss. In these circumstances, the MNE Group should not make an adjustment under Article 3.2.3.

98. Article 3.2.3 requires an adjustment to the Financial Accounting Net Income or Loss to avoid double taxation or double non-taxation under the GloBE Rules where the taxable income of one or more Constituent Entities that are parties to a controlled transaction (counterparties) is determined using a transfer price different from the one used in in the financial accounts. These differences may arise in the local tax return as filed or later when the tax return is audited by the local tax authority of one or more counterparties.

99. Where all of the relevant tax authorities agree that a transfer price must be adjusted to the same price in order to reflect the Arm’s Length Principle, the counterparties shall adjust their GloBE Income or Loss based on that price for purposes of computing GloBE Income or Loss. For example, such an instance would arise where a bilateral Advance Pricing Agreement (APA) is agreed by the competent authorities of all counterparty jurisdictions concerned. The adjustments to the GloBE Income or Loss must be applied consistently for GloBE purposes across all counterparties in line with the arm’s length price agreed under the bilateral Advance Pricing Agreement. If, in connection with an audit of counterparties’ tax returns, the relevant tax authorities agree that a transfer price must be adjusted to the same price, each Constituent Entity concerned must adjust its GloBE Income or Loss. The adjustment to each counterparty’s transfer price is taken into account in the computation of its GloBE Income or Loss pursuant to Article 4.6.1.

100. In some cases, the transfer price used in the financial accounts of the counterparties may differ from the transfer price used to compute a counterparty’s taxable income but not the transfer price used to compute another counterparty’s taxable income in another jurisdiction. These differences may arise where:

a) a unilateral APA has been agreed;

b) a Constituent Entity files a tax return under a self-assessment system that includes book-to-tax adjustments, in order to comply with domestic transfer pricing rules; or

c) a tax authority challenges and adjusts the transfer price used in the local tax return of one of the Constituent Entities.

101. When these differences arise, the transfer price used for taxable income purposes is presumed to be consistent with the Arm’s Length Principle. The GloBE Income or Loss should be adjusted accordingly under Article 3.2.3 where necessary to prevent double taxation or double non-taxation under the GloBE Rules. Specifically, a unilateral transfer pricing adjustment will result in a corresponding adjustment to the GloBE Income or Loss of all counterparties under Article 3.2.3, unless the transfer pricing adjustment increases or decreases the MNE Group’s taxable income in a jurisdiction that has a nominal tax rate below the Minimum Rate or that was a Low-Tax Jurisdiction with respect to the MNE Group in each of the two Fiscal Years preceding the unilateral transfer pricing adjustment (an under-taxed jurisdiction).

102. This rule results in adjustments where necessary to prevent double taxation or double nontaxation. For example, a local transfer pricing adjustment that increases the taxable income in a high-tax jurisdiction results in a corresponding adjustment under Article 3.2.3 where that adjustment is necessary to ensure a corresponding decrease to the GloBE Income of the relevant counterparties in an under-taxed jurisdiction. Without this adjustment, the income included in the high-tax jurisdiction under local law would be subject to double taxation – once in the high-tax jurisdiction and again under the GloBE Rules. Similarly, if an adjustment decreases the taxable income in a high-tax jurisdiction, corresponding adjustments to the GloBE Income or Loss of all counterparties will ensure that the GloBE Income of counterparties in undertaxed jurisdictions is increased by a corresponding amount and exposed to Top-up Tax under the GloBE Rules. Without this adjustment, the income excluded from the high-tax jurisdiction taxable income would benefit from double non-taxation, in that it would not be subject to tax in the high-tax jurisdiction or under the GloBE Rules. GloBE Rules

103. However, adjustments will not be made under this rule when such adjustments would give rise to double taxation or double non-taxation under the GloBE Rules. For example, a unilateral transfer pricing adjustment that reduces taxable income in a jurisdiction that has a nominal tax rate above the Minimum Rate but that had an ETR below the Minimum Rate in the previous two years should not be reflected in the GloBE Income or Loss, because if the counterparties are located in a high-tax jurisdiction, such adjustment would produce double non-taxation under the GloBE Rules (i.e. the adjusted income is not subject to tax in either jurisdiction and is not exposed to Top-up Tax under the GloBE Rules). Finally, a unilateral transfer pricing adjustment that increases taxable income in an under-taxed jurisdiction should not be reflected in the GloBE Income because such adjustment would produce double taxation under the GloBE Rules (i.e. the adjustment would expose the income to Top-up Tax in the jurisdiction in which the unilateral adjustment is made and the income is already subject to local tax in the other jurisdiction and/or Top-up Tax if the other jurisdiction is an under-taxed jurisdiction).

104. Article 3.2.3 does not impose any requirements beyond an arm’s length price. Thus, it does not require the MNE Group to conform the timing of an item of income or expense for GloBE purposes to the timing of that item for local tax purposes.

105. The GloBE Implementation Framework will give further consideration to the appropriate adjustments to the GloBE Income in situations where, in connection with a proceeding concerning the tax returns of two or more counterparties, the relevant tax authorities disagree as to whether or to what extent a transfer price needs to be adjusted to reflect the Arm’s Length Principle as well as in other situations where adjustments are necessary to avoid double taxation or double non-taxation under the GloBE Rules. In addition, the GloBE Implementation framework will consider information reporting related to adjustments made by Constituent Entities pursuant to Article 3.2.3.

Arm’s length requirement for same-country transactions

106. Transactions between Constituent Entities located in the same jurisdiction, on the other hand, generally are not required to be adjusted, for tax purposes, from the amounts used in preparation of the Consolidated Financial Statements. This is because the shifting of income from one taxpayer to another within the same jurisdiction will generally not impact on the overall amount of income subject to tax in that jurisdiction. These same-country transactions may already be eliminated or otherwise adjusted for local tax purposes pursuant to a consolidation or group tax relief regime. For GloBE purposes, additional adjustments to conform with the Arm’s Length Principle in respect of wholly domestic transactions should not generally be required because the effect of these transactions will generally be eliminated under the jurisdictional blending rules of Chapter 5. Furthermore, the Constituent Entities may not be applying the Arm’s Length Principle to same-jurisdiction transactions in a jurisdiction that does not impose a Covered Tax.

107. However, Article 3.2.3 does require the application of the Arm’s Length Principle to transactions between Constituent Entities in the same jurisdiction if the sale or other transfer of an asset produces a loss and that loss is taken into account in the computation of GloBE Income or Loss. This rule is intended to prevent MNE Group’s from manufacturing losses in a jurisdiction through sales or other transfers between Group members at prices that are not consistent with the Arm’s Length Principle. The rule does not apply if the loss is excluded from the Constituent Entity’s GloBE Income or Loss computation. Thus, if the MNE Group has in place an election under Article 3.2.8 to apply consolidated accounting in the jurisdiction in which the loss arises, the loss will be eliminated in consolidation and excluded from the computation of the Constituent Entity’s GloBE Income or Loss.

108. Transactions between Minority-Owned Constituent Entities and other Constituent Entities must also be recorded in accordance with the Arm’s Length Principle. This is necessary because MinorityOwned Constituent Entities are not included in the ETR and Top-up Tax computations for the jurisdiction under Articles 5.1 and 5.2, but instead compute their ETR and Top-up Tax separately pursuant to Article 5.6. Thus, the income and expense of the parties to the transaction will not be eliminated in the jurisdictional blending computation and failure to reflect transactions based on the Arm’s Length Principle would distort the ETR and Top-up Tax calculations for the jurisdiction and the Minority-Owned Constituent Entities. Similarly, transactions between Investment Entities and other Constituent Entities located in the same jurisdiction must also be recorded in accordance with the Arm’s Length Principle.

109. Finally, although not explicitly stated in Article 3.2.3, transactions between Constituent Entities in the same jurisdiction must also be recorded in the same amount in both Constituent Entities. This is the expected result from applying a common accounting standard to Constituent Entities in the same jurisdiction. The principle applies, however, in all cases to prevent the exclusion of income from, or duplication of expenses in, the GloBE Income or Loss computation.

Article 3.2.4

109.1 The Commentary to Article 3.2.4 sets out the Inclusive Framework’s agreement on the treatment of Qualified Refundable Tax Credits and Marketable Transferable Tax Credits under the GloBE Rules. The treatment provided in Article 3.2.4 applies only to tax credits that are Qualified Refundable Tax Credits or Marketable Transferable Tax Credits. Where a tax credit regime provides for tax credits that are partially refundable or transferable (i.e. tradeable), such that only a fixed percentage or portion of the credit is refundable or transferable, the credit shall be bifurcated and the part that is refundable or transferable shall be tested to determine whether it is a Qualified Refundable Tax Credit or Marketable Transferable Tax Credit. The Commentary under Article 4.1.3(b) or (c) applies to any tax credit or any part of a tax credit that does not meet the definition of a Qualified Refundable Tax Credit or Marketable Transferable Tax Credit.

Qualified Refundable Tax Credits

110. Article 3.2.4 prescribes the treatment of certain refundable tax credits. The refundable tax credits referred to in Article 3.2.4 are government incentives delivered via the tax system. They are not ordinary refunds of tax paid in a prior period due to an error in the computation of tax liability or pursuant to an imputation system. Instead, they are incentives to engage in certain activities, such as research and development, whereby the government allows the company to offset its taxes dollar-for-dollar for engaging in specified activities or incurring specified expenditures or the government will refund the amount of the unused credit if the company doesn’t have any tax liability. In this way, the government effectively pays for the activity or expenditure in a similar manner to a grant. The basic idea is that the incentive or grant is delivered by a tax reduction to the extent possible because it is more efficient than having checks from the government and taxpayer crossing in the mail.

111. The face value of a Qualified Refundable Tax Credit will be treated as GloBE Income of the recipient Constituent Entity in the year such entitlement accrues. However, if the Qualified Refundable Tax Credit is related to the acquisition or construction of assets and the Constituent Entity that engages in the activities that generate the credit (the Originator) has an accounting policy of reducing the carrying value of its assets in respect of such tax credits, or recognising the credit as deferred income, such that the income from the tax credit is recognized over the productive life of the asset, the Originator shall follow this same accounting policy for Qualified Refundable Tax Credits to determine its GloBE Income or Loss without changing the character of the credit. This reflects that these types of refundable tax credits share features of, and should be treated in the same way as, government grants that form part of income, given that they are in effect government support for a certain type of activity that can ultimately be received in cash or cash equivalent. See also the Commentary on the definition of Qualified Refundable Tax Credit. The Inclusive Framework will consider providing further guidance to address transitional issues and deferred tax implications in respect of QRTCs and other tax credits, including for those QRTCs and other tax credits that are taxable income.

112. In cases where an amount of a Qualified Refundable Tax Credit has been recorded as a reduction in current income tax expense (or other Covered Taxes) in the financial accounts of the Constituent Entity, that amount must be treated as an Addition to Covered Taxes under Article 4.1.2(d) to fully reverse the accounting entry that treated it as a tax reduction instead of income. This ensures that the Qualified Refundable Tax Credit is treated as an item of income rather than a reduction of accrued taxes. No adjustment is required if a tax credit that meets the definition of Qualified Refundable Tax Credit was already treated as income in the financial accounts.

Marketable Transferable Tax Credits

112.1 Marketable Transferable Tax Credit means a tax credit that can be used by the holder of the credit to reduce its liability for a Covered Tax in the jurisdiction that issued the tax credit and that meets the legal transferability standard and the marketability standard in the hands of holder.

(a) Legal transferability standard. The legal transferability standard is met for the Originator of a tax credit if the tax credit regime is designed in a way that the Originator can transfer the credit to an unrelated party in the Fiscal Year in which it satisfies the eligibility criteria for the credit (Origination Year) or within 15 months of the end of the Origination Year. The legal transferability standard is met for a purchaser of a tax credit if the tax credit regime is designed in a way that the purchaser can transfer the credit to an unrelated party in the Fiscal Year in which it purchased the tax credit. If under the legal framework that applies to the credit, a purchaser of the tax credit cannot legally transfer the tax credit to an unrelated party or is subject to more stringent legal restrictions on transfer of the credit than the Originator, the tax credit does not meet the legal transferability standard in the hands of the purchaser.

(b) Marketability standard. The marketability standard is met for the Originator of a tax credit if it is transferred to an unrelated party within 15 months of the end of the Origination Year (or, if not transferred or transferred between related parties, similar tax credits trade between unrelated parties within 15 months of the end of the Origination Year) at a price that equals or exceeds the Marketable Price Floor. The marketability standard is met for a purchaser if that purchaser acquired the credit from an unrelated party at a price that equals or exceeds the Marketable Price Floor. Marketable Price Floor means 80% of the net present value (NPV) of the tax credit, where the NPV is determined based on the yield to maturity on a debt instrument issued by the government that issued the tax credit with equal or similar maturity (and up to 5-year maturity) issued in the same Fiscal Year as the tax credit is transferred (or if not transferred, the Origination Year). For this purpose, the tax credit is the face value of the credit or the remaining creditable amount in relation to the tax credit. For this purpose, the cash flow projection to be factored in the NPV calculation shall be based on the maximum amount that can be used each year under the legal design of the credit. An Originator and purchaser are considered related parties if one owns, directly or indirectly, at least 50% of the beneficial interest in the other (or, in the case of a company, at least 50% of the aggregate vote and value of the company’s shares) or another person owns, directly or indirectly, at least 50% of the beneficial interest (or, in the case of a company, at least 50% of the aggregate vote and value of the company’s shares) in each of the Originator and purchaser. In any case, an Originator and purchaser are considered related parties if, based on all the relevant facts and circumstances, one has control of the other or both are under the control of the same person or persons.

112.2 The marketability standard can be illustrated with the following example. Assume that a Constituent Entity satisfies the eligibility criteria for a tax credit with face value equal to EUR 100 in Year 1 and that, according to the legal design of the tax credit, the Constituent Entity can either utilize it over the subsequent 5-year period in equal installments of EUR 20 per year or transfer it beginning in Year 1. The same government granting the tax credit issued in Year 1 five-year debt instruments with a yield to maturity equal to 4%. In that case, the NPV of the tax credit is equal to EUR 89.04, and the relevant Marketable Price Floor is equal to EUR 71.23. The marketability standard is met where the tax credit is transferred to an unrelated party at a price equal to or higher than EUR 71.23 or, if retained or transferred to related parties only, where similar tax credits trade between unrelated parties at a price equal to or higher than EUR 71.23.

112.3 It is recognized that tax credits generally are not traded on public exchanges with daily quoted prices but instead are privately negotiated in over-the-counter transactions. MNE Groups can establish the price at which tax credits trade for purposes of paragraph 112.5 based on evidence of similar transactions and in accordance with the applicable fair value accounting standards used in their Consolidated Financial Statements, for example IFRS 13 or ASC 820.

112.4 Generally, the Originator of a Marketable Transferable Tax Credit shall treat the face value of the tax credit as GloBE Income in the Origination Year. However, if the Marketable Transferable Tax Credit is related to the acquisition or construction of assets and the Originator has an accounting policy of reducing the carrying value of its assets in respect of such tax credits, or recognising the credit as deferred income, such that the income from the tax credit is recognized over the productive life of the asset, the Originator shall follow this same accounting policy for GloBE purposes. If all or part of a Marketable Transferable Tax Credit expires without use, the Originator treats the face value attributable to the expired portion of the credit as a loss (or increase to the carrying value of the asset) in the computation of GloBE Income or Loss in the Fiscal Year of the expiration.

112.5 An Originator that transfers a Marketable Transferable Tax Credit within 15 months of the end of the Origination Year shall include the transfer price (in lieu of the face value of the credit) in its GloBE Income in the Origination Year. If the Originator transfers a Marketable Transferable Tax Credit after this period, any difference between the face value of the tax credit transferred that was included in GloBE Income or Loss for the Origination Year and the transfer price shall be treated as a loss in computing the Originator’s GloBE Income or Loss in the Fiscal Year of the transfer. Where the Originator includes the tax credit as income ratably over the productive life of the asset, for both accounting and GloBE purposes, the difference between the transfer price and the face value of the tax credit shall be included in the GloBE Income or Loss ratably over the remaining productive life of the asset. For example, a Constituent Entity originates a tax credit with EUR 100 face value and includes it as income over a period of 5 years because it is related to an asset with 5-year productive life (either via contra-asset accounting or via deferred income accounting). In year 2, this tax credit is transferred at a price of 90. Assuming that the face value of the credit at the date of transfer is still 100, the seller realizes a loss of 10 which is allocated ratably over the remaining four years of the productive life of the asset to match the income attributable to the reduction in the carrying value of the asset.

112.6 A purchaser of a Marketable Transferable Tax Credit that uses the tax credit to satisfy its liability for a Covered Tax includes the difference between the purchase price and the face value of the tax credit in its GloBE Income when and in proportion to the amount of the tax credit used by the purchaser to satisfy its liability for a Covered Tax. For example, if a purchaser acquires a tax credit with a face value of 100 for 90 and uses 70 of the credit in Year 1, it includes 7 (= 70/100 x (100-90)) in its GloBE Income in Year 1. A purchaser of a Marketable Transferable Tax Credit that sells the credit must include the gain or loss on the sale in its GloBE Income or Loss in the Fiscal Year of the sale. The gain or loss on sale is equal to the sale price minus the total of the purchase price and the gain recognized from use of the credit. If all or part of a Marketable Transferable Tax Credit expires without use, the purchaser treats the loss attributable to the expired portion of the credit as a loss in the computation of GloBE Income or Loss in the Fiscal Year of the expiration. The loss attributable to the expiration is equal to the excess of the purchase price and the gain recognized on use of the credit over the amount of the credit used. Thus, in the example, the loss would be 27 (= (90 + 7) – 70). This treatment of a purchased Marketable Transferable Tax Credit applies to a purchased tax credit that also qualifies as a Qualified Refundable Tax Credit.

113. A tax credit that does not meet the conditions for being a Qualified Refundable Tax Credit or a Marketable Transferable Tax Credit, but that was treated as income in the financial accounts, must be subtracted in full from the computation of GloBE Income or Loss.

114. The conditions for a Marketable Transferable Tax Credit draw on the treatment in financial accounting standards (both for government grants and for income taxes), and are designed to identify tax credits that are, as a matter of substance and not merely form, transferable in a market. In order to be treated as a Marketable Transferable Tax Credit under the GloBE Rules, there must be a market such that the legal right to transfer the credit has immediate practical and economic significance for those taxpayers that will be entitled to the credit. If there is no actual market for the transferable tax credits, then the transferability element will be of no practical significance to taxpayers and the GloBE Rules will not treat the tax credit as a Marketable Transferable Tax Credit.

114.1 The provisions of Article 8.3 on Administrative Guidance will apply to ensure consistency of outcomes in respect of the application of the marketability standard. If those jurisdictions that adopt the common approach identify risks associated with the treatment of Marketable Transferable Tax Credits that lead to unintended outcomes, the relevant jurisdictions could be asked to consider developing further conditions for a Marketable Transferable Tax Credit or, if necessary, explore alternative rules for the treatment of Marketable Transferable Tax Credits. This analysis would be based on empirical and historical data with respect to the tax credit regime and market as a whole, and not on a taxpayer-specific basis.

Article 3.2.5

Election to use realisation method in lieu of fair value accounting

115. Article 3.2.5 provides an election to use the realisation method for assets and liabilities that are accounted for in the Constituent Entity’s financial accounts using the fair value method or impairment accounting. The election generally applies with respect to all assets and liabilities of all Constituent Entities in a jurisdiction and may be made with respect to those assets or liabilities after the year in which the asset was acquired. However, the election can be limited to tangible assets of such Constituent Entities or to assets and liabilities of such Constituent Entities that are Investment Entities.

116. Under the election, gain or loss associated with an asset or liability will arise when the asset is disposed rather than as its value changes due to changes in market value or impairments. The carrying value of such asset or liability for purposes of determining gain or loss shall be the carrying value of that asset or liability at the later of the time the asset was acquired or liability was incurred or the beginning of the year for which the election is made. Accordingly, under Article 3.2.5, a Constituent Entity must exclude fair value or impairment gain or loss in respect of assets or liabilities subject to the election from the computation of GloBE Income or Loss and must include gain or loss determined under the realisation method.

117. The policy justification for this treatment is to reduce volatility by allowing the taxpayer to crystallise the gain for GloBE purposes as of the actual date of disposition rather than from one period to the next in line with the accounting treatment. For example, if a Constituent Entity holds convertible debt in a start-up company and the company performs poorly in its first few years, the Constituent Entity may be required, under the applicable accounting standard, to recognise a fair value loss on the investment. If the start-up is eventually acquired by an unrelated purchaser and the Constituent Entity disposes of the convertible debt for its original acquisition cost, the “gain” reported upon sale is not really an economic gain but could be subject to a Top-up Tax if there are no related Covered Taxes paid in respect of the gain in that year. An election under Article 3.2.5 prevents this result by permitting the Constituent Entity to determine the gain upon sale based on the original cost of the asset.

118. An election under Article 3.2.5 is a Five-Year Election. It cannot be revoked within five Fiscal Years after an Election Year and another election cannot be made within five Fiscal Years after a revocation year. In the year an election under this Article is revoked, the GloBE Income or Loss is adjusted by the difference between the fair value of the asset or liability at the beginning of the year and the carrying value of the asset or liability determined pursuant to the election. This adjustment recaptures the net fair value gain or loss that arose during the pendency of the Article 3.2.5 election.

Article 3.2.6

Election to spread capital gains over five years

119. Article 3.2.6 provides an election that permits an MNE Group to spread the effect of gains and losses from the sale of Local Tangible Assets over a period of up to five years to mitigate the effect of recognising the entire gain in a single year on the MNE Group’s jurisdictional ETR computation and to match the timing of gains and losses on Local Tangible Assets. The policy justification for this election is that the increase in value of the asset likely accumulated over a period of years and spreading the gain over that period, up to a maximum of five years, and matching it with losses from similar property provides a better measure of whether the MNE Group has been subject to a minimum level of tax in the jurisdiction over that period.

120. The election is an Annual Election made on a jurisdictional basis. It applies only with respect to gains and losses attributable to disposition of Local Tangible Assets, defined in Article 10.1 as immovable property located in the same jurisdiction as the Constituent Entity. This limitation ensures that relief provided under this section cannot be used to shelter gain on mobile assets. However, the election may be combined with an election under Article 3.2.5 in respect of tangible assets. In that case, fair value gains or losses and impairment adjustments associated with the asset during the pendency of the Article 3.2.5 election will have been excluded from the computation of GloBE Income or Loss and the carrying value for determining gain or loss will not be adjusted for fair value changes or impairments. The election does not apply to sales between Group Entities because the spread period includes all years in which Constituent Entities held the property.

121. Under the election, the Aggregate Asset Gain in the year for which the election is made (the Election Year) is allocated to the years in the Look-back Period (defined in Article 10.1 as the Election Year and the four prior Fiscal Years). The Aggregate Asset Gain is the net gain in the Election Year from the disposition of Local Tangible Assets by all Constituent Entities located in the jurisdiction except for gain or loss on a transfer of assets between Group Members.

122. The Aggregate Asset Gain is not simply prorated over the Look-back Period. Instead, it is first matched against Net Asset Losses arising during the Look-back Period (that haven’t already been offset under a previous Article 3.2.6 election), starting with the earliest Loss Year (defined in Article 10.1 as a Fiscal Year in the Look-back Period for which there is a Net Asset Loss for a Constituent Entity located in that jurisdiction and the total amount of Net Asset Loss of all such Constituent Entities exceeds the total amount of their Net Asset Gain) in the period. If the Aggregate Asset Gain is not fully absorbed in the earliest Loss Year, the balance is brought forward to the next Loss Year, and so on, until the Aggregate Asset Gain is fully absorbed or there are no remaining Loss Years in the Look-back Period.

123. Net Asset Loss in respect of a Constituent Entity and a Fiscal Year, is defined in Article 10.1 as the net loss from the disposition of Local Tangible Assets by that Constituent Entity in that year excluding the gain or loss on a transfer of assets to another Group Member. The amount of Net Asset Loss for each Fiscal Year in the Look-back Period is reduced by the amount of Net Asset Gain or Adjusted Asset Gain that is set-off against it pursuant to the application of Article 3.2.6(b) or (c) as a result of a previous Article 3.2.6 election. In other words, when an Aggregate Asset Gain is set-off against a Net Asset Loss of a Fiscal Year pursuant to an election under Article 3.2.6, that Net Asset Loss is reduced by a corresponding amount for purposes of a subsequent election under Article 3.2.6. This prevents that amount from being used again in the future to eliminate another Aggregate Asset Gain from the computation of GloBE Income or Loss. Where the Net Asset Losses of all Constituent Entities in the jurisdiction for a Fiscal year exceed the Aggregate Asset Gain brought to the Fiscal Year, the Aggregate Asset Gain is set-off against the Net Asset Loss of each Constituent Entity based on the ratio of the Constituent Entity’s Net Asset Loss to the total Net Asset Losses of all Constituent Entity’s in the jurisdiction for the Fiscal Year.

124. If there is an amount of Aggregate Asset Gain in excess of the Net Asset Losses in the Loss Years of the Look-back Period, that excess is spread evenly (i.e. pro-rated) over the Look-back Period and then allocated among Constituent Entities based on their respective Net Asset Gains in the Election Year. Net Asset Gain is defined in Article 10.1 as the net gain from the disposition of Local Tangible Assets by a Constituent Entity located in the jurisdiction for which the election was made excluding the gain or loss on a transfer of assets to another Group Member. Finally, the Effective Tax Rate and Top-up Tax, if any, for each previous Fiscal Year in the Look-back Period must be re-calculated under Article 5.4.1.

125. When the election is made, any Covered Taxes (including deferred tax assets) with respect to any Net Asset Gain or Net Asset Loss in the Election Year must be determined based on the facts and circumstances and excluded from the computation of Adjusted Covered Taxes. In many cases when the election is made, it is being made because there are no Covered Taxes attributable to Net Asset Gains or Net Asset Loss on Local Tangible Assets. To the extent the election is not made and there are Covered Taxes attributable to Net Asset Gains or Net Asset Loss on Local Tangible Assets, such Covered Taxes remain in the ETR computation. Determining the amount of Covered Taxes to apportion to each year would be unduly cumbersome and the allowance of a carry-back tailored to match losses in prior years is a substantial benefit. Therefore, the Covered Taxes arising in the Election Year, if any, with respect to Net Asset Gains or Losses are excluded from Adjusted Covered Taxes.

126. Note that to the extent a GloBE Loss was generated in previous Fiscal Years, such GloBE Loss must be recalculated after the application of this Article. To the extent a GloBE Loss is reduced as a result of the operation of this Article and such loss had been used in a Fiscal Year, the Top-up Tax for such Fiscal Year must also be re-computed in line with the principles of Articles 4.6 and 5.4.

Article 3.2.7

Special Rule for Intragroup Financing Arrangements

127. Article 3.2.7 provides a rule with respect to Intragroup Financing Arrangements that increase the amount of expenses taken into account in computing the GloBE Income or Loss of a Low-Tax Entity and do not result in a corresponding increase to the taxable income of the High-Tax Counterparty to such arrangement. This rule prevents MNE Groups from engaging in transactions that are intended to increase the ETR in a jurisdiction that is below the Minimum Rate by reducing the GloBE Income or Loss in such jurisdiction without increasing the taxable income of the counterparty to the arrangement. A payment should not be treated as increasing the taxable income of a High-Tax Counterparty if it is eligible for an exclusion, exemption, deduction or credit or other tax benefit under local law and the amount of that benefit is calculated by reference to the amount of payment received. For example, assume that Jurisdiction A has introduced an interest limitation rule that limits a taxpayer’s net interest deduction to a percentage of its earnings. The amount of interest expense denied under this interest limitation rule constitutes excess interest capacity that is eligible to be carried forward and set-off against interest income in a subsequent year. For example, a High-Tax Counterparty located in Jurisdiction A lends money to a Low-Tax Entity. At the time the loan is entered into, the High-Tax Counterparty has excess interest capacity from previous years that is not expected to be used over the expected term of the loan. In this case, the receipt of interest from the Low-Tax Entity under the loan will not be treated as giving rise to an increase in taxable income to the extent the High-Tax Counterparty can immediately set-off such interest income against the carryforward of excess interest capacity.

128. An Intragroup Financing Arrangement is defined in Article 10.1 as any arrangement entered into between two or more members of the MNE Group whereby a High-Tax Counterparty directly or indirectly provides credit or otherwise makes an investment in a Low-Tax Entity. The term arrangement includes an agreement, plan or understanding (whether enforceable or not) and includes all the steps and transactions that give effect to that arrangement. Whether there is an arrangement in place is an objective test to be inferred from the actual transactions that took place and the information available to those involved in the arrangement. A series of transactions will be treated as part of an Intragroup Financing Arrangement where an objective observer would reasonably conclude that they were part of a plan or arrangement to allow a High-Tax Counterparty to provide credit or make a direct or indirect investment in a Low-Tax Entity. The test is an objective one, based on an assessment of the actual transactions that took place in light of the overall outcomes achieved. A step or transaction can form part of an arrangement even though the details may not be known to all the parties to the arrangement.

129. For example, a member of the MNE Group may act as an intermediary by borrowing money from a High-Tax Counterparty and then on-lending it to a Low-Tax Entity within the same group. In this case, the back-to-back loans could be considered part of an arrangement whereby a High-Tax Counterparty has indirectly provided credit to a Low-Tax Entity. Although the High-Tax Counterparty did not know the ultimate destination of the funds, it would be sufficient that the intermediary borrowed the funds with the specific purpose of on-lending them to the Low Tax Entity. If the Intermediary operates, however, as a treasury or financing centre for the group that manages the group’s working capital requirements, the money borrowed from the High-Tax Counterparty may, on an objective assessment, be considered entirely separate from and independent of the loan made to the Low-Tax Entity such that these loans are not considered part of an Intragroup Financing Arrangement.

130. Article 3.2.7 only applies when the arrangement can reasonably be expected, over the duration of the arrangement, to reduce the GloBE income of a Low-Tax Entity without increasing the taxable income of the High-Tax Counterparty. The duration of, and expected outcomes under, the arrangement should be determined based on an objective assessment, including by taking into account the financing requirements of the parties. Even if the initial loan is only made for a limited duration, a financing arrangement may reasonably expected to be in place for an extended period if it is put in place to finance a long-term investment.

131. A Low-Tax Entity is defined in Article 10.1 as a Constituent Entity located in a Low-Tax Jurisdiction or a jurisdiction that would be a Low-Tax Jurisdiction if the ETR for the jurisdiction were determined without regard to any income or expense accrued by that Entity in respect of an Intragroup Financing Arrangement. A Low-Tax Jurisdiction, in respect of an MNE Group in any Fiscal Year, is a jurisdiction where the MNE Group has Net GloBE Income and is subject to an ETR in that period that is lower than the Minimum Rate.

132. A High-Tax Counterparty is defined in Article 10.1 as a Constituent Entity that is located in a jurisdiction that is not a Low-Tax Jurisdiction or that is located in a jurisdiction that would not be a Low-Tax Jurisdiction if its ETR were determined without regard to any income or expense accrued by that Entity in respect of an Intragroup Financing Arrangement.

Article 3.2.8

Election to consolidate transactions in same jurisdiction

133. Article 3.2.8 provides an election that permits consolidated accounting treatment to be applied to transactions between Constituent Entities of the same MNE Group located in the same jurisdiction. If this election is made, income, expenses, gains and losses resulting from transactions between the Constituent Entities may be eliminated from the computation of GloBE Income or Loss in the same manner as amounts relating to transactions among members of a consolidated group are eliminated as part of the consolidation adjustments under the Acceptable Financial Accounting Standard used by the UPE in preparing its Consolidated Financial Statements. This is intended to prevent unintended consequences where income, expense, gains and losses from domestic intra-group transactions are treated as tax neutral intra-group transactions under local law. The consolidated accounting should not eliminate the MNE Group’s economic income from transactions with third parties nor should it result in the carrying value of any assets being adjusted to include purchase accounting adjustments held in consolidation. Assets will continue to be held at their original carrying values and the full economic gain or loss accruing during the MNE Group’s ownership of those assets should be brought into account when they are sold outside of the tax consolidated group or outside of that jurisdiction. The requirement that the Constituent Entities are included in a tax consolidated group includes any rules of the local jurisdiction which enable the Constituent Entities to share current income or losses by virtue of the fact that they are related through ownership or common control.

134. Many transactions between Constituent Entities result in immediate income for the seller and an immediate expense for the buyer and would net to zero in the computation of Net GloBE Income for the jurisdiction. For example, interest would be an expense for the borrowing Constituent Entity and income for the lending Constituent Entity and would accrue at the same time for both Constituent Entities under the same financial accounting standard. However, some transactions would essentially shift income, gain, expense or loss to the other member of the group to be recognized in a subsequent Fiscal Year in connection with a third-party transaction. For example, inventory sold from a purchasing Constituent Entity to a manufacturing Constituent Entity may be manufactured into a finished product and sold to a third-party customer in the following Fiscal Year. The MNE Group’s consolidated accounting should take into account the full gain from the sale to a third party.

135. The election is limited to transactions between Constituent Entities (other than Investment Entities, Minority-Owned Constituent Entities, and JVs treated as Constituent Entities under Article 6.4) located in the same jurisdiction. Transactions between Constituent Entities located in different jurisdictions would continue to be treated in the same manner as transactions with a third party and would not benefit from the netting or income deferral that results from the election. Building on the inventory example above, if the manufacturing Constituent Entity instead sells its finished product to a resale Constituent Entity located in another jurisdiction, the manufacturing Constituent Entity would be required to recognize the MNE Group’s profit on that intra-group sale (taking into account the Arm’s Length Principle) as if it were a sale to a third-party customer.

136. Thus, the election requires the MNE Group to distinguish between transactions between Constituent Entities in the same jurisdiction and Constituent Entities in different jurisdictions which creates some compliance burden. However, transactions between the Constituent Entities in the same jurisdiction may already be eliminated or deferred for local tax purposes pursuant to the applicable consolidation or group tax relief regime. In addition, the Constituent Entities may not be applying an arm’s length standard to same-jurisdiction transactions in a jurisdiction that does not impose a Covered Tax. In these cases, the MNE Group may prefer the election over the burden of determining arm’s length prices for transactions between Constituent Entities in the same jurisdiction.

137. When an election pursuant to Article 3.2.8 is made or revoked, appropriate adjustments will be required to ensure that there is no duplication or omission of items of GloBE Income or Loss.

Article 3.2.9

Exclusion of certain insurance company income

138. Article 3.2.9 excludes certain income of an insurance company from the computation of GloBE Income. Insurance companies are sometimes subject to current tax on returns that must be contractually paid over to policyholders. The insurance company passes that tax along to the policyholders through a charge so that the company is in effect reimbursed for taxes paid, in some sense, on behalf of the policyholder. It is normally the case that the insurance company passes that tax along to the policyholders through a charge, specifically by way of a reduction in policy liabilities equivalent to the tax. The reduction is recognised as income and so the company is in effect reimbursed for taxes paid on behalf of the policyholder.

139. Financial accounting standards generally treat the returns that will be contractually paid over to the policyholder as income of the insurance company and the corresponding liability to pay the returns over to the policyholder as an expense resulting in a net zero effect on its income before tax. The tax paid on behalf of policyholders, as stated above, reduces policy liabilities resulting in a profit before tax for the insurance company. If the tax paid on the policyholder’s return is treated as an above-the-line expense of the insurance company, these two items also will result in a net zero effect on the company’s profit before tax and have no effect on the GloBE ETR.

140. However, the tax paid on the policyholder returns may be treated as an income tax under some financial accounting standards. Thus, even though the reduction in the policyholder liability and the tax on investment income are equal and offsetting in the end, the former increases pre-tax income above-the-line and the latter is treated as a below-the-line tax expense under some financial accounting standards. Thus, for GloBE purposes, the tax is included in the Covered Taxes that increase the numerator of the ETR fraction and the charge (reduction in policy liabilities equivalent to the tax) is income included in the GloBE Income that increases the denominator of the ETR fraction. Consequently, instead of offsetting the reduction in the policyholder liability with no effect on the ETR computation, the tax would effectively provide shelter from Top-up Tax to other low-taxed income earned by the insurance company

141. To address this issue, the charge of tax (or reduction in policyholder liabilities equivalent to policyholder tax) is excluded from the computation of GloBE Income or Loss under Article 3.2.9 and any taxes arising on the policyholder returns are excluded from the definition of Covered Taxes pursuant to Article 4.2.2(e). However, amounts charged to policyholders for taxes paid by the insurance company in respect of returns to the policyholders, are only to be excluded from the GloBE Income and Loss calculation if that tax is not included as an expense within the profit or loss before tax in the financial accounts. If the tax on the policyholder returns is treated as an above-the-line expense under the accounting standard used in the Consolidated Financial Statements, it will offset the charge of tax (or reduction in policyholder liabilities equivalent to policyholder tax) and thus no adjustment is necessary.

Article 3.2.10

Additional Tier One Capital

142. Article 3.2.10 provides a special rule for the treatment of Additional Tier One Capital, which is defined in Article 10.1 as an instrument issued by a Constituent Entity pursuant to prudential regulatory requirements applicable to the banking sector that is convertible to equity or written down if a pre-specified trigger event occurs and that has other features which are designed to aid loss absorbency in the event of a financial crisis. This type of capital is commonly referred to in financial markets as Additional Tier One Capital. Prudential regulatory requirements in the insurance sector often require Constituent Entities to issue instruments with the same characteristics. In the insurance sector, this type of capital is commonly referred to as Restricted Tier One Capital. Because of their similar characteristics and purpose, the Inclusive Framework has agreed that Article 3.2.10 shall also apply to Restricted Tier One Capital. This is defined as an instrument issued by a Constituent Entity pursuant to prudential regulatory requirements applicable to the insurance sector that is convertible to equity or written down if a prespecified trigger event occurs and that has other features which are designed to aid loss absorbency in the event of a financial crisis.

143. Additional Tier One Capital is generally treated as equity for financial accounting purposes. However, it is treated as debt for tax purposes in some Inclusive Framework jurisdictions. Thus, for many Constituent Entities, payments in respect of Additional Tier One Capital are deductible as interest expense by the issuer and includible as interest income of the holder for tax purposes. This represents a permanent difference between financial accounting and taxable income that is both common and material. Accordingly, Article 3.2.10 provides that increases or decreases to the equity of a Constituent Entity attributable to distributions in respect of Additional Tier One Capital shall be treated as income or expense in the computation of its GloBE Income or Loss. Equity adjustments attributable to the issuance or redemption of Additional Tier One Capital are not included in the computation of GloBE Income or Loss.

144. Article 3.2.7 does not apply to deny a deduction for distributions treated as an expense pursuant to Article 3.2.10.

Article 3.2.11

145. Article 3.2.11 requires adjustments to a Constituent Entity’s Financial Accounting Net Income or Loss where necessary to reflect the requirements of Chapters 6 and 7. For example, if a Constituent Entity is required to use the historical carrying value of an asset pursuant to Article 6.2 and it used the fair value of that asset to computed its depreciation expense for the Fiscal Year, it must adjust the depreciation expense to the amount that would have been computed using the historical carrying value of the asset.