Article 4.5. – The GloBE Loss Election

Article 4.5 provides an elective rule to effectively carry GloBE losses forward with a deemed deferred tax asset. When elected, Article 4.5 applies in lieu of the Article 4.4 modified deferred tax accounting rules. Accordingly, Article 4.5 is generally expected to be of greatest utility as a simplification in jurisdictions that do not impose a corporate income tax or impose one at a very low rate given that when the election is made, Article 4.4 no longer applies and temporary differences may result in Top-up Tax. However, the election may be made for any jurisdiction.

4.5.1. In lieu of applying the rules set forth in Article 4.4, a Filing Constituent Entity may make a GloBE Loss Election for a jurisdiction. When a GloBE Loss Election is made for a jurisdiction, a GloBE Loss Deferred Tax Asset is established in each Fiscal Year in which there is a Net GloBE Loss for the jurisdiction. The GloBE Loss Deferred Tax Asset is equal to the Net GloBE Loss in a Fiscal Year for the jurisdiction multiplied by the Minimum Rate.

4.5.2. The balance of the GloBE Loss Deferred Tax Asset is carried forward to subsequent Fiscal Years, reduced by the amount of GloBE Loss Deferred Tax Asset used in a Fiscal Year.

4.5.3. The GloBE Loss Deferred Tax Asset must be used in any subsequent Fiscal Year in which there is Net GloBE Income for the jurisdiction in an amount equal to the lower of the Net GloBE Income multiplied by the Minimum Rate or the amount of available GloBE Loss Deferred Tax Asset.

4.5.4. If the GloBE Loss Election is subsequently revoked, any remaining GloBE Loss Deferred Tax Asset is reduced to zero, effective as of the first day of the first Fiscal Year in which the GloBE Loss Election is no longer applicable.

4.5.5. The GloBE Loss Election must be filed with the first GloBE Information Return of the MNE Group that includes the jurisdiction for which the election is made. A GloBE Loss Election cannot be made for a jurisdiction with an Eligible Distribution Tax System as defined in Article 7.3.

4.5.6. A Flow-through Entity that is a UPE of an MNE Group may make a GloBE Loss Election under this Article. When such an election is made, the GloBE Loss Deferred Tax Asset shall be calculated in accordance with Articles 4.5.1 to 4.5.5, however, the GloBE Loss Deferred Tax Asset shall be calculated with reference to the GloBE Loss of the Flow-through Entity after reduction in accordance with Article 7.1.2.

Articles 4.5.1 to 4.5.3

114. Article 4.5.1 establishes a deemed deferred tax asset at the Minimum Rate when there is a Net GloBE Loss for a jurisdiction in a Fiscal Year. This GloBE Loss Deferred Tax Asset may be carried forward under Article 4.5.2 and used in any subsequent Fiscal Year in which there is GloBE Income for the jurisdiction under Article 4.5.3. When a GloBE Loss Deferred Tax Asset is used in a subsequent Fiscal Year, the amount of GloBE Loss Deferred Tax Asset is added to Covered Taxes under Article 4.1.2. For example, if a Constituent Entity is located in a country that does not impose a CIT, an election under Article 4.5 would provide a GloBE Loss attribute at the Minimum Rate for economic losses incurred that otherwise would not have a corresponding deferred tax asset due to the lack of a domestic CIT. While Article 4.5 provides for an indefinite carry-forward, domestic law in certain circumstances may limit the practical application of the GloBE Loss DTA after a certain period of time. For example, a jurisdiction may prevent a taxpayer from claiming the benefit of a carry-forward loss unless they can meet certain record keeping and evidential requirements.

Article 4.5.4

115. Article 4.5.4 sets out the transition rule that is applicable if the GloBE Loss Election is subsequently revoked. This article requires that any remaining GloBE Loss Deferred Tax Asset be reduced to zero upon transition. This adjustment is required because when a jurisdiction is transitioned to the modified deferred tax accounting method set out in Article 4.4, the historic deferred tax assets and liabilities will be taken into account as if they had been calculated under Articles 4.4 and 9.1 for the prior Fiscal Years. Allowing the GloBE Loss Deferred Tax Asset to be carried forward into these subsequent Fiscal Years would potentially permit double benefit for losses and other distorted outcomes.

Article 4.5.5

116. Article 4.5.5 provides that the GloBE Loss Election must be filed with the GloBE Information Return of the MNE Group filed for the first Fiscal Year in which the MNE Group has a Constituent Entity located in the jurisdiction for which the election is made and that such election cannot be made for a jurisdiction with an Eligible Distribution Tax System as defined in Article 7.3. Because the GloBE Loss Election can only be filed with the first GloBE Information Return of the MNE Group that includes the jurisdiction for which the election is made, the GloBE Loss Election is an election that may only be made once. This rule is required to limit the applicability of Article 4.5.1 such that it provides a relief mechanism or simplification for jurisdictions where an MNE Group decides that an election is necessary, but also does not allow for manipulation or distortions by shifting into and out of the election over time. Further, permitting a deemed deferred tax asset for losses in jurisdictions with an Eligible Distribution Tax System as defined in Article 7.3 would result in an overstated ETR in such jurisdictions, given that distribution tax is only applicable when positive earnings are distributed.

117. Because the GloBE Loss Deferred Tax Asset is a jurisdictional attribute of the MNE Group, pursuant to Article 6.2.1(f), it does not transfer with a Constituent Entity in the event such entity leaves the MNE Group. Accordingly, when a Constituent Entity has been acquired from another MNE Group, whether such MNE Group has or has not made a GloBE Loss Election will not be relevant or taken into account for purposes of the acquiring MNE Group. Note that to the extent all Constituent Entities in a jurisdiction are transferred, the GloBE Loss Deferred Tax Asset remains with the transferor MNE Group despite the fact that it no longer has Constituent Entities in such jurisdiction. For example, MNE Group 1 has made a GloBE Loss Election with respect to Country A and then sells Constituent Entity Z, which is located in Country A, to MNE Group 2. MNE Group 2 will not acquire any GloBE Loss Deferred Tax Asset with respect to the acquisition of Constituent Entity Z and the GloBE Loss Election made by MNE Group 1 has no impact on MNE Group 2. MNE Group 2 may still elect the GloBE Loss Election for Country A with its first GloBE Information Return that includes Country A if it so desires.

Article 4.5.6

118. Article 4.5.6 provides a special rule for Flow-through Entities that are the UPE of an MNE Group that is made independently of an Article 4.5 election for any jurisdiction. Such entities may make a GloBE Loss Election under Article 4.5 and when the election is made, the GloBE Loss Deferred Tax Asset is calculated for the UPE in accordance with Articles 4.5.1 through 4.5.5. This special GloBE Loss Deferred Tax Asset is calculated solely with reference to the GloBE Loss of the Flow-through Entity after reduction in accordance with Article 7.1.2 to ensure losses that flow through to share-holders are not double counted. This GloBE Loss remains with the Flow-through Entity that is a UPE and can only be used to offset future GloBE Income of such UPE. Accordingly, because other entities are not aggregated with the Flow-through Entity that is a UPE for purposes of calculating the GloBE Loss, this election is made with respect to only the Flow-through Entity that is the UPE. Note that other entities are not aggregated with the Flow-through Entity that is a UPE even if a GloBE Loss Election has been made for the jurisdiction in which the UPE is located.

No examples have been published by the OECD regarding this article.

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