Article 5.5.1

Effects of the de minimis exclusion

75. Article 5.5.1 provides that the Top-up Tax for the Constituent Entities located in a jurisdiction shall be deemed to be zero for a given Fiscal Year when all Constituent Entities located in the same jurisdiction meet the requirements for the de minimis exclusion.

76. Article 5.5.1 further provides that this exclusion applies notwithstanding the requirements otherwise provided in Chapter 5, such as the requirement to determine the ETR of a jurisdiction and compute the Top-up Tax due, if any. This means that there is no need for the MNE Group to compute the ETR of the Constituent Entities that are located in the jurisdiction that meets the de minimis thresholds and no need to calculate the amount of Top-up Tax that would have been due if the exclusion did not apply.

77. The exclusion applies on an annual basis. This means that a jurisdiction can fall under the de minimis exclusion for a given Fiscal Year, but not necessarily for the preceding or the following year. If a Constituent Entity was located in a jurisdiction to which Article 5.5.1 applied the first year when the MNE is subject to the GloBE Rules, the Transition Rules provided in Article 9.1 shall apply to such Constituent Entity at the beginning of the first Fiscal Year for which Article 5.5.1 does not apply to the jurisdiction. If a Constituent Entity was located in a jurisdiction to which Article 5.5.1 starts to apply one or several Fiscal Years after the MNE is subject to the GloBE Rules, the Filing Constituent Entity may nevertheless still be subject to filing obligations under the GloBE Rules during the Fiscal Year(s) where the de minimis exclusion applies (e.g. to ensure that an earlier deferred tax liability reversed within the required timeframe).

78. The exclusion applies to all Constituent Entities of an MNE Group that are located in the same jurisdiction, unless those Entities are not eligible for the exclusion such as Investment Entities. This means that a jurisdiction can be treated as a de minimis jurisdiction for a given Fiscal Year for a given MNE Group but not for another MNE Group.

Elective exclusion

79. Article 5.5.1 applies at the election of the Filing Constituent Entity. As provided in Article 8.1.4 (b), the Filing Constituent Entity shall elect and provide the relevant information in its GloBE Information Return showing that the required conditions are met to benefit from the exclusion. This election is an annual election.

Conditions for the exclusion

80. Article 5.5.1 provides two conditions for a jurisdiction to be eligible for the de minimis exclusion. The first condition requires the Average GloBE Revenue of the MNE Group in that jurisdiction to be less than EUR 10 million, while the second condition requires the Average GloBE Income or Loss of the MNE Group in that jurisdiction to be a loss or less than EUR 1 million. Both the Average GloBE Revenue and Average GloBE Income are determined by applying the same rules used to compute the GloBE Income of a jurisdiction, as provided in Article 5.5.3.

81. The two conditions provided in Article 5.5.1 are aggregate and cumulative. This means that the income and revenues of all Constituent Entities located in the same jurisdiction must be aggregated for the purposes of the de minimis exclusion and if, for a Fiscal Year, the aggregate outcome for those Constituent Entities fail to meet one of the two conditions, the jurisdiction is not eligible for the de minimis exclusion for that Fiscal Year. As provided in Article 5.5.2, the relevant elements used for purposes of this exclusion are computed by using an average, which should minimise the volatility and the risk that a jurisdiction’s eligibility for the de minimis exclusion varies from one year to the next.

82. Article 5.5.1 further provides that the election applies notwithstanding the requirements otherwise provided in Chapter 5. This means that the election available in Article 5.5.1 does not require the MNE Group to compute the Average GloBE Revenue and Average GloBE Income or Loss of the members of a Minority-Owned Subgroup as if they were a separate MNE Group or of a Minority-Owned Constituent Entity on an entity basis. Therefore, the GloBE Revenue and the GloBE Income or Loss of those entities is taken into account for purposes of determining the Average GloBE Revenue and the Average GloBE Income or Loss of the jurisdiction where they are located.

83. The two conditions provided in Article 5.5.1 are denominated in the Euro currency. Like the revenue threshold, this may require the MNE Group to convert its revenue and income into Euros and may require a jurisdiction that measures the de minimis conditions in local currency to re-base the de minimis threshold amounts on a yearly basis to align with the references provided in the GloBE Rules. Where the threshold is determined in a currency different to the presentation currency of the Consolidated Financial Statements, MNE Groups should translate the relevant amounts based on the average exchange rate of December for the calendar year immediately preceding the commencement of the MNE Group’s Fiscal Year.

Article 5.5.2

84. Article 5.5.2 provides that the GloBE Revenue and the GloBE Income or Loss of a jurisdiction shall be averaged for purposes of testing whether a jurisdiction meets the criteria for the de minimis exclusion. For each of those indicators, Article 5.5.2 provides that the values of the current Fiscal Year (whether income or loss) shall be averaged with that of the preceding two Fiscal Years for purposes of testing whether the jurisdiction is below the threshold. Using a three-year average is intended to simplify both compliance with the rule by MNE Groups and administration of the rule by tax authorities. It is, however, acknowledged that the average may result in volatile outcomes where a Fiscal Year with a significant amount of income (or loss) drops out of the three-year average.

85. To avoid skewing the computation of the average, the second sentence of Article 5.5.2 provides that some Fiscal Years shall be excluded from the computation of the Average GloBE Revenue and the Average GloBE Income or Loss when there are no Constituent Entities with either GloBE Revenue or GloBE Losses (in the absence of revenue) that were located in the jurisdiction for that Fiscal Year. This applies when there are no Constituent Entities located in the jurisdiction for a given Fiscal Year. It can also arise when there are only dormant Constituent Entities located in the jurisdiction. Before the GloBE Rules come into effect, there are also no Constituent Entities with GloBE Revenue or GloBE Income or Loss in any jurisdiction. This means that if, for instance, the Constituent Entities located in a given jurisdiction have an aggregate GloBE Income that equals or exceeds EUR 1 million for the first year when the GloBE Rules apply, the determination will be based solely on the revenue, income and loss of that year and the jurisdiction will not benefit from the de minimis exclusion for that year.

86. The computation of the average provided under Article 5.5.2 relies on the assumption that Fiscal Years have the same duration. If one Fiscal Year is shorter, taking into account the GloBE Revenue or the GloBE Income or Loss of that year as if it accounted for the entire year would also skew the results. In such a case, the average shall be computed by adjusting the corresponding revenue and income (or loss) calculations in proportion to the period covered by the short Fiscal Year over a calendar year, in order to obtain an annual GloBE Revenue and GloBE Income or Loss for purposes of the computation.

Article 5.5.3

87. Article 5.5.3 provides the definitions of GloBE Revenue of a jurisdiction and GloBE Income or Loss of a jurisdiction that are used for purposes of Article 5.5.2.

(a) GloBE Revenue of a Jurisdiction

88. Paragraph (a) provides that the GloBE Revenue of a jurisdiction is the sum of the revenue of all Constituent Entities located in the jurisdiction for a Fiscal Year, taking into account the adjustments calculated in accordance with Chapter 3. Chapter 3 provides the methodology for computing the GloBE Income or Loss of a Constituent Entity. Article 3.1 provides that the starting point for determining the GloBE Income or Loss of a Constituent Entity is the Financial Accounting Net Income or Loss determined for that Constituent Entity. Similarly, the starting point for determining the revenue of a Constituent Entity is the financial accounting revenue used in preparing the Consolidated Financial Statements, unless another Accounting Standard is applied, as provided in Article 3.1.3.

89. Chapter 3 provides the adjustments that shall apply to determine the GloBE Income or Loss of a Constituent Entity. Only the adjustments that affect the amount of the revenue of a Constituent Entity shall be taken into account for computing the GloBE Revenue of a jurisdiction. A number of adjustments provided in Chapter 3 may affect the amount of revenue of a Constituent Entity. For example, depending upon the treatment of the following items in the financial accounts, the adjustments required by Article 3.2 in respect thereof may affect the amount of revenue:

• the adjustments provided for in Article 3.2.2, under paragraphs (b) (Excluded Dividends), (c) (Excluded Equity Gain or Loss), (d) (Included Revaluation Method Gain or Loss), (e) (Gain or loss from disposition of assets and liabilities excluded under Article 6.3.), (f) (Asymmetric Foreign Currency Gain or Loss) or (h) (Prior Period Errors and Changes in Accounting Principles);
• the rule provided in Article 3.2.3 in situations where transactions between Constituent Entities form part of the revenue of a Constituent Entity;
• the rule provided in Article 3.2.4 concerning refundable tax credits;
• the elective adjustments provided in Article 3.2.5 and Article 3.2.6 relating to gains or losses in respect of an asset for which the Constituent Entity uses fair value or impairment accounting
• the elective treatment of income and gains from transactions between Constituent Entities that are located in the same jurisdiction as provided in Article 3.2.8;
• the rule provided in Article 3.2.9 applicable to insurance companies;
• amounts recognised as an increase to the equity of a Constituent Entity attributable to distributions received or receivable in respect of Additional Tier One Capital held by the Constituent Entity as provided in Article 3.2.10;
• the rules referred to in Article 3.2.11 (referring to provisions of Articles 6 and 7) to the extent they affect the amount of the revenue of a Constituent Entity;
• the exclusion provided in Article 3.3 in relation to International Shipping Income or loss and Qualified Ancillary International Shipping Income;
• the rules provided in Article 3.4 (Allocation of Income or Loss between Main Entity and PE) to the extent they affect the amount of the revenue of a Constituent Entity; and
• the rules provided in Article 3.5 (Allocation of Income or Loss from a Flow-through Entity) to the extent they affect the amount of the revenue of a Constituent Entity.

90. On the other hand, Chapter 3 also provides a number of adjustments that relate to expenses only, and therefore are unlikely to affect the amount of the revenue of a Constituent Entity. These adjustments shall not be taken into account in determining the GloBE Revenue of a jurisdiction. This is the case for:

• the adjustments provided in Article 3.2.2, under paragraphs (a) (Net Taxes Expense), (g) (Policy Disallowed Expenses) or (i) (Accrued Pension Expense);
• the elective adjustment provided in Article 3.2.2 that relates to the amount of the stock-based compensation expense;
• the rule provided under Article 3.2.7 in relation to the expenses accrued in respect of a liability to another Constituent Entity;
• amounts recognised as a decrease to the equity of a Constituent Entity attributable to distributions paid or payable in respect of Additional Tier One Capital issued by the Constituent Entity as provided in Article 3.2.10;
• the rules referred to in Article 3.2.11 (referring to provisions of Articles 6 and 7) to the extent they do not affect the amount of the revenue of a Constituent Entity;
• the exclusion provided in Article 3.3.5 that relates to the expenses attributed to the International Shipping Income or Qualified Ancillary International Shipping Income;
• the rules provided in Article 3.4 (Allocation of Income or Loss between Main Entity and PE) to the extent they do not affect the amount of the revenue of a Constituent Entity; and
• the rules provided in Article 3.5 (Allocation of Income or Loss from a Flow-through Entity) to the extent they do not affect the amount of the revenue of a Constituent Entity.

(b) GloBE Income or Loss of a Jurisdiction

91. Paragraph (b) provides that the GloBE Income or Loss of a jurisdiction is the Net GloBE Income of that jurisdiction, if any, or the Net GloBE Loss of that jurisdiction. The Net GloBE Income of a jurisdiction is defined in Article 5.1.2 as the positive amount, if any, that is computed as the difference between the sum of the GloBE Income of all Constituent Entities and the sum of the GloBE Losses of all Constituent Entities, where both elements are determined in accordance with the rules provided in Chapter 3. If this difference is nil or negative, the outcome is a loss and that is the Net GloBE Loss of a jurisdiction.

Post-filing ETR Adjustments

92. The GloBE Revenue and the GloBE Income or Loss of a jurisdiction are computed for each Fiscal Year to determine whether the de minimis exclusion applies. An ETR Adjustment Article may apply in a subsequent year such that the Effective Tax Rate of a jurisdiction for a previous Fiscal Year is required or permitted to be recalculated, which may also require the re-computation of the GloBE Income or Loss of that jurisdiction for that Fiscal Year or any intervening Fiscal Years. When the GloBE Income or Loss is adjusted under an ETR Adjustment Article, the GloBE Revenue shall also be adjusted as appropriate and necessary. Adjustments that reduce GloBE Income and/or GloBE Revenue for a previous Fiscal Year will not make a jurisdiction eligible for the de minimis exclusion in a previous Fiscal Year. However, adjustments that increase the GloBE Income and/or the GloBE Revenue of the jurisdiction may result in the Average GloBE Income or the Average GloBE Revenue of the jurisdiction no longer being below the threshold for the de minimis exclusion for a previous Fiscal Year or Years. In such a case, Article 5.5 is no longer applicable for the relevant Fiscal Year or Years and the Filing Constituent Entity must provide the relevant information required in the GloBE Information Return with respect to that jurisdiction for those Fiscal Years, without applying Article 5.5.

93. For instance, in the case of a re-calculation pursuant to Article 3.2.6, the GloBE Revenue for a previous Fiscal Year shall be increased by the amount of Aggregate Asset Gain set-off against a Net Asset Loss for the year under paragraphs (b) or (c) and the amount allocated to the year under paragraph (d). Another example is Article 4.6.1 which addresses post-filing adjustments provides that the ETR is recomputed for a previous Fiscal Year when post-filing adjustments result in a reduction of the Effective Tax Rate for that year. Those adjustments also require re-computing the GloBE Income of that Fiscal Year and the intervening Fiscal Years, as necessary and appropriate. In circumstances where the GloBE Income would need to be increased for those Fiscal Years where post-filing adjustments result in a reduction of the Effective Tax Rate, this may have an impact on the de minimis exclusion. If the adjusted GloBE Income results in the Average GloBE Income exceeding the EUR 1 million threshold that provided in Article 5.5.1 for any Fiscal Year, the de minimis exclusion would not be applicable for those years.

Changes in the Scope of the MNE Group

94. As mentioned previously, the GloBE Revenue and the GloBE Income or Loss of a jurisdiction is determined in accordance with the principles and adjustments provided in Chapter 3, which provides the methodology for computing the GloBE Income or Loss of a Constituent Entity, the starting point being the financial accounts used in preparing the Consolidated Financial Statements. This means that the determinations of GloBE Revenue and GloBE Income or Loss of a jurisdiction under Article 5.5.3 are not adjusted to take into account periods when a Constituent Entity does not belong to the MNE Group and are limited based on whether an Entity was a Constituent Entity of the MNE Group in the previous Fiscal Years. Thus, if an MNE Group acquires Entities in a merger, the GloBE Revenue and GloBE Income or Loss of those Entities determined for periods prior to the merger are not taken into account for purposes of determining the three-year averages under Article 5.5.3. Similarly, if a Constituent Entity leaves the MNE Group, the GloBE Revenue and GloBE Income or Loss of that Entity determined for periods prior to the disposition of that Constituent Entity are still taken into account for purposes of determining the three-year averages under Article 5.5.3.

Article 5.5.4

95. Article 5.5.4 provides that an election under Article 5.5 shall not apply to Stateless Constituent Entities. Equally, Article 5.5.4 further provides that an election under Article 5.5 shall not apply to a Constituent Entity that is an Investment Entity. The policy intent underlying the de minimis exclusion is to avoid the complexities of determining the Adjusted Covered Taxes for the ETR and Top-up Tax calculations where the potential amount of Top-up Tax does not seem to justify the compliance and administrative burden. The election is not applicable to these Constituent Entities because their ETR is computed on an Entity basis and they are typically not subject to tax. Thus, because the ETR determined for these Entities will usually be zero and the Net GloBE Income or Loss for the jurisdiction must be determined in any case to apply the exclusion, applying the exception to these Entities would not produce a significant reduction in compliance burdens, but would instead encourage MNE Groups to separate its tax-exempt income into multiple Stateless Constituent Entities and Investment Entities that qualify for the de minimis exclusion.

96. Since Stateless Constituent Entities and Investment Entities are not eligible for the de minimis exclusion, their revenue and GloBE income are excluded from the De Minimis Exclusion computations in Article 5.5.3 for purposes of determining whether a jurisdiction is eligible for the de minimis exclusion so that such revenue or income will not cause a jurisdiction to fail the de minimis tests.