Article 6.2.1

47. The rules of Article 6.2.1 apply to all Constituent Entities that leave or join an MNE Group as a result of a direct or indirect disposition or acquisition of a Controlling Interest in that Entity. Accordingly, the term “target” as used in the Commentary to this Article refers to all such Entities.

Paragraph (a)

48. Paragraph (a) confirms that the target will be treated as a Constituent Entity of both the acquiring and disposing MNE Group notwithstanding that its financial performance for the entire Fiscal Year is not consolidated on a line-by-line basis. Paragraph (a) follows the accounting treatment such that if any portion of the target’s assets, liabilities, income, expenses and cash flows are included in the UPE’s Consolidated Financial Statements in the acquisition year, then it will be treated as a member of the MNE Group for that year. In practice, if an MNE Group disposes a Controlling Interest in a Constituent Entity during a Fiscal Year, it is likely that a portion of its income and expenses would be included in the Consolidated Financial Statements of the disposing MNE Group based on the period in which the Constituent Entity was a member of the Group. Similarly, it is likely that all of the Constituent Entity’s assets and liabilities would be included in the Consolidated Financial Statements of the acquiring MNE Group and a portion of its income, expenses, and cash flows would be included based on the period in which the Constituent Entity was a member of the Group. The remaining paragraphs of Article 6.2 set out specific rules designed to ensure an equitable apportioning of tax outcomes and tax attributes between the two MNE Groups.

Paragraph (b)

49. Paragraph (b) states that in the acquisition year, the amount of Financial Accounting Net Income or Loss and the amount of Adjusted Covered Taxes taken into account for calculating a GloBE tax liability for each MNE Group, shall be the amount that is taken into account in the Consolidated Financial Statements of each MNE Group. This approach follows the general approach adopted by the GloBE Rules of relying on the amounts reflected in the financial accounts that are used for the preparation of the Consolidated Financial Statements.

Paragraph (c)

50. Under Article 6.2.1(c), an MNE Group that acquires a Controlling Interest in a Constituent Entity will ignore the effect of any purchase accounting consolidation adjustments attributable to the acquisition and treat the acquired target, for GloBE purposes, as having the same carrying value in its assets that it has prior to the transfer (i.e. the historical carrying value). In other words, the acquisition of a Controlling Interest in a target does not result in any change to the carrying value of the target’s assets and liabilities for the purposes of determining GloBE Income or Loss. Moreover, any adjustment to the carrying value of intangible assets that results from the acquisition, such as goodwill, customer lists, or workforce-in-place, are ignored in the computation of GloBE Income or Loss. Denying a step-up in the target’s inside basis in its assets and liabilities matches the treatment of the seller and purchaser under the GloBE Rules and ensures that gains or losses on the assets and liabilities of a Constituent Entity are not permanently excluded from taxation under the GloBE Rules by virtue of a transfer of its Ownership Interests. Paragraph (c) is also expected to align outcomes under the GloBE rules with those provided under the domestic laws of most Inclusive Framework jurisdictions and avoid potential differences in treatment across financial accounting standards.

51. This rule is consistent with the prohibition on taking into account purchase accounting adjustments in the computation of GloBE Income or Loss under Article 3.2 and applies irrespective of whether the Controlling Interest was acquired before or after the applicability date of the GloBE Rules. Where the financial accounting standard used by the UPE in preparing its Consolidated Financial Statements permit the UPE to “push down” adjustments to the carrying value of assets and liabilities that were attributable to a purchase of a business to the separate accounts of the acquired Constituent Entity, the Constituent Entity may use the carrying value reflected in its separate accounts if the acquisition occurred prior to 1 December 2021 and the MNE Group does not have sufficient records to determine its Financial Accounting Net Income or Loss with reasonable accuracy based on the unadjusted carrying values of the acquired assets and liabilities. In such cases, however, the Constituent Entity must also take into account any deferred tax assets and liabilities arising in connection with the purchase in the computation of its Financial Accounting Net Income or Loss and its Adjusted Covered Taxes.

Paragraph (d)

52. The Substance-based Income Exclusion is computed for each Constituent Entity under Article 5.3 by aggregating a percentage of Eligible Payroll Costs and Eligible Tangible Assets. Paragraphs (d) and (e) adjust the determination of Eligible Payroll Costs and Eligible Tangible Assets in the case of a target that is acquired or disposed part way through the Fiscal Year. Without such a rule, the Substance-based Income Exclusion calculated for the acquiring and disposing MNE Groups could take into account expenses and costs that were incurred prior to, or after, the target was a member of the MNE Group, possibly duplicating the effect of the expenses and costs.

53. Paragraph (d) states that the amount of Eligible Payroll Costs referred in Article 5.3.3 shall be adjusted by taking into account only the costs that are reflected in the Consolidated Financial Statements prepared by the UPE of the MNE Group. Thus, each MNE Group takes into account the Eligible Payroll Costs arising during its period of ownership and that it bears economic responsibility for.

Paragraph (e)

54. Paragraph (e) provides that the amount of the Eligible Tangible Assets referred in Article 5.3.4 shall be adjusted proportionally to correspond to the length of the period during the Fiscal Year that the target was a Constituent Entity of the MNE Group. The carrying value of the Eligible Tangible Assets is determined based on the amount recorded for the purpose of preparing the Consolidated Financial Statements, including any purchase accounting consolidation adjustments attributable to the acquisition. This means that the acquisition of a Controlling Interest in a target will result in a step-up in a target’s inside basis in its assets for the purposes of the Substance-based Income Exclusion, notwithstanding that it does not produce a similar step-up for the purposes of calculating GloBE Income or Loss. The difference in treatment between paragraphs (d) and (e) can be explained on the grounds that the tangible asset carveout is based on the economic cost of the investment made by the MNE Group in the tangible asset located in the relevant jurisdiction which is more accurately determined by looking to the fair value of that asset at the time of acquisition than the historical cost of that asset as recorded by the target.

Paragraphs (f) and (g)

55. Paragraph (f) generally provides that deferred tax assets and liabilities of a Constituent Entity that are transferred between MNE Groups are taken into account by the acquiring MNE Group in the same manner and to the same extent as they would have been taken into account if the acquiring MNE Group had controlled the Constituent Entity when they arose. Thus, if the acquiring MNE Group acquires a deferred tax liability that qualifies as a Recapture Exception Accrual, Article 4.4.4 does not apply to that deferred tax liability. On the other hand, if the deferred tax liability does not fall within the Recapture Exception Accruals, it will be subject to recapture under Article 4.4.4, after taking into account the rule in paragraph (g) related to the recapture period for acquired deferred tax liabilities. Whether a deferred tax asset or liability is transferred depends on its treatment under the applicable financial accounting standard. This accounting treatment will depend in large part on how the tax laws of the jurisdiction allocate the relevant items of deferred income and expense between the disposing and acquiring MNE Groups.

56. The exception to paragraph (f) is the GloBE Loss Deferred Tax Asset. Ordinary deferred tax assets and liabilities arise with respect to specific Constituent Entities and are accounted for accordingly. They feed into the computation of the Constituent Entity’s Total Deferred Tax Adjustment Amount under Article 4.4.1. A GloBE Loss Deferred Tax Asset, on the other hand, arises in connection with a GloBE Loss Election under Article 4.5 with respect to a particular jurisdiction. It is an attribute that arises pursuant to an election under the GloBE Rules, but is not found in the Constituent Entity’s or the MNE Group’s financial accounts. Because the GloBE Loss Deferred Tax Asset arises in respect of a Net GloBE Loss in a particular jurisdiction of the MNE Group that makes the election, it is considered a jurisdictional attribute of the electing MNE Group, rather than an attribute of the Constituent Entities located in the jurisdiction and cannot be transferred to another MNE Group. Accordingly, Article 6.2.1(f) does not apply to a GloBE Loss Deferred Tax Asset.

57. Paragraph (g) is intended to relieve the disposing MNE Group of the need to recapture deferred tax liabilities that do not reverse (through payment or otherwise) within the five-year period required by Article 4.4.4. This is achieved by treating any deferred tax liability of a Constituent Entity that leaves an MNE Group as reversed when the Entity leaves the MNE Group. The paragraph also starts, or re-starts the five-year period in Article 4.4.4 with respect to deferred tax liabilities of a Constituent Entity when it joins an MNE Group. By re-starting the five-year period in Article 4.4.4, paragraph (g) reduces compliance and administrative burdens that would arise if the deferred tax liabilities were subject to recapture based on their accrual dates in the disposing MNE Group. Thus, a Constituent Entity that leaves one MNE Group and joins another MNE Group will not be required to recapture any deferred tax liabilities under Article 4.4.4 when it leaves the first MNE Group and will start a new five-year period under Article 4.4.4 for all of its deferred tax liabilities when it joins the second MNE Group. Paragraph (g) does not apply to Recapture Exception Accruals described in Article 4.4.5 because they are not subject to the requirements of Article 4.4.4 before or after the acquisition date.

58. Paragraph (g) also modifies the process for handling deferred tax liabilities that do not reverse within the five-year period after the date of acquisition. This is necessary because the normal rule under Article 4.4.4 invokes the procedures of Article 5.4.1, which requires a re-calculation of the ETR and Topup Tax for the year in which the liability first accrued. The acquiring MNE Group did not perform an original calculation of the ETR and Top-up Tax for the relevant year based on the deferred tax liabilities of the acquired Constituent Entity and thus Article 5.4.1 does not function properly in this context. Accordingly, when an acquired deferred tax liability fails to reverse before the end of the fifth Fiscal Year after the acquisition date, paragraph (g) reduces Covered Taxes in that Fiscal Year. To the extent Covered Taxes in a jurisdiction in that Fiscal Year are negative as a result of this reduction, Additional Current Top-up Tax may result from the application of Article 4.1.5 if the other conditions for applying Article 4.1.5 are met.

59. As explained at the beginning of this chapter, deferred tax assets and liabilities arising in connection with a business combination generally are not taken into account under the GloBE Rules because the purchase accounting adjustments to the carrying value of assets and liabilities are not taken into account in the computation of GloBE Income or Loss (subject to exceptions for Articles 6.2.2, 6.3.1, 6.3.3, and 6.3.4 noted in the discussion of purchase accounting at the beginning of this chapter).2 Where the deferred tax assets and liabilities arising in connection with a business combination are not taken into account under the GloBE Rules, the deferred tax assets and liabilities referred to in Article 6.2.1 (f) and (g) refer to the deferred tax assets and liabilities of an acquired Constituent Entity that existed before the Constituent Entity joined the MNE Group, i.e pre-acquisition deferred tax assets and liabilities.

60. However, in any case where the adjusted carrying value of assets and liabilities is used for purposes of determining the GloBE Income or Loss, any deferred tax assets and liabilities arising in connection with the acquisition of those assets and liabilities should be taken into account under the GloBE Rules. In such cases, deferred tax liabilities are treated as arising in the Fiscal Year that includes the acquisition date for purposes of applying Article 4.4.4. Deferred tax liabilities that meet the definition of a Recapture Exception Accrual in Article 4.4.5 will not be subject to recapture under Article 4.4.4. The exception in Article 4.4.5(e) for deferred tax liabilities in respect of fair value accounting on unrealised net gains, however, does not provide a blanket exception for deferred tax liabilities attributable to a business combination. That exception applies to deferred tax liabilities in respect of unrealised net gains on assets and liabilities that are regularly accounted for using a fair value method, such as marketable securities. Thus, if a deferred tax liability arises in respect of a purchase accounting adjustment to the carrying value of an asset or liability that will be accounted for using a fair value method after the transaction, Article 4.4.5(e) applies to that deferred tax liability. However, if the deferred tax liability arises in respect of inventory that is accounted for using a cost method or a marketing intangible asset, the deferred tax liability does not qualify as Recapture Exception Accrual.

Paragraph (h)

61. Paragraph (h) deals with the situation in which the target is required to apply the IIR as a Parent Entity of one or both MNE Groups. Paragraph (h) provides that the target shall apply the IIR separately to its Allocable Shares of the Top-up Tax of LTCEs determined for each MNE Group. Thus, this rule applies where the target has an Ownership Interest in an LTCE and is a Parent Entity required to apply the IIR under the top-down approach or split-ownership rules applicable to one or both MNE Groups.

62. The determination of whether a Constituent Entity in which the target has an Ownership Interest is an LTCE must be made separately with respect to both the MNE Group that the target left and the MNE Group that the target joined. Whether a Constituent Entity in which the target has an Ownership Interest is an LTCE is determined based on jurisdictional blending which means that the taxes and income of other Constituent Entities owned by each MNE Group that are located in the same jurisdiction as the target will impact on the jurisdictional ETR and therefore whether the target is considered to have an Ownership Interest in an LTCE. In fact, the same Constituent Entity could be an LTCE of the disposing MNE Group but not an LTCE of the acquiring MNE Group, or vice-versa. This could occur, for example, because one MNE Group has high-taxed Constituent Entities located in the same jurisdiction sheltering the low-tax outcome of the target. This outcome is consistent with the policies or principles underlying the GloBE Rules because the tax attributes of the Constituent Entities would be subject to two different computations for each of the MNE Groups involved.

63. Similarly, whether the target is a Parent Entity required to apply the IIR must be determined based on the facts of each MNE Group. If the target is an Intermediate Parent Entity and the UPEs of the MNE Groups involved are located in a jurisdiction with a Qualified IIR, the target would not be required to apply the IIR under Article 2.1.3(a). However, if only one of the UPEs is located in a jurisdiction with a Qualified IIR, then the target may be required to apply the IIR with respect to the MNE Group whose UPE is not subject to the IIR. Stated differently, Article 2.1.3(a) deactivates the IIR applicable to the target in the case of the MNE Group whose UPE is subject to a Qualified IIR, but not in the case of the MNE Group whose UPE is not subject to a Qualified IIR. If both UPEs are not located in a jurisdiction with a Qualified IIR, then the target may be required to apply the IIR with respect to each MNE Group based on its Allocable Share of the Top-up Tax, if any, computed with respect to the LTCE by each MNE Group.

Article 6.2.2

64. Article 6.2.2 provides for an exception to Article 6.2.1 aimed at providing consistent treatment of an acquisition and disposition of assets and liabilities for GloBE purposes, regardless of the form in which the transaction is undertaken. When Article 6.2.2 applies to a transaction, the seller is treated as selling its Ownership Interests and the gain or loss on that sale is excluded from Article 3.2.1(c) in the jurisdiction in which it is located. At the same time, the target is treated as selling its assets and liabilities to the acquiring MNE Group in exchange for the consideration received by the seller in a transaction that is subject to Article 6.3.1. The target’s gain or loss and Covered Taxes on the sale of its assets and liabilities are taken into account in computing its GloBE Income or Loss and Adjusted Covered Taxes and the disposing MNE Group’s ETR for the target’s jurisdiction for the Fiscal Year that includes the acquisition date. As a result of this treatment the gain or loss on the transfer that is treated as a sale of assets and liabilities of the target are included in the disposing MNE Group’s ETR computation for the jurisdiction that imposed that treatment for local tax purposes, rather than the jurisdiction of the seller of the Ownership Interests.

65. Article 6.2.2 applies to an acquisition (or disposition) of a Controlling Interest where the jurisdiction of the target Constituent Entity treats the transaction as an acquisition and disposition of the underlying assets and liabilities for tax purposes and imposes a Covered Tax on the gain or loss from the deemed disposition of assets by the seller. This provision includes situations where the target jurisdiction imposes a Covered Tax on the seller based on the difference between the tax basis of the assets and the tax amounts of the liabilities and the consideration paid or fair value.

66. A Controlling Interest is acquired when a Constituent Entity that was not in control of the target acquires Ownership Interests that give it control of the target. The rule in Article 6.2.2 does not require the Constituent Entity to acquire all of its Ownership Interests in the transaction in which it gains control. Thus, acquisition of an Ownership Interest, no matter how small, that combined with Ownership Interests already owned by the Constituent Entity may result in the Constituent Entity acquiring a Controlling Interest. Once a Constituent Entity has a Controlling Interest, acquisition of additional Ownership interests in the target are not acquisitions of a Controlling Interest. However, the tax laws of the target’s jurisdiction may treat a transaction as a sale of assets only when the control is acquired in a single or series of related transactions.

67. There are two conditions for Article 6.2.2 to apply. The first is that the jurisdiction of the target Constituent Entity treats the transaction as, or similar to, an acquisition or a disposal of the underlying assets and liabilities for tax purposes. This condition includes situations where, on acquisition of a Controlling Interest in the target Constituent Entity, for tax purposes, the jurisdiction of the target Constituent Entity recognises the assets and liabilities of that Constituent Entity as forming part of another Constituent Entity located in that jurisdiction because the target has become a member of a tax consolidated group.

68. The second condition is that the jurisdiction of the target Constituent Entity imposes a Covered Tax on the seller based on the difference between the tax basis of the underlying assets and amount of the underlying liabilities and the consideration received in exchange for the Controlling Interest, or the difference between that tax basis and fair value of the assets and liabilities. The second condition is met in situations where the target jurisdiction imposes a Covered Tax on the seller based on the difference between the consideration received by the seller and the tax basis of the target’s underlying assets and liabilities. The second condition can also be met where the target jurisdiction imposes a Covered Tax on the seller based on the difference between the fair value of the underlying assets and liabilities and the target’s tax basis therein. In sum, the Covered Tax must be based on a gain that is determined by reference to the “inside basis” of the target’s assets and liabilities.