Article 6.3.1

71. Article 6.3.1 relates to an acquisition or disposition of assets and liabilities that is not part of a GloBE Reorganisation. The Article follows the accounting treatment for both the disposing Entity and the acquiring Entity. Financial accounting rules generally recognise a seller’s gain or loss on the disposition of assets and liabilities and require the acquirer to use the acquisition price, which is generally the fair value of the assets, to measure the assets and liabilities upon its acquisition. As such, for GloBE purposes, the disposing Entity must include gain or loss from the disposition of assets and liabilities in its computation of GloBE Income or Loss and the acquiring Entity must use the adjusted carrying value as determined under the financial accounting standard used in preparing the Consolidated Financial Statements of the UPE.

72. In a transfer to which Article 6.2.2 applies, the carrying value of the acquired assets and liabilities for GloBE purposes is based on their fair value to the extent gain or loss on those assets and liabilities was included in the GloBE Income or Loss computation of the selling MNE Group. The fair value must be used in the computation of the acquiring Entity’s computation of GloBE Income or Loss in the acquisition year and subsequent Fiscal Years irrespective of whether the fair value adjustments are reflected in the Entity’s financial accounts or the MNE Group’s consolidated financial accounts.

73. The acquiring Entity may be required under the applicable accounting standard to recognise assets and liabilities that were not recognised in the financial accounts of the disposing Entity, such as goodwill or other intangible assets. In addition, the acquiring Entity may be required to recognise bargain purchase gains under the applicable accounting standard. In such cases, amortisation of the intangible assets or the bargain purchase gain will be included in the computation of GloBE Income or Loss only to the extent included in the acquiring Entity’s Financial Accounting Net Income or Loss.

73.1 In a transaction between Constituent Entities of an MNE Group that is described in Article 6.3.1, the GloBE Income or Loss of the disposing Constituent Entity is determined in accordance with Article 3.2.3. The arm’s length principle under Article 3.2.3 applies irrespective of whether the MNE Group accounts for transactions between Constituent Entities at the disposing Constituent Entity’s carrying value rather than based on fair value. The Inclusive Framework will develop further guidance, including possible simplifications, for an acquiring Constituent Entity to avoid any possible double taxation attributable to the MNE Group’s accounting for intra-group transactions.

Article 6.3.2

74. Articles 6.3.2 sets out the general treatment of an acquisition or disposition of assets and liabilities as part of a GloBE Reorganisation. Article 6.3.2 aligns the GloBE Rules with the tax deferral treatment of reorganisations under domestic provisions. The requirements to qualify as a GloBE Reorganisation in paragraphs (b) and (c) of the definition relate to the tax treatment of the transformation or transaction under local tax law. These paragraphs consider the tax treatment of the transferor/disposing and transferee/acquiring entities and both paragraphs must be met for the transaction to qualify as a GloBE Reorganisation. Consistent treatment of the transferor/disposing and transferee/acquiring entities will ordinarily occur in a purely domestic transformation or transaction and may occur in a cross-border transformation or transaction. However, consistent treatment will not always occur in a cross-border transformation or transaction.

75. Article 6.3.2(a) provides that the disposing Constituent Entity will not recognise the gain or loss from the transfer of the assets and liabilities for GloBE purposes. Pursuant to Article 6.3.2(b) future profit or loss of the acquiring Constituent Entity will be determined on the basis of the historical carrying amounts of the acquired assets and liabilities. The Constituent Entity must maintain accounting records to support the computation of GloBE Income or Loss by reference to the historical carrying amounts of the acquired assets and liabilities.

Article 6.3.3

76. Article 6.3.3 addresses instances where a GloBE Reorganisation results in the recognition of Nonqualifying Gain or Loss under the laws of the disposing Entity’s jurisdiction. This may be the case under tax rules in Inclusive Framework jurisdictions, for example, where there is a limit to the amount of nonequity consideration that can be paid as part of the consideration for the transaction to qualify as a GloBE Reorganisation. Amounts paid over that limit may constitute taxable consideration that triggers the recognition of a gain or loss in respect of the assets transferred pursuant to the reorganisation.

77. In the context of such GloBE Reorganisations, Article 6.3.3 provides that the disposing Constituent Entity will include a gain or loss to the extent of the Non-Qualifying Gain or Loss. This means that the computation of GloBE Income or Loss will include the lesser of the amount of gain or loss reflected in the financial accounts or the amount of the taxable gain or loss arising from the GloBE Reorganisation. Further, the acquiring Constituent Entity will increase or decrease the carrying amounts of the acquired assets and liabilities to account for the Non-qualifying Gain or Loss. The changes in carrying value for GloBE purposes must be allocated among assets and liabilities in a manner consistent with the increases and decreases of those assets under the tax law applicable to the acquiring Constituent Entity. For example, if the Constituent Entity is required by local tax rules to allocate the basis increases due to the tax gain, first to depreciable assets up to the amount of built-in gain on such assets, and then to inventory and other current assets, the Constituent Entity must do the same for GloBE purposes. However, the increase or decrease in carrying value of assets and liabilities for GloBE purposes cannot exceed the Non-qualifying Gain or Loss.

Article 6.3.4

78. A Constituent Entity may be required or permitted to adjust the tax basis of its assets or the tax amount of its liabilities for a variety of reasons. Perhaps the most common circumstance is where a Constituent Entity is subject to an exit tax because of a cross-border reorganisation or a change in the Entity’s tax residence. In addition, a Constituent Entity may be required to adjust the tax basis or amount of some or all of its assets and liabilities when it joins or leaves a tax consolidated group. In other cases, the Constituent Entity (or its owners) may be permitted to make an election that adjusts the tax basis of assets and tax amount of liabilities. The adjustments required by these local tax rules are usually, but not always, based on the fair value of the asset or liability.

79. Article 6.3.4 provides an MNE Group with an election for these situations which seeks to align the outcomes under GloBE with those that apply under local tax law. When an election under Article 6.3.4 is made, the Constituent Entity recognises gain or loss and adjusts the carrying value of its assets and liabilities for purposes of the GloBE Rules. The election, however, does not apply to ordinary sales of assets (e.g. sales of inventory) by a Constituent Entity or transfer pricing adjustments. Moreover, if an election is made under this Article in connection with the acquisition of a Controlling Interest in a Constituent Entity that is governed by Article 6.2.1, the election does not affect the application of Article 3.2.1(c) to the seller.

80. Under paragraph (a), the gain or loss with respect to each asset or liability to be included in the computation of GloBE Income or Loss is initially determined under sub-paragraph (i) based on the difference between the carrying value for financial accounting purposes of the asset or liability immediately before the date of the event that triggered the tax adjustment (the triggering event), and the fair value of the asset or liability immediately after the triggering event. The carrying value of the asset or liability prior to the triggering event can be calculated by subtracting any depreciation or other valuation adjustment leading up to the trigger event from the carrying value of the asset or liability at the beginning of the Fiscal Year. Where the triggering event is the acquisition of an Ownership Interest in a Constituent Entity, the fair value of all the assets and liabilities of the Constituent Entity will typically be commensurated with the acquisition cost of the Ownership Interest(s). Because the triggering event may occur as a result of, or in connection with, a GloBE Reorganisation, sub-paragraph (ii) reduces (or increases) the amount of gain (or loss) determined under sub-paragraph (i) by the amount of any gain (or loss) already recognised as NonQualifying Gain or Loss. Thus, sub-paragraph (ii) prevents duplication of gains and losses that have already been included in the GloBE Income or Loss computation under Article 6.3.3.

81. Pursuant to paragraph (b), the Constituent Entity will use the fair value of the assets and liabilities to compute its GloBE Income or Loss in the Fiscal Years ending after the triggering event. The fair value to be used is the fair value of the assets determined pursuant to the financial accounting standard used in the Consolidated Financial Statements.

82. Under paragraph (c), the net gain or loss on all of the Constituent Entity’s assets and liabilities determined under paragraph (a) can be included in the computation of GloBE Income or Loss in the Fiscal Year in which the triggering event occurs or can be spread pro rata over five consecutive Fiscal Years starting with the Fiscal Year in which the triggering event occurs. If the total net gain or loss is spread over five Fiscal Years and the Constituent Entity leaves the MNE Group before the end of the five-year period, the remainder of the gain or loss must be accelerated and taken into account in the Fiscal Year that the Constituent Entity leaves the MNE Group.