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Article 6.4. Joint Ventures

A common business practice undertaken by MNE Groups is entering into joint ventures with third parties. Generally, for accounting purposes, a joint venture is a business enterprise that is jointly controlled by two or more persons or Entities. Because the enterprise is not controlled exclusively by one person, its accounting results are not consolidated with any of its owners on a line-by-line basis. Instead, the financial results of joint ventures are commonly reported by MNE Groups using the equity method in their Consolidated Financial Statements. Absent a special rule, this accounting treatment would exclude them from the scope of the GloBE Rules because they do not meet the definition of a Constituent Entity under Article 1.3, which requires an Entity to be consolidated on a line-by-line basis. Thus, if two MNE Groups subject to the GloBE Rules each owned 50% of the Ownership Interests of a joint venture, neither MNE Group would be subject to the GloBE Rules on its share of the JV’s income in the absence of Article 6.4.

Article 6.4 extends the application of the GloBE Rules to Entities in which the UPE of an MNE Group owns 50% or more of the Ownership Interests (such Entities are JVs under the GloBE Rules). This ensures that all of the income of a 50/50 JV owned, directly or indirectly, by the UPE of an MNE Group will be subject to the GloBE Rules and that the rule extends to any venture in which the MNE Group holds 50% or more of the Ownership Interests (without having unilateral control). Article 6.4 does not, however, require the JV or its JV Subsidiaries to apply the IIR or the UTPR directly. Rather it requires the MNE Group to determine Top-up Tax in respect of a JV (or its JV Subsidiaries) located in a Low-Taxed Jurisdiction and allocates any resulting Top-up Tax to a Constituent Entity within the MNE Group under the IIR or the UTPR.

6.4.1. The GloBE Rules shall apply to a Joint Venture and its JV Subsidiaries as follows for each Fiscal Year:

(a) Chapters 3 to 7, and Article 8.2 shall apply for purposes of computing any Top-Up Tax of the Joint Venture and its JV Subsidiaries as if they were Constituent Entities of a separate MNE Group and as if the Joint Venture was the Ultimate Parent Entity of that Group;

(b) a Parent Entity that holds directly or indirectly Ownership Interests in the Joint Venture or a JV Subsidiary shall apply the IIR with respect to its Allocable Share of the Top-up Tax of a member of the JV Group in accordance with Article 2.1 to Article 2.3; and

(c) the JV Group Top-up Tax shall be reduced by each Parent Entity’s Allocable Share of the Top-up Tax of each member of the JV Group that is brought into charge under a Qualified IIR under paragraph (b), and any remaining amount shall be added to the Total UTPR Top-up Tax Amount taken into account under Article 2.5.1.

Article 6.4.1

85. Article 6.4.1 is a special rule that applies to JVs reported by the MNE Group in their Consolidated Financial Statements. The definition of a JV under the GloBE Rules departs from the one commonly used in accounting rules. A JV is defined in Article 10.1 as an Entity whose financial results are reported under the equity method in the Consolidated Financial Statements of the MNE Group provided that the UPE holds directly or indirectly at least 50% of its Ownership Interests. Thus, an Entity is not a JV under the GloBE Rules, where the UPE holds less than 50% of its Ownership Interests despite that it could still be considered as a JV under accounting rules if it is jointly controlled by the MNE Group. Similarly, an Entity commonly referred to as an “associate” under accounting rules (e.g., IAS 28 (IFRS Foundation, 2022)) and also reported under the equity method typically would not meet the GloBE definition of a JV because the UPE would not reach the 50% ownership threshold. In this latter case, the MNE Group would have significant influence over the Entity instead of joint control, which is a difference between “associates” and JVs under accounting rules.3 However, such factor is not decisive in the GloBE definition of a JV.

86. An Entity is not considered a JV for GloBE purposes if it is an Excluded Entity or the Ownership Interests of the Entity held by the MNE Group are held directly by an Excluded Entity. Furthermore, an Entity is excluded from the definition of a JV if it is a UPE of an MNE Group that is already within the scope of the GloBE Rules because such Group meets the consolidated revenue threshold set out in Article 1.1.

87. Article 6.4.1 also extends the operation of the GloBE Rules to the income of Entities controlled by the JV (JV Subsidiaries). The JV and its JV Subsidiaries make up a JV Group. The members of a JV Group are not required to apply the charging provisions in Chapter 2. However, they are treated as if they were Constituent Entities for purposes of computing their jurisdictional ETR and Top-up Taxes.

88. Article 6.4.1 brings a JV and its subsidiaries into scope of the GloBE Rules but only with respect to the UPE’s share of the JV and its subsidiaries. If the JV is an LTCE, the GloBE Rules would apply similar to the way they apply to Constituent Entities. However, Article 6.4.1 does not require a JV or its JV subsidiaries to apply the IIR or UTPR.

Paragraph (a)

89. Paragraph (a) provides special rules for computing the Top-up Tax of the JV and its JV Subsidiaries. It states that the Top-up Tax of the JV Group shall be computed in accordance with Chapters 3 to 7 and Article 8.2 as if such the members of the JV Group were Constituent Entities of a separate MNE Group and as if the JV was the UPE of that Group. This means that all the provisions included in Chapters 3 to 7 and Article 8.2 of the GloBE Rules related to the computation of the Top-up Tax are applicable to the members of JV Group including the provisions on the Substance-based Income Exclusion and SafeHarbours. However, the Top-up Tax computation for the JV Group under Chapter 5 is made as if the JV was the UPE of a separate MNE Group. Therefore, for example, the accounting standard used in preparing Consolidated Financial Statements of the JV Group is the accounting standard of the JV (not the UPE) and the GloBE Income or Loss and Covered Taxes of the JV and its JV Subsidiaries are not blended with the Constituent Entities of the wider MNE Group for purposes of the JV’s jurisdictional ETR computations (or the jurisdictional ETR computations of the wider MNE Group). Lastly, the transitional rules in Articles 9.1 and 9.2 also apply with respect to JVs on the grounds that they complement the provisions in Chapters 4 and 5. When an MNE Group computes the jurisdictional ETR of the members of a JV Group it should take into account any Adjusted Covered Taxes recorded in the financial accounts of the Constituent Entities of such MNE Group with respect to the GloBE Income or Loss of the members of the JV Group in accordance with Article 4.3.

Paragraph (b)

90. Paragraph (b) regulates the application of the IIR by Parent Entities with respect to the Top-up Tax of a JV and a JV Subsidiary. Paragraph (b) only applies to Parent Entities that have Ownership Interest in the JV or the JV Subsidiary. It requires such Parent Entities to apply the IIR in accordance with Articles 2.1 to 2.3. This means that the UPE and other Parent Entities are required to apply the IIR in accordance with the top-down approach and split-ownership rules.

91. The UPE or any other Parent Entity applying the IIR must allocate the Top-up Tax of the JV or JV Subsidiary based on its Allocable Share of the Top-up Tax. For example, assume Hold Co holds 50% of the Ownership Interests of JV Co, a JV as defined by Article 10.1. JV Co owns 80% of the Ownership Interests of Sub Co (a JV Subsidiary as defined by Article 10.1). JV Co and Sub Co are both LTCEs and each one has a Top-up Tax of 100. The UPE’s Allocable Share of the Top-up Tax of JV Co is 50 (100 x 50%). The UPE’s Allocable Share of the Top-up Tax of Sub Co is 40 (100 x 50% x 80%).

Paragraph (c)

92. Lastly, paragraph (c) describes how the UTPR is applied in the context of JVs. In practice, the UTPR only applies, with respect to a member of a JV Group, where the UPE or other Parent Entities have not brought into charge the JV Group Top-up Tax under a Qualified IIR in accordance with paragraph (b). Paragraph (c) requires the JV Group Top-up Tax to be added to the Total UTPR Top-up Tax Amount, after it has been reduced by the amount that has already been brought into charge under the IIR.

93. The term JV Group Top-up Tax is defined in Article 10.1 as the UPE’s Allocable Share of the Topup Tax of all members of the JV Group. The amount is computed on the basis of the UPE’s Allocable Share of the Top-up Tax of the JV or its JV Subsidiaries. For example, assume the UPE holds 50% of the Ownership Interests of JV Co, a JV subject to Article 6.4. JV Co owns 80% of the Ownership Interests of Sub Co (a JV Subsidiary also subject to Article 6.4). JV Co and Sub Co are both LTCEs and each one has a Top-up Tax of 100. The JV Group Top-up Tax is 90 (50 of JV Co’s Top-up Tax and 40 of Sub Co’s Topup Tax).

94. If all the Top-up Tax is allocated under paragraph (b), then the JV Group Top-up Tax would be zero and therefore, paragraph (c) has no effect. If there is an amount of Top-up Tax that has not been brought into charge under paragraph (b), then such amount would be added to the Total UTPR Top-up Tax Amount taken into account under Article 2.5.1 so it can be allocated under the UTPR.

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