Article 7.5.1

89. Article 7.5.1 provides a Five-Year election to treat an Investment Entity or Insurance Investment Entity as a Tax Transparent Entity. The election is available to Constituent Entity-owners of Investment Entities or Insurance Investment Entities that are subject to a mark-to-market or similar tax regime on investments in Investment Entities and Insurance Investment Entities. The treatment as a Tax Transparent Entity applies for all purposes of the GloBE Rules, including Article 3.5.

90. Under Article 10.1, Investment Entities are defined as Entities that meet the definition of an Investment Fund or Real Estate Investment Vehicle. Article 10.1 defines an Insurance Investment Entity as an Entity that would qualify as an Investment Fund or Real Estate Investment Vehicle but for the fact that it is wholly-owned by an insurance company and established in relation to liabilities under one or more insurance or annuity contracts. An Insurance Investment Entity may be wholly-owned by a single Entity, or by a number of Entities which are all part of the same MNE Group. The definition also requires that the owner, or owners, are subject to regulation as insurance companies. This requirement may also be met if the Insurance Investment Entity is owned by a Flow Through Entity which is subject to regulations in the same manner as an insurance company. If an election under Article 7.5.1 is made with respect to an Investment Entity or an Insurance Investment Entity, the rules in Article 7.4 do not apply.

91. A Filing Constituent Entity may elect to treat a Constituent Entity that is an Investment Entity or an Insurance Investment Entity as a Tax Transparent Entity if the Constituent Entity-owner of that Investment Entity or Insurance Investment Entity is subject to tax in its location under a mark-to-market or similar regime based on the annual changes in the fair value of its Ownership Interest in the Investment Entity or Insurance Investment Entity and the tax rate applicable to the Constituent Entity-owner with respect to such income equals or exceeds the Minimum Rate. For this purpose, a Constituent Entity that is a policyholder-owned, regulated insurance Entity (a “regulated mutual insurance company”) and that owns an Ownership Interest in an Investment Entity or an Insurance Investment Entity is considered to be subject to tax under a mark-to-market or similar regime based on the annual changes in the fair value of its Ownership Interest in the Investment Entity or Insurance Investment Entity at a rate that exceeds the Minimum Rate. The election, which is made by the Filing Constituent Entity, is only available where the Constituent Entity-owner is subject to tax in its location on changes in the value of its interest in the Investment Entity or Insurance Investment Entity (or its underlying investments) under a mark-to-market or similar regime at a rate that equals or exceeds the Minimum Rate. The election does not need to be made with respect to all Constituent Entity-owners of the Investment Entity. However, the election applies to all of a Constituent Entity-owner’s interests in the Investment Entity.

91.1. The previous paragraph is further clarified by the following example. Company A is a regulated mutual insurance company which is wholly policyholder-owned. It decides to set up Subsidiary B to invest funds for the benefit of its policyholders. Subsidiary B is an Insurance Investment Entity as defined in Article 10.1. Subsidiary B is 100% owned by Company A and is a Constituent Entity in Company A’s MNE Group. Subsidiary B’s Financial Accounting Net Income or Loss for the Fiscal Year is 100. Company A’s financial accounts include a fair value gain of 100 on the increase in the value of its ownership interests in Subsidiary B. This is offset by an expense of 100 in respect of the increase in Company A’s liabilities to its policyholders, meaning that Company A has no Financial Accounting Net Income or Loss for the Fiscal Year. However, the fair value gain is excluded from Company A’s GloBE Income or Loss under Article 3.2.1(c). Consequently, Company A would have a GloBE Loss of 100, while Subsidiary B would have a GloBE Income of 100. From the MNE Group’s perspective, there is no net income as the 100 of income from the fund is economically the income of the policyholders rather than the income of the MNE Group. As Company A is a regulated mutual insurance company, it is eligible to make an Article 7.5 election to treat Subsidiary B as a Tax Transparent Entity. While the election is in effect, Subsidiary B’s income is allocated to Company A in accordance with Article 3.5. Company A therefore includes the 100 of Financial Accounting Income or Loss, which is matched against the expense of 100 from the movement in liabilities to policyholders, and results in GloBE Income of zero. Subsidiary B also has GloBE Income of zero as its Financial Accounting Net Income or Loss has been allocated to Company A.

92. By treating the Investment Entity as tax transparent, the election allows the MNE Group to include the Constituent Entity-owner’s share of the Investment Entity’s results as income of the Constituent Entityowner for GloBE purposes. This election matches the timing and location of income earned through an Investment Entity under the GloBE Rules and the local tax rules where the Constituent Entity-owner is subject to a mark-to-market or similar regime.

93. The election is available for both directly owned Investment Entities and Insurance Investment Entities as well as such Entities that are indirectly owned through other Investment Entities or Insurance Investment Entities. Thus, the tax effect of changes in value of a lower-tier Investment Entity or Insurance Investment Entity in a chain of such Entities that is reflected in the valuation of the interest in a directly held Investment Entity or Insurance Investment Entity can be matched with the GloBE Income or Loss of that Entity. The tax method and the financial accounting method of computing fair value may not be exactly the same, and thus, there may be timing differences even with the election. However, those differences will occur less frequently and in smaller amounts.

94. The Constituent Entity-owner’s share of the GloBE Income or Loss of the Investment Entity or the Insurance Investment Entity should not be counted twice by the Constituent Entity-owner. Only the Constituent Entity-owner’s share of the GloBE Income or Loss computed for the Investment Entity or Insurance Investment Entity should be taken into account pursuant to an election under Article 7.5. The income of the Investment Entity or Insurance Investment is likely to be determined using fair value accounting in the preparation of the Consolidated Financial Statements.

95. The Constituent Entity-owner should not account for its Ownership Interest in a Constituent Entity that is an Investment Entity or an Insurance Investment Entity using a fair value accounting method, even if, on a separate entity accounting basis, the Constituent Entity-owner does not control the Investment Entity or Insurance Investment Entity. The Constituent Entity-owner’s Financial Accounting Net Income or Loss should be determined pursuant to Chapter 3 using the accounting standard that was used to determine the Constituent Entity’s income in preparing the Consolidated Financial Statements. However, if for some reason the Constituent Entity-owner did account for its interest in the Investment Entity or Insurance Investment Entity using a fair value method, that income or loss should be excluded from the computation of its GloBE Income or Loss.

96. For example, assume that UPE owns 100% of the Ownership Interests of CE1 and CE2, and CE1 and CE2 own 90% and 10%, respectively, of the Ownership Interests in Fund, an Insurance Investment Entity. Fund earns 100 of net income in Year 1, pays no tax. and makes no distributions. An election under Article 7.5 is made on behalf of CE1 and CE2. Accordingly, CE1 and CE2 include their share of Fund’s income, 90 and 10, respectively, in the computation of their GloBE Income or Loss. On a standalone basis, CE1 controls Fund and thus would consolidate its accounts even if CE2 were an unrelated company. CE2, on the other hand, owns only 10% of Fund and on a standalone basis might be required to apply fair value accounting to its interest in Fund under the Acceptable Financial Accounting Standard used in the Consolidated Financial Statements. For purposes of the GloBE Rules, however, CE2 does not include any fair value gains or distributions from Constituent Entities. Otherwise, in this case, CE2 would recognise 10 of fair value gain in addition to the 10 of income included in its income under the Article 7.5 election.

97. In addition, the election allows the Constituent Entity-owner to apply the Substance-based Income Exclusion with respect to its share of the income of the Investment Entity. In many cases, the MNE Group’s Eligible Payroll Expenses and Eligible Tangible Assets related to managing the Investment Entity’s or Insurance Investment Entity’s activities will not arise in the Investment Entity or Insurance Investment Entity itself, but instead will be those of the Constituent Entity-owners.

Article 7.5.2

98. Article 7.5.2 provides that the Article 7.5.1 election is a Five-Year Election. Article 7.5.2 further provides transition rules for revocation of the election. If the election is revoked, gains or losses from the disposition of an asset or liability held by the Investment Entity shall be determined based on the fair value of the assets or liabilities on the first day of the revocation year. The fair value at the beginning of the revocation year is the starting point. If the Investment Entity’s income is determined using a realisation method, that value will continue to be the value of the asset for purposes of determining gains or losses under the GloBE Rules until it is disposed. If, on the other hand, the Investment Entity’s income is determined using a fair value method for the assets, then that method will re-value the assets at regular intervals and include the gains or losses in Financial Accounting Net Income or Loss. That re-valuation will apply for GloBE purposes as well.