Article 9.1.1

5. Article 9.1.1 sets out the deferred tax accounting attributes of a Constituent Entity that may be utilised in calculating the ETR in a jurisdiction in the Transition Year and subsequent years. Rather than requiring an MNE Group to undertake complex calculations as if the Constituent Entity had been subject to the GloBE Rules in prior years, it uses a simplified approach that allows the MNE Group to take into account the deferred tax accounting attributes of the MNE Group at the beginning of the Transition Year, at the lower of the Minimum Rate or the applicable domestic tax rate. The applicable domestic tax rate is the rate at which an item of deferred tax expense has been recorded in the financial accounts. However, deferred tax assets in respect of GloBE Losses that have been recorded at a rate lower than the Minimum Rate may be recast at the Minimum Rate if the taxpayer can demonstrate that the deferred tax asset is attributable to a loss that would have been a GloBE Loss had the MNE Group been subject to the GloBE Rules in the year in which the loss arose. These attributes include losses that have not been recognised due to an accounting recognition adjustment or valuation allowance.

6. Article 9.1.1 provides the basis to use these attributes in determination of Covered Taxes pursuant to Article 4.4. Therefore, when a pre-existing deferred tax attribute is used for financial reporting purposes in a Fiscal Year in which the GloBE Rules apply, such attribute is available for use in the application of Article 4.4, subject to the limitations of Article 9.1. For example, if a Constituent Entity incurred a tax loss of (100) in a year before the GloBE applied, a deferred tax expense of (15) (i.e., deferred tax benefit) will be included in the Total Deferred Tax Adjustment Amount under Article 4.4 when the associated tax loss is used in a Fiscal Year in which the GloBE applies. The GloBE Implementation Framework will consider providing Agreed Administrative Guidance related to the measurement and treatment of items of deferred tax expense (i.e., deferred tax assets and deferred tax liabilities) in the Transition Year and subsequent years.

6.1 Deferred tax assets with respect to tax credit carry-forwards reflected or disclosed in the financial accounts of a Constituent Entities in a jurisdiction shall be treated as deferred tax accounting attributes to be used in the calculation of the ETR in the Transition Year and subsequent years. Article 4.4.1(e) shall not apply to such deferred tax assets arising prior to the Transition Year. The amount of deferred tax assets recorded for purpose of Article 9.1.1 shall be equal to the deferred tax assets accrued in the financial accounts if the tax rate used to determine the deferred tax assets is below the Minimum Rate or, in any other case, such deferred tax assets shall be determined in accordance with the following formula:

For this purpose, the Applicable domestic tax rate is the tax rate in the Fiscal Year preceding the Transition Year. However, if the tax rate applicable to the Constituent Entity changes in a subsequent Fiscal Year (the re-application year), the formula must be re-applied to the outstanding balance of the tax credit in the financial accounts at the beginning of the re-application year to determine the revised DTA for GloBE purposes. The change in the amount of the DTA resulting from re-application of the formula shall not be treated as deferred tax expense included in the computation of Adjusted Covered Taxes in the re-application year. Rather, the deferred tax expense for the re-application year and subsequent years shall be determined by reference to the amount of the reversal of the DTA after re-application of the formula.

6.2 Refundable tax credits might have been recorded as income in the financial accounts of a Constituent Entity before the applicability of the GloBE Rules. In this case, no deferred tax accounting attributes would be generated and thereby subject to Article 9.1.1. Nevertheless, to avoid unintended outcomes, the settlement of refundable tax credits that accrued prior to the beginning of the Transition Year, whether or not the amount satisfies an income tax liability, generally should not be treated as a reduction to Adjusted Covered Taxes.

6.3 Further, except as provided in Article 9.1.2, attributes imported into the GloBE attributes pursuant to Article 9.1.1 are not subject to any adjustments to deferred tax expense under Article 4.4.1(a), (b), (c), or (d), or Article 4.4.4. Under Article 9.1.1, a Constituent Entity’s tax attributes at the beginning of the Transition Year shall include any deferred tax asset that was not recognised because the recognition criteria was not met.

7. Attributes established under Article 9.1.1 are eliminated pursuant to Article 4.5.1 when a GloBE Loss Election is made under Article 4.5 because Article 4.4 does not apply when the GloBE Loss is elected under Article 4.5. The Transition Year is determined on a jurisdictional basis. As defined in Article 10.1, Transition Year, for a jurisdiction, means the first Fiscal Year in which the MNE Group comes within the scope of the GloBE Rules in respect of that jurisdiction. The phrase “in respect of that jurisdiction” is used in the definition rather than “of that jurisdiction” to make clear that the MNE Group’s Transition Year for a particular jurisdiction may be initiated due to the GloBE Rules of another jurisdiction.

Article 9.1.2

8. Article 9.1.2 provides a limitation to prevent the triggering of permanent difference losses before applicability of the GloBE Rules. An example of this would be a Constituent Entity that triggers a domestic tax loss with respect to an item that is not taken into account in the calculation of GloBE Income or Loss, such as depreciation deductions in excess of an asset’s cost. Absent the Article 9.1.2 limitation, such attribute would be imported into the GloBE attributes upon becoming subject to the rules. The limitation in Article 9.1.2 applies to any deferred tax asset generated in a transaction that takes place after 30 November 2021. Article 9.1.2 does not have retroactive tax implications, but rather sets out rules with respect to how certain attributes are taken into account in Fiscal Years to which the GloBE Rules apply.

9. The application of Article 9.1.2 is illustrated in the following example. In December, 2021, a Constituent Entity purchases an asset for 100. The jurisdiction in which the Constituent Entity is located imposes a 25% corporate income tax rate and allows for immediate expensing of the asset in 2021 and an additional 300 of tax depreciation with respect to such asset as a tax incentive that will be deducted in the same Fiscal Year. After taking into account the deductions with respect to the asset, there is a domestic tax loss of 300 for which a deferred tax asset is established. As the deferred tax asset recorded with respect to the supplemental 300 domestic tax loss reverses, it is not included in Adjusted Covered Taxes under the application of this Article.

Article 9.1.3

10.1 Article 9.1.3 provides a limitation on intra-group asset transfers before applicability of the GloBE Rules. Article 9.1.3 applies when an asset (other than inventory) is transferred between Entities after 30 November 2021 and before commencement of the Transition Year of an MNE Group if such Entities would have been Constituent Entities of that MNE Group had the GloBE Rules been in effect with respect to that MNE Group immediately before the transfer. When Article 9.1.3 applies, the acquiring Entity must treat the asset for purposes of the GloBE Rules as acquired for an amount equal to the carrying value in the hands of the disposing Entity upon disposition. That carrying value of the asset can easily be determined because the gain on the intra-group transfer must be eliminated in the Consolidated Financial Statements. Thereafter, the acquiring Entity’s carrying value of the asset may be increased by capitalised expenditures or decreased by amortization or depreciation in accordance with the accounting standard used in the UPE’s Consolidated Financial Statements. The carrying value used for GloBE purposes beginning in the Transition Year is the carrying value upon disposition of the transferred asset on the day of transfer adjusted for capital expenditures, amortization or depreciation after the transaction and before the beginning of the Transition Year. Any increased depreciation or amortization, if any, attributable to recording the asset at fair value in the financial accounts of the acquiring Entity must be excluded from the computation of its GloBE Income or Loss. Similarly, gain or loss from a subsequent sale of the asset shall be determined for GloBE purposes based on its carrying value determined under Article 9.1.3. The rule in Article 9.1.3, however, does not apply to inventory because of the routine nature of intragroup inventory sales and the typically brief period that it is held before sale outside the MNE Group.

Scope of transactions covered

10.2 As explained above, the policy intention of Article 9.1.3 is to disallow the normal accounting treatment of asset transactions after 30 November 2021 and before the commencement of a Transition Year (hereinafter referred to as the Pre-GloBE Period) where the income is taxed below the minimum rate and the corresponding deductions shield future income from potential Topup Tax. Allowing the normal accounting treatment of such transactions would undermine the integrity of the GloBE Rules, and Article 9.1.3 addresses this integrity concern by requiring the acquiring Entity to use the disposing Entity’s carrying value at the time of the asset transfer as the asset’s carrying value or precluding the acquiring Entity from utilizing a deferred tax asset arising in connection with the transaction that has the same effect for GloBE purposes as an increased carrying value. However, the integrity concern is not present where the disposing Constituent Entity is subject to the GloBE Rules or a QDMTT in the Fiscal Year in which the transaction occurs.

10.2.1 For purposes of Article 9.1.3, the relevant Transition Year is the Transition Year of the disposing Constituent Entity and the Transition Year of the disposing Constituent Entity is the first year in which its Low-Taxed Income becomes subject to charge under the GloBE Rules or it becomes subject to a Qualified Domestic Minimum Top-up Tax irrespective of when other Constituent Entities in the jurisdiction are subject to the GloBE Rules. The Article applies to any transfer of assets between Constituent Entities after 30 November 2021, including transfers after the acquiring Constituent Entity becomes subject to the GloBE Rules, where the disposing Constituent Entity’s Low-Taxed Income was not subject to charge under the GloBE Rules or a Qualified Domestic Minimum Top-up Tax either because it was not within the scope of the GloBE Rules or because it applied a safe harbour.

10.3 As a result, for purposes of Article 9.1.3, a “transfer of assets” should be interpreted broadly to include cross-border and domestic transactions that are treated like a sale of assets from an accounting perspective and create the integrity risks as described in the above paragraph. Accordingly, the term “transfer of assets” as used in Article 9.1.3 includes any transfer of rights to an item of economic value (e.g. intellectual property, real estate, financial instrument, business operations) in which the acquiring Entity creates or increases the carrying value of an asset in its financial accounts and the disposing Entity recognises the corresponding amount of income in the Pre-GloBE Period. This rule applies also where the MNE Group records intra-group transactions at cost and a deferred tax asset based on the difference between the carrying value in the acquiring Entity and the tax basis under the domestic tax law.

10.4 Article 9.1.3. also applies to a transfer or deemed transfer of assets within the same Entity. For example, in a relocation or migration of an Entity (in which the Entity increases the carrying value of an asset for tax or financial accounting purposes) or a change to fair value accounting (in which the Entity records a gain/loss and adjusts the carrying value of the asset accordingly), the Entity in question is considered as both the disposing Entity and the acquiring Entity for purposes of Article 9.1.3.

10.5 For example, Article 9.1.3 applies to the following types of intra-group transactions or restructurings:

a.) A sale of an asset;

b.) A capital lease, which is accounted for in the same or similar manner as a purchase of an asset;

c. )A license that is effectively treated as a sale for accounting purposes;

d.) A transfer of assets through a sale of a Controlling Interest;

e.) A prepayment of royalty or rents, where the licensor/lessor records the prepayment as income and the licensee/lessee capitalizes and amortizes the asset in its financial accounts;

f.) A total return swap where the underlying asset is transferred to the financial accounts of the Entity that acquired the rights to income and capital gains generated by an underlying asset;

g.) A migration of an Entity/Entities where an MNE Group receives a step-up in the tax basis or carrying value (e.g. based on fair value of assets) of the relocated assets; and

h.) A change to fair value accounting where the Entity records the relevant gains or losses from fair value changes of the underlying asset and corresponding adjustments to the carrying value of the asset.

10.6 Article 9.1.3 applies to transactions where the accounting impact of the transaction is reflected in the financial accounts of the disposing Entity during the Pre-GloBE Period, without regard to whether the legal transfer or the financial impact to the acquiring Entity is recorded during or after the Pre-GloBE Period.

10.7 Article 9.1.3 does not apply to a lease, license, or a total return swap where the transacting parties account for the income and corresponding expense items in the same Fiscal Years (i.e. where the lessor’s or licensor’s income is not front-loaded).

Transactions accounted for at cost

10.8 The purpose of Article 9.1.3 is to limit the ability to step-up the carrying value in the MNE Group’s assets for GloBE purposes in an intragroup transaction without including the corresponding gain in the computation of GloBE Income or Loss. Some MNE Groups account for intra-group transactions by treating the acquiring Entity as having acquired the asset at the transferring Entity’s carrying value upon disposition and create a deferred tax asset based on the difference between the tax basis of the asset and the acquiring Entity’s carrying value and the tax rate in the acquiring Entity’s jurisdiction. If the MNE Group were allowed to take into account a deferred tax asset created in connection with the intragroup sale, it would, in combination with the financial accounting carrying value upon disposition, affect the applicability of the GloBE Rules in much the same way as allowing the step-up in carrying value of the asset for GloBE purposes. The step-up in carrying value would essentially eliminate an amount of income equal to the step-up from the acquiring Constituent Entity’s GloBE Income or Loss computation usually either at the time of a subsequent sale by the acquiring Constituent Entity’s or over the asset’s depreciation or amortization period. The carrying value upon disposition preserves that income in the GloBE income or Loss computation, but the corresponding deferred tax asset amount would be included in the Covered Taxes and, in effect, would shield that same amount of income from Top-up Tax. This result would be inconsistent with the policy and purpose of Article 9.1.3. Accordingly, when Article 9.1.3 applies, the deferred tax assets or liabilities with respect to the transferred assets, if any, that are recognised at the beginning of the Transition Year are those that existed in the financial accounts of the MNE Group prior to the transaction that triggered application of Article 9.1.3, adjusted as appropriate for subsequent capitalised expenditures, amortization, and depreciation and further adjusted to the Minimum Rate if necessary pursuant to Article 9.1.1. Any deferred tax asset or liability arising in the MNE Group’s financial accounts as a result of the transaction is ignored under the GloBE Rules, except as provided in paragraph 10.9.

10.9 The acquiring Entity may take into account a deferred tax asset to the extent that the disposing Entity paid tax in respect of the transaction and to the extent of any deferred tax asset that would have been taken into account under Article 9.1.1 but was reversed or was not created by the disposing Entity (Other Tax Effects) because gain from the disposition was included in the taxable income of the disposing Entity. If there is a group taxation regime applicable to the disposing Entity, this paragraph shall be applied by reference to the taxes paid by the group and Other Tax Effects on the group under the group taxation regime. This paragraph may also be applied in respect of any Covered Taxes that are attributable to the transaction and that would have been allocated to the disposing Entity under the principles of Article 4.3. The MNE Group has the burden of proving:

(a) the amount of tax paid in respect of the transaction;

(b) the amount of any Other Tax Effects; and

(c) the amount of any Covered Taxes that are attributable to the transaction and that would have been allocated to the disposing Entity under Article 4.3.

A deferred tax asset created under this rule shall not exceed the Minimum Rate multiplied by the difference in the local tax basis in the asset and the GloBE carrying value of the asset determined under Article 9.1.3. The creation of a deferred tax asset under this paragraph shall not reduce the Adjusted Covered Taxes of a Constituent Entity. This deferred tax asset is adjusted annually in proportion to any decrease in the carrying value of the asset for the year, for example due to depreciation, amortization, or impairment. See Examples 9.1.3-1 through 9.1.3-6.

Transactions accounted at fair value

10.10 Where an acquiring Constituent Entity recorded an asset acquired in a transaction subject to Article 9.1.3 at fair value in its financial accounts, it may instead use the carrying value of that asset reflected in its financial accounts for GloBE purposes in all subsequent years if it would otherwise be entitled to take into account a deferred tax asset equal to the Minimum Rate multiplied by the difference in the local tax basis in the asset and the GloBE carrying value of the asset determined under Article 9.1.3. See Example 9.1.3-7. 10.11 Like Article 9.1.2, this Article does not have retroactive tax implications, but rather sets out rules with respect to how certain tax attributes are taken into account in Fiscal Years to which the GloBE Rules apply.