GLOBAL MINIMUM TAX SERIES – PART 12 GloBE De Minimis Exclusion Rule

[Amit Jalan]

 Friends                          

In the previous two editions, viz. 10 and 11 we explained the key concepts of the GloBE Safe Harbour Rule as contained within chapter 8 of the GloBE Rules as well as the two temporary and one permanent safe harbours that have been currently released by the OECD.  

In this edition, we have discussed in detail the provisions of the De Minimis exclusion rule as contained within Article 5.5 of the GloBE Rules.

We hope this bulletin adds Value in your professional Sphere.  A de minimis exclusion applies where there is a relatively small amount of revenue and income in a Jurisdiction.  

Under Article 5.5 of the GloBE Rules, a constituent entity can make an annual election for a de minimis exclusion to apply whereby the top-up tax for that constituent entity in a fiscal year will be deemed to be zero, if:  

i) the average GloBE revenue of all constituent entities in the jurisdiction for the current and the two preceding fiscal years is less than EUR 10 million; and  

ii) the average net GloBE income or loss of all constituent entities in the jurisdiction for the current and the two preceding fiscal years is a loss or is less than EUR 1 million.  

Where the de minimis exclusion applies, the MNE is not required to calculate adjusted covered taxes, the ETR or top-up tax for the jurisdiction under the GloBE Rules.  

The de minimis exclusion applies on an annual basis, which means that a jurisdiction can fall under the de minimis exclusion for a given Fiscal Year, but not necessarily for the preceding or the following year. If a Constituent Entity was located in a jurisdiction to which the de minimis exclusion applied the first year when the MNE is subject to the GloBE Rules, the Transition Rules provided in Article 9.1 shall apply to such Constituent Entity at the beginning of the first Fiscal Year for which the de minimis election is not made for the jurisdiction.

As noted above, the de minimis exclusion is based on a three-year average for revenue and GloBE income or loss, however, under Article 5.5.2 of the GloBE Rules, a year or years are excluded for the averaging calculation if:  

• there are no constituent entities located in the jurisdiction for a given fiscal year; or  
• there are only dormant constituent entities located in the jurisdiction; or  
• There are no constituent entities located in the jurisdiction before the GloBE Rues came into effect;  

Further, if the fiscal years for the averaging calculation are different with some longer or shorter, a pro-rata calculation is made.

It is also worth noting that although the de minimis exclusion applies to all Constituent Entities of an MNE Group that are located in the same jurisdiction, minority-owned constituent entities and minority-owned sub-groups are included for this purpose (unlike for standard jurisdictional blending purposes where such calculations for minority-owned entities/sub-groups are performed as if they were a separate MNE Group for the purposes of ETR and top-up tax calculations). Therefore, the average revenue and income/loss of minority-owned constituent entities/subgroups are included for the GloBE Revenue and GloBE Income/Loss calculations to determine if de minimis exclusion applies for a fiscal year.    

GloBE Revenue calculation  

GloBE Revenue, for the purposes of determining application of the de minimis exclusion under the GloBE Rules, is the sum of the financial accounting revenue used in preparing the consolidated financial statements, of all Constituent Entities located in the jurisdiction for such fiscal year. This is then adjusted for amounts based on adjustments prescribed in Chapter 3 of the GloBE Rules that are used to calculate the GloBE income.  

However, only the adjustments in Chapter 3 that would affect revenue are taken into account, not the adjustments that relate to expenses only. Key GloBE income adjustments under Chapter 3 that would impact the GloBE revenue for the purposes of the de minimis exclusion include:  

• Under Article 3.2.1, income and gains excluded as below:
• Excluded Dividends (participation exemption)
• Excluded equity gains or losses  Included Revaluation Method Gain or Loss
• Gain or loss from disposition of assets and liabilities excluded under Article 6.3
• Asymmetric Foreign Currency Gains or Losses
• Prior Period Errors and Changes in Accounting Principles  
• Under Article 3.2.3, adjustment for arms-length requirement for transactions between constituent entities in different jurisdictions  
• Under Article 3.2.4, adjustment for Qualified Refundable Tax Credits (treated as income for GloBE purposes), where they are reflected under current tax expense in the financial accounts. Note that no adjustment to be made for Non-Qualified Refundable Tax Credits as they are not treated as Income for GloBE purposes.  
• Under Article 3.2.5, relating to the election to exclude gains or losses with respect to assets and liabilities for which the Constituent Entity uses fair value or impairment accounting in the Consolidated Financial Statements, i.e., the Constituent Entities may elect to tax such gains and losses upon realisation.  
• Under Article 3.2.6, relating to the election (5-year election) to exclude capital gains/losses on immovable property, i.e., to spread the effect of gains and losses from the sale of immovable properties over a period of up to five years (i.e., the Election Year and the four prior Fiscal Years) to mitigate the effect of recognising the entire gain in a single year  
• Under Article 3.2.8, relating the election (annual election) to apply consolidated accounting treatment to constituent entities in the same jurisdiction in order to eliminate transactions between Constituent Entities included in a tax consolidation group.  
• Under Article 3.2.9, relating to the reclass of taxes paid on certain policy holder returns by an insurance company from Income tax line (under financial accounting) to above-the-line expense within profit before tax for GloBE purposes.  
• Under Article 3.2.10, relating to an increase to the equity of a Constituent Entity (in the Banking Sector) attributable to distributions received or receivable in respect of Additional Tier One Capital is treated as income for GloBE purposes. These are generally treated as equity for financial accounting purposes, hence the adjustment needed.  
• Under Article 3.2.11, relating to provisions within Chapters 6 and 7 of the GloBE Rules to the extent that they affect the amount of the revenue of a Constituent Entity  
• Under Article 3.3, relating to International Shipping Income or loss and Qualified Ancillary International Shipping Income  
• Under Article 3.4, relating to the allocation of income or loss between the Main Entity and its Permanent Establishment. The revenue allocated to the PE is deducted from revenue of the main entity  
• Under Article 3.5, relating to the allocation of income or loss from a Flowthrough Entity or Tax transparent entities where the income is allocated to members / entity-owners      

Net GloBE Income or Loss calculation

Net GloBE Income or Loss, for the purpose of determining the application of the de minimis exclusion, is as defined within Article 5.1.2 of the GloBE Rules, which is the difference between the sum of the GloBE Income of all Constituent Entities and the sum of the GloBE Losses of all Constituent Entities of that jurisdiction. If this difference is negative, the outcome is a loss and that is the Net GloBE Loss of a jurisdiction  

Post-Filing Adjustments  

If there is a requirement to recalculate the ETR for a previous year, as per the provisions of the GloBE Rules, referenced as ETR Adjustment Articles (viz. Articles, 3.2.6, 4.4.4, 4.6.1, 4.6.4 and 7.3 of the GloBE Rules), this could impact the GloBE Revenue or Income for that Fiscal Year (depending on the nature of the adjustment).  

If a subsequent adjustment reduces GloBE revenue or income/loss for a fiscal year below the relevant monetary threshold for the de minimis exclusion, this does not entitle the MNE to the de minimis exclusion for that fiscal year.

However, if there is an increase in the GloBE revenue or income for a fiscal year or years such that the relevant monetary threshold for the de minimis exclusion are exceeded, the de minimis exclusion is not applicable for that year or years, i.e. GloBE ETR and top-up tax needs to be calculated for the relevant fiscal year or years.

Stateless and Investment Entities  The de minimis exclusion does not apply to Stateless Constituent Entities or Investment Entities. As such their revenue and income are not included in the monetary threshold tests for determining if the de minimis exclusion applies.