GLOBAL MINIMUM TAX SERIES: 8 – Rules on Corporate Restructurings & Holding Structures – Joint Ventures

[Amit Jalan]

Friends

The impact of Pillar Two on the end-to-end operations of the tax department is monumental given the anticipated law changes in many countries. This series on GMT needs a holistic reading to understand the intricacies and implementing the same in your Organisations or clients.

In the last edition, we discussed in detail on special rules that deal with corporate restructurings (including mergers, acquisitions, and demergers) and covered in detail Article 6.3 relating to the rules for treatment of transfers of assets and liabilities including as part of a reorganisation.

In this 8th edition we will cover Article 6.4 of the GloBE Rules that provides special rules for JVs reported by an MNE Group in their Consolidated Financial Statements, where the UPE holds directly or indirectly at least 50% of its Ownership Interests.

We hope this bulletin adds Value in your professional Sphere.

To recap, Chapter 6 contains rules relating to acquisitions, disposals and Joint Ventures, summarised as below:

o Article 6.1 supplements Article 1.1 by providing further rules to assess the consolidated revenue threshold for determining the applicability of the GloBE www.vilgst.com Page - 2 - of 5 Rules to an MNE Group and its constituent entities in case of merger and demerger transactions that took place in the prior four-year period.

o Article 6.2 provides special rules for the application of the GloBE Rules that apply when a Constituent Entity enters or leaves an MNE Group during the Fiscal Year.

o Article 6.3 provides special rules for the treatment of transfers of assets and liabilities including as part of a reorganisation.

o Article 6.4 brings certain Joint Ventures within the scope of the GloBE Rules.

o Article 6.5 provides special rules for Multi-Parented MNE Groups.

We have covered below in detail, Article 6.4 which provides special rules for JVs reported by an MNE Group in their Consolidated Financial Statements, where the UPE holds directly or indirectly at least 50% of its Ownership Interests.

Generally, for accounting purposes, a joint venture (“JV”) 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, but using the equity method in each owners’ Consolidated Financial Statements. This accounting treatment would exclude the JV from the scope of the GloBE Rules because it does 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 JV, 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 is a special rule that 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. 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 www.vilgst.com Page - 3 - of 5 to any venture in which the MNE Group holds 50% or more of the Ownership Interests. 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.

The definition of a JV under the GloBE Rules departs from the that used in accounting rules. As per Article 10.1 of the GloBE Rules, a JV is 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. Under the GloBE Rules, an Entity is not considered as a JV in the following cases:

a) If the UPE holds less than 50% of its Ownership Interests (although 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) 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).

b) 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

c) 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.

Article 6.4.1 also extends the operation of the GloBE Rules to the income of Entities controlled by the JV (and JV Subsidiaries), but only with respect to the UPE’s share of the JV and its subsidiaries. The JV and its JV Subsidiaries make up a JV Group. 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. www.vilgst.com Page - 4 - of 5 The application of GloBE Rules to a JV and its Subsidiaries are covered under the following three para of Article 6.4.1:

a) 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 Safe-Harbours. 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.

b) A Parent Entity that holds directly or indirectly, Ownership Interests in the JV or a JV Subsidiary shall apply the IIR in accordance with Article 2.1 to Article 2.3 of the GloBE Rules, i.e. in accordance with the top-down approach and split-ownership rules. Further, 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, UPE holds 50% of the Ownership Interests of JV Co which also owns 80% of the Ownership Interests of Sub Co (JV Subsidiary). 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%).

c) This para describes the application of UTPR in the context of JVs. The UPE’s Allocable Share of the Top-up Tax of all members of the JV Group (i.e. “JV Group Top-up Tax”) is 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 a Qualified IIR in accordance with para (b) above. If all the Topup Tax is allocated under para (b), then the JV Group Top-up Tax would be zero and therefore, para (c) has no effect. If there is an amount of Top-up Tax that has not been brought into charge under para (b), then such amount www.vilgst.com Page - 5 - of 5 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. In the example provided in para (b) above, the JV Group Top-up Tax is 90 (50 of JV Co’s Top-up Tax and 40 of Sub Co’s Top-up Tax) which has been allocated to the UPE under para (b), hence the JV Group Top-up Tax is zero and para (c) has no effect.