GLOBAL MINIMUM TAX SERIES - Guidance on Rebasing monetary thresholds in the Globe Rules

[Amit Jalan]

Global Minimum Tax (GMT) - A global deal to ensure big companies pay a minimum tax rate of 15% and make it harder for them to avoid taxation has been agreed by most of Countries in the World, and the Inclusive Framework (IF) is moving aggressively towards implementation of Pillar 2 on 1st January 2024, at least in a phased manner.

With a primary aim to put an end to decades of tax competition between governments to attract foreign investment and discourage multinationals from shifting profits - and tax revenues - to low-tax countries regardless of where their sales are made, it will apply to all Multi-National Entities. GMT will, therefore, impact the bottom line of the companies directly in terms of tax expense and it is expected that entities implementing this regime seamlessly, can benefit from a competitive advantage.

For tax professionals, both on the Consulting and Client side, it is an opportunity for tomorrow and those who enter now will certainly have a first mover’s advantage. Hence it is imperative that tax professionals keep themselves abreast of the dynamics of the new regime, which are expected to change fast as Governments and Tax Departments of the IF get more and more involved.

In this article we have covered the guidance issued in relation to the Rebasing of monetary thresholds in the GloBE Rules.

We hope this bulletin adds Value in your professional Sphere.

The GloBE Rules contain several monetary thresholds expressed in Euros (EUR), as below:

a) Articles 1.1, 1.2, and 6.1.1 – which refer to revenue included in the Consolidated Financial Statements equal to or greater than EUR 750 million.

b) Article 3.1.3 – which refers to permanent differences in excess of EUR 1 million.

c) Articles 4.6.1 and 4.6.4 – which refer to an aggregate decrease of less (Article 4.6.1) or more (Article 4.6.4) than EUR 1 million in the Adjusted Covered Taxes.

d) Articles 5.5.1(a) and (b) – which refer to Average GloBE Revenue of less than EUR 10 million and Average GloBE Income or Loss of less than EUR 1 million.

e) Article 9.3.2 – which refers to the sum of the Net Book Values of Tangible Assets not exceeding EUR 50 million.

f) Article 10.1, “Material Competitive Distortion” – which refers to an aggregate variation of greater than EUR 75 million in a Fiscal Year.

g) Article 10.1, “Policy Disallowed Expenses” – which refers to expenses accrued by the Constituent Entity for fines and penalties that equal or exceed EUR 50 000.

To ensure consistency in the monetary thresholds used by different jurisdictions including those that are expressed in non-EUR currency, the Administrative Guidance provides for an annual rebasing of the non-EUR denominated thresholds based on:

a) The average foreign exchange rate for the month of December determined by the foreign exchange reference rates as quoted by the European Central Bank (ECB) and apply the rebased thresholds to any Fiscal Year that starts on any day of the following calendar year.

b) Where the local currency of the jurisdiction is not quoted in the foreign exchange reference rates of the ECB or the jurisdiction faces legal or practical impediments to using such exchange rate, the average foreign exchange rate for the month of December as quoted by the jurisdiction’s Central Bank should be used.

The Administrative Guidance also provides that the foreign exchange rate for each individual year for the purposes of determining the relevant threshold translated into local currency will be based on the average foreign exchange rate for December of the calendar year immediately preceding the calendar year in which such Fiscal Year starts and not a single foreign exchange rate applied for the purposes of all the relevant Fiscal Years.

For example, Article 1.1 sets out that the GloBE Rules apply to Constituent Entities that are members of an MNE Group that has annual revenue of EUR 750 million or more in the Consolidated Financial Statements of the Ultimate Parent Entity (UPE) in at least two of the four Fiscal Years immediately preceding the tested Fiscal Year. Assuming the tested Fiscal Year is 2026 and the jurisdiction expresses the threshold in local currency, then for the purposes determining whether the MNE Group’s revenues exceeded the threshold, the MNE Group’s revenues would need to exceed the threshold in two of the four years based on the annually translated rates outlined below, rather than applying a single foreign exchange rate to all the Fiscal Years in question:

a) For the 2022 Fiscal Year – EUR 750 million will be translated into local currency based on the average foreign exchange rate for the month of December 2021 determined by the foreign exchange reference rates as quoted by the ECB or if that is not available, the average exchange rate quoted by the central bank of the jurisdiction.

b) For the 2023 Fiscal Year – the only change will be that the average foreign exchange rate for the month of December 2022 will be used.

c) For the 2024 Fiscal Year – the only change will be that the average foreign exchange rate for the month of December 2023 will be used.

d) For the 2025 Fiscal Year – the only change will be that the average foreign exchange rate for the month of December 2024 will be used.