DTL Recapture
The determination of the DTL Recapture comes with challenges in tracking and allocating deferred tax liabilities (DTLs) in an appropriate manner to be compliant with the GloBE Rules. The June 2024 AG aims to simplify the tracking and allocation thereof, but despite the suggested simplifications this remains to be quite a challenge for the reporting systems of in-scope Groups.
Divergences between GloBE and accounting carrying values
Where the GloBE Income or Loss is determined based on a carrying value that deviates from the carrying value based on the relevant accounting standard, the DTAs and DTLs should generally be determined in line with such GloBE carrying value. A very welcome clarification included in the June 2024 AG is that a transfer of assets subject to a GloBE arm's length adjustment will also be recognized against such GloBE carrying value at the level of the acquiring Constituent Entity.
Allocation of cross-border current taxes
Further guidance is provided on the allocation of cross-border taxes between a Main Entity and its Permanent Establishments (PEs) subject to cross-crediting systems and the allocation of taxes with respect to Controlled Foreign Companies, Hybrid Entities, and Reverse Hybrid Entities. The June 2024 AG aims to introduce a consistent mechanism for such allocation, but the resulting four-step allocation mechanism seems to be very complicated.
Allocation of cross-border deferred taxes
The June 2024 AG also provides for guidance on the allocation of deferred taxes between Constituent Entities. In particular, the guidance discusses the application of the Substitute Loss Carry-Forward DTA to foreign PEs and Hybrid Entities as well as the methodology to allocate deferred tax expenses and benefits under a CFC Tax Regime, and to allocate deferred taxes to Hybrid Entities, Reverse Hybrid Entities and PEs.
Allocation of profits and taxes in structures including Flow-through Entities
Various issues have been identified for GloBE purposes in relation to the allocation of profits to Flow-through Entities. The issues discussed in the June 2024 AG in this respect are: (1) the location and identification of the direct owner of a Flow-through Entity, (2) application of Article 3.5.3 in view of Ownership Interests in Flow-through Entities held by entities other than Group Entities, (3) the allocation of cross border taxes to Flow-through Entities in case of CFC taxes, (4) allocation of taxes to Hybrid Entities, and (5) allocation of taxes to Reverse Hybrid Entities.
Treatment of securitization entities
Securitization entities, often consolidated with the originator or operating as orphan vehicles, are designed to repackage risks without taking on risks themselves. However, their financial operations, particularly those involving hedging arrangements and deferred tax accounting, can lead to significant profits or losses. The OECD has recognized these complexities and has issued new guidance to accommodate the unique nature of securitization entities. This guidance aims to prevent adverse GloBE impacts on these entities, allowing countries to exclude them from the scope of the QDMTT without jeopardizing their eligibility for the QDMTT Safe Harbour.
How can we support you?
The GloBE Rules have been introduced in the EU and other jurisdictions around the world for years starting on or after 31 December 2023 at the earliest. The newly released June 2024 AG contains various technical details that will impact the calculation of the GloBE ETR in various scenarios.
Our Pillar Two team is available to support you in analysing and modelling the impact of this new guidance and the GloBE Rules in general on your group, assisting you in setting up compliance processes and exploring ways to mitigate increased administration, taxation and complexity.
Should you have any questions, please contact a member of our Pillar Two team or your regular trusted contact at Loyens & Loeff.
