The Global Anti-Base Erosion (hereinafter “GloBE”) rules belong to Pillar 2 of the initiative led by the Organisation for Economic Co-operation and Development (OECD) to address the tax challenges arising from the digitalization of the economy and base erosion and profit shifting (BEPS).
These rules ensure that large multinationals pay a minimum level of tax in all jurisdictions where they operate. GloBE regulations and Transfer Pricing are interrelated in the fight against tax base erosion and profit shifting. Multinationals should consider both regulations in their tax planning and documentation preparation to ensure compliance and minimize the risk of tax adjustments and penalties.
Article 1.1 of the consolidated commentary on Pillar Two, global minimum tax rules set out the limits of application of the GloBE rules to groups of Multinational Enterprises (MNEs) whose annual consolidated revenues in at least two of the previous four tax years equal to or exceed EUR 750 million. These scope rules ensure that smaller and purely domestic groups are not affected by the GloBE rules. In addition, it clarifies that Excluded Entities are not subject to the GloBE rules.
Article 1.1: Limits and Exclusions
Application Limitations
Article 1.1 establishes a revenue threshold for determining the applicability of the GloBE rules, thereby protecting smaller groups and purely domestic groups. It also specifies that Excluded Entities are not subject to these rules.
Article 1.1.1: Key Elements
Restrictions and Revenue Threshold
Article 1.1.1.1 supplements this scope with two main elements. First, it restricts the application of the GloBE rules to Constituent Entities of an MNE Group. Second, it establishes a revenue threshold based on that used in the Country-by-Country Reporting (CbCR) rules. This threshold limits their application to those MNE groups with consolidated revenues of at least EUR 750 million in at least two of the previous four fiscal years. This revenue threshold reflects cost/benefit considerations within the context of the overall tax policy rationale of the GloBE rules.
Practical Application
Operationalization of the Revenue Threshold
The application of the revenue threshold is based on the revenue reported in the MNE Group’s consolidated financial statements. Two years of a four-year test are used to reduce volatility in applying the rules. The Constituent Entities comprising the MNE Group will be within the scope of the GloBE rules if the MNE Group has €750 million or more of reported revenue in at least two fiscal years in the four-year period immediately preceding the fiscal year tested.
Special Cases and Additional Provisions
Special provisions apply in limited cases where consolidated financial statements are not available for the four fiscal years immediately preceding the fiscal year tested. If the Group Forming Entities were created again, the third year would be the first year in which the GloBE rules may apply as long as the revenue threshold for the previous two years is met.
The revenue threshold applies to consolidated revenues as reported in the Group’s consolidated financial statements. When an Entity’s revenues are consolidated with those of the MNE Group, the threshold applies to the Entity’s total revenues as reflected in the Group’s consolidated financial statements, without reduction for the participation of minority interests.
Although an excluded entity is not subject to the GloBE rules, it is considered a group entity that determines the revenue threshold as long as revenues are consolidated with the rest of the Group.
In cases where the revenue threshold is set in a currency other than the Euro and such amount changes annually, the revenue threshold in effect at the beginning of the fiscal year applies.
Article 1.1.2: Non-Conventional Fiscal Year Adjustments
Consistency in the Threshold Application
This section addresses the adjustment needed when an MNE Group’s fiscal year does not coincide with a standard 12-month period, ensuring consistency in applying the threshold for both GloBE and CbCR.
Article 1.1.3: Exclusions and Threshold Calculation
Excluded Entity Considerations
We detail herein how Article 1.1.3 excludes certain entities from the GloBE rules, considering only their revenues to calculate the threshold, thus ensuring the integrity of the evaluation process.
Summary
Impact and Objectives
Article 1.1 and its associated provisions establish a clear framework to apply the GloBE rules, ensuring that MNE groups with global reach are subject to these rules while reducing administrative costs and maintaining overall tax profits.
