GloBE Income or Loss Computation under the GloBE Model Rules

How Article 3 Determines GloBE Income or Loss

This is the third article in my series on the OECD/G20 Global Anti-Base Erosion (GloBE) Model Rules. It deals with the computation of GloBE income or loss under Article 3. That figure decides how much top-up tax a group pays in each jurisdiction. Each step below changes it, so the order matters.

Understanding the Computation of GloBE Income or Loss

The GloBE Rules use one tax base for every jurisdiction. The aim is to stop national tax rules from changing the measure of profit. The result is a common starting point for the effective tax rate test.

Article 3.1: Financial Accounts

Article 3.1 starts with the financial accounts. Those accounts must follow a high-quality standard, such as IFRS or US GAAP, and the parent's standard normally governs. Audited accounts work here because an outside auditor has tested them. I would check which standard applies before I touch a figure, and I would apply it the same way in every entity.

Importance of Standardized Financial Statements:

- Uniformity and comparability: one standard across the group makes the numbers comparable. Profit in one country can then be read against another without adjustment.

- Transparency: audited figures are harder to dispute. A tax authority can trace them to a signed set of accounts. That helps when it tests the return.

Article 3.2: Adjustments to Determine GloBE Income or Loss

Article 3.2 then adjusts the financial figure. Accounting and tax report for different reasons, so the two numbers rarely agree. The adjustments bridge the gap.

Key Adjustments Include:

- Permanent adjustments: some items never reverse. Fines, penalties and exempt income are removed once, and they stay removed in later years.

- Temporary adjustments: other items only change the year in which they appear. Depreciation methods and deferred income are typical. The difference unwinds later.

Complexity in Adjustments:

- Country-specific rules: local tax law drives many of the adjustments. Two countries can need opposite entries for one transaction.

- Intercompany transactions: dealings between group companies must sit at arm's length. A price that fails that test is adjusted before it enters the figure.

Article 3.3: International Shipping Income Exclusion

Article 3.3 keeps income from international shipping out of the computation. Shipping has long been taxed under its own treaties. The exclusion respects that history.

Justification for Exclusion:

- Avoiding double tax: the same voyage income can be taxed in more than one country. Leaving it out of the GloBE base stops the rules from taxing it again.

- Industry features: ships move between waters and flags, and the tax follows the flag. One territorial measure of profit would misstate the income.

Article 3.4: Allocating Income to a Permanent Establishment

Article 3.4 splits income between a head office and its permanent establishment. Banking and insurance show why. The branch can book profit that the head office has earned. I would read the treaty first, then the branch accounts.

Allocation Principles:

- Arm's length standard: the branch's profit must match the work it does. That is the same test as between two separate companies.

- Treaty and local law: the split should follow the Double Taxation Agreement (DTA) and local law. The branch return and the GloBE figure should then agree.

Article 3.5: Allocation of Income or Loss from a Flow-through Entity

Article 3.5 covers entities that are transparent for tax, mainly partnerships and trusts. Their income goes to the owners, following the partnership agreement or the trust deed.

Challenges in Allocation:

- Differing structures: a partnership in one country may be a company in another. The allocation has to follow the legal form the group actually uses.

- Uneven tax treatment: the same flow-through entity can be taxed in one country and ignored in another. That difference changes the group's effective tax rate.

Conclusion

Articles 3.1 to 3.5 move from the audited accounts to a figure the group can compare across jurisdictions. I would test each adjustment against the local accounts before I sign the return. The next article in the series takes up the computation of adjusted covered taxes, which turns that figure into an effective tax rate.