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Election to consolidate transactions in the same jurisdiction

Applies
FY2024 onwards
Reviewed
Rule
P2-CONS-2024.1
By

Can intragroup transactions be eliminated under Pillar Two?

Yes, by five-year election, between entities in one jurisdiction and one tax consolidation group, as they are in the consolidated accounts.

Per GloBE Model Rules (Pillar Two), December 2021, Article 3.2.8, election to apply consolidated accounting treatment

An Ultimate Parent Entity may elect to apply its consolidated accounting treatment to eliminate income, expense, gains, and losses from transactions between Constituent Entities that are located, and included in a tax consolidation group, in the same jurisdiction for purposes of computing each such Constituent Entity's Net GloBE Income or Loss. The election is a Five-Year Election. Upon making or revoking such election, appropriate adjustments shall be made for GloBE purposes such that there shall not be duplications or omissions of items of GloBE Income or Loss as a result of having made or revoked the election.

Where local tax already treats dealings inside a tax group as neutral, the GloBE computation can do the same — sparing the group from pricing domestic transactions at arm's length, and from being charged on a profit it has not yet made outside the group.

Four conditions, all required

The conditions

  • Both parties are Constituent Entities located in the same jurisdiction
  • Both are included in a tax consolidation group there — which includes any local rule that lets related entities share current income or losses, such as group relief
  • Neither is an Investment Entity, a Minority-Owned Constituent Entity, or a Joint Venture entity under Article 6.4
  • The Five-Year Election is in force

What changes, and what does not

Interest, service fees and the like between two entities in one jurisdiction already cancel in the jurisdiction's total: income of one, expense of the other, in the same year. The election matters where they do not cancel in the same year. Stock sold by one entity to another, made into a product and sold to a customer the next year would otherwise show a profit a year early; with the election the profit is recognised when the group sells outside.

Not a step-up

The election must not remove the group's income from transactions with third parties, and must not bring purchase accounting adjustments held on consolidation into carrying values. Assets stay at their original carrying value, and the full gain or loss accrued while the group owned them is recognised when they are sold outside the tax consolidated group or outside the jurisdiction.

Cross-border dealings are untouched

A transaction with a group entity in another jurisdiction is treated like one with a third party, at arm's length. If the manufacturer in the example sold its finished goods to a group reseller abroad instead, it would recognise the group's profit on that sale.

Why elect

Local tax may already eliminate or defer such transactions under its consolidation or group relief regime. And in a jurisdiction with no Covered Tax, the entities may not be pricing their dealings with each other at arm's length at all; the election avoids having to.

On making or revoking it

Appropriate adjustments are required so that no item of GloBE Income or Loss is counted twice or left out — for example on stock sold inside the group before the election and still unsold outside it.

Order of testing

  1. 1

    Inputs requiring your determination

    The four questions, one at a time. An unanswered question is never read as a no.

  2. 2

    Constituent Entities in the same jurisdiction

    A cross-border transaction is outside the election.

  3. 3

    Entities whose rate is computed separately

    Investment Entities, Minority-Owned Constituent Entities and Joint Venture entities are outside it.

  4. 4

    A tax consolidation group

    Both parties must be in one, or in a regime for sharing current income or losses.

  5. 5

    The Five-Year Election

    Made by the Ultimate Parent Entity.

Examples

Illustrative scenarios — ours, not the authority’s — each computed live by this rule. Change any fact and the outcome is the rule’s, not a hand-written answer.

Stock sold between two companies in one tax group

A purchasing company sells raw materials to a manufacturing company in the same country and the same tax consolidation group; the finished goods are sold to customers the following year. With the election the internal profit is eliminated and the group's profit is recognised on the sale to the customer.

Computed

The income, expense, gain or loss from the transaction is eliminated in computing each party's GloBE Income or Loss for FY2026, as determined: both are Constituent Entities located in the same jurisdiction and included in a tax consolidation group there, neither has a separately computed rate, and an election under Article 3.2.8 is in force. The elimination follows the Ultimate Parent Entity's consolidated accounting treatment. It does not remove the group's income from a sale to a third party, and it does not bring purchase accounting adjustments into carrying values: an asset stays at its original carrying value, and the whole gain or loss accrued during the group's ownership comes in when it is sold outside the tax consolidated group or the jurisdiction. Based on the determinations you supplied.

Decided by the five-year election

The manufacturer sells to a group reseller abroad

The same goods sold to a distribution company in another jurisdiction. The election does not reach it: the manufacturer recognises its profit at arm's length.

Computed

The transaction is not eliminated under Article 3.2.8, as determined: the parties are located in different jurisdictions. A cross-border transaction within the group is treated like one with a third party and gets no netting or deferral from the election. Each Constituent Entity takes its own side of it into GloBE Income or Loss, in the same amount and — where Article 3.2.3 requires — at arm's length. Based on the determinations you supplied.

Decided by the constituent entities in the same jurisdiction

A property sale to a minority-owned group company

A building sold to a company in the same country that the group controls but owns 25% of. Its rate is computed apart, so the sale is not eliminated and must be at arm's length.

Computed

The transaction is not eliminated under Article 3.2.8, as determined: one of the parties is an Investment Entity, a Minority-Owned Constituent Entity or a Joint Venture entity. The election does not reach transactions with them, because their Effective Tax Rate is computed apart and nothing would net off. Each Constituent Entity takes its own side of it into GloBE Income or Loss, in the same amount and — where Article 3.2.3 requires — at arm's length. Based on the determinations you supplied.

Decided by the entities whose rate is computed separately

Two local companies not in a tax group

Domestic sister companies that file separately, with no group relief between them.

Computed

The transaction is not eliminated under Article 3.2.8, as determined: the parties are not both included in a tax consolidation group, or a regime for sharing current income or losses, in the jurisdiction. Each Constituent Entity takes its own side of it into GloBE Income or Loss, in the same amount and — where Article 3.2.3 requires — at arm's length. Based on the determinations you supplied.

Decided by the a tax consolidation group

Try it

Supply the facts and this rule computes the outcome in your browser, live. Leave a determination undecided and it blocks the result — it is never read as a no.

Not computed yet

1 input still need your determination:

  • Are both parties to the transaction Constituent Entities of the MNE Group located in the same jurisdiction?

Computed in your browser from the figures you supply. Nothing is sent anywhere, and the result is a computation against a rule — reference, not tax advice.

Sources

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Reference, not tax advice.

Pankaj Agarwal — Tax Technology Leader