750 Euro in Dollars: Understanding the GloBE Revenue Threshold

The global minimum tax, known as Pillar Two of the OECD’s Base Erosion and Profit Shifting (BEPS) project, introduces a 15% minimum effective tax rate for multinational enterprises (MNEs) with annual revenue exceeding 750 million euros. This threshold, a critical component of the Global Anti-Base Erosion (GloBE) rules, determines which companies fall under the purview of these new regulations. Understanding how this threshold is calculated and applied is crucial for businesses operating internationally.

The 750 million euro threshold is determined based on the consolidated revenue of the MNE group. This means that all revenue of companies consolidated within the group is considered, regardless of ownership percentages. Even revenue attributable to minority shareholders is included in the calculation. Excluded entities, while not directly subject to the GloBE rules, still have their revenue counted toward this 750 million euro threshold.

The OECD Model Rules stipulate adjustments to the 750 million euro threshold for fiscal years that are shorter or longer than 12 months. For example, a company with a six-month fiscal year and 300 million euros in consolidated revenue would have an adjusted revenue of 600 million euros for the purposes of the threshold calculation (12/6 * 300 million). This ensures a consistent application of the rules across varying fiscal year lengths.

While the threshold is expressed in euros, countries implementing the GloBE rules domestically may use their own currencies. The OECD recommends using the euro for consistency, but if a local currency is used, annual rebasing is advised. This involves adjusting the threshold in the local currency each year to reflect fluctuations in exchange rates. An MNE would then use the revenue threshold in effect at the start of its fiscal year. For instance, a company with a fiscal year ending March 31, 2023, in a country that rebases its currency on December 31st each year, would use the revenue threshold as of April 1, 2022. Consistency in currency conversion is also vital for MNEs, requiring a uniform method across all jurisdictions rather than a selective approach.

The GloBE rules heavily rely on consolidated financial statements prepared according to accounting standards like IFRS 10. These statements provide a comprehensive view of the MNE group’s financial position by consolidating the assets, liabilities, income, and expenses of the parent company and its controlled entities. Control is established through power over the entity, exposure to variable returns, and the ability to influence those returns. Intragroup transactions are eliminated to avoid double counting. Investment entities, however, generally have an exception and are not required to consolidate their subsidiaries.

Defining “revenue” for GloBE purposes requires careful consideration of accounting standards. The OECD provides guidance that revenue encompasses inflows from ordinary activities like selling goods or services. It should be determined in line with the applicable accounting standard, typically before deducting cost of sales or operating expenses. Net gains from investments, even extraordinary or non-recurring items, are included. If gains and losses are presented separately, gross losses are netted against gross gains to arrive at the revenue figure. Financial entities, which may not record gross transaction amounts, are allowed a more flexible approach, using items similar to revenue under their specific accounting standards.

The OECD also addresses situations where the fiscal year of the Ultimate Parent Entity (UPE) differs from that of its constituent entities. Different accounting standards may handle this discrepancy differently, either by including the full fiscal period results of the constituent entity or only the overlapping period. The GloBE rules align with the chosen accounting standard’s method. If a constituent entity’s financial accounts are not included in the UPE’s consolidated statements due to differing fiscal years, the GloBE calculations for that entity are based on the UPE’s fiscal year-end. Similar considerations apply to discrepancies between fiscal and tax years, with the GloBE rules deferring to the method used in the consolidated financial statements for determining adjusted covered taxes.