3‑95 Adjustment—Arm’s Length Principle a3‑95 Adjustment—Arm’s Length Principle and tax/accounting permanent differences in respect of cross‑border transactions

3‑95 Adjustment—Arm’s Length Principle and tax/accounting permanent differences in respect of cross‑border transactions

(1) In computing the GloBE Income or Loss of a Constituent Entity of an MNE Group for a Fiscal Year, adjust the Constituent Entity’s Financial Accounting Net Income or Loss for the Fiscal Year in accordance with the following subsections. (2) Subsection (3) applies if: (a) the amount of a transaction that is between Constituent Entities of the MNE Group that are located in different jurisdictions: (i) is not recorded in the financial accounts of both Constituent Entities in the same amount; or (ii) is not recorded in the financial accounts of both Constituent Entities consistently with the Arm’s Length Principle; or (iii) is not recorded at all in the financial accounts of both Constituent Entities; and (b) as a result of adjustments to the taxable income of each of the Constituent Entities made in connection with transfer pricing, a tax/accounting permanent difference (see subsection (6)) arises in respect of the transaction for each of the Constituent Entities; and (c) the tax/accounting permanent difference for each Constituent Entity corresponds to the tax/accounting permanent difference for the other Constituent Entity. (3) For the purposes of subsection (1), adjust the amount (the recorded amount) in which the transaction is recorded in the financial accounts of both Constituent Entities so that the recorded amount reflects the adjustments to the taxable income mentioned in paragraph (2)(b). (4) Subsection (5) applies if: (a) the amount of a transaction that is between Constituent Entities of the MNE Group that are located in different jurisdictions: (i) is not recorded in the financial accounts of both Constituent Entities in the same amount; or (ii) is not recorded in the financial accounts of both Constituent Entities consistently with the Arm’s Length Principle; or (iii) is not recorded at all in the financial accounts of both Constituent Entities; and (b) there is a tax/accounting permanent difference in respect of the transaction in relation to one of the Constituent Entities (the high‑tax Constituent Entity) as a result of adjustments to the taxable income of the high‑tax Constituent Entity made in connection with transfer pricing; and (c) there is not a tax/accounting permanent difference in respect of the transaction in relation to the other Constituent Entity as a result of adjustments to the taxable income of the other Constituent Entity made in connection with transfer pricing; and (d) the high‑tax Constituent Entity is located in a jurisdiction that has a nominal tax rate that equals or exceeds the Minimum Rate; and (e) the Effective Tax Rate of the MNE Group for the jurisdiction for at least one of the 2 Fiscal Years immediately preceding the Fiscal Year mentioned in subsection (1) equals or exceeds the Minimum Rate. (5) For the purposes of subsection (1), adjust the amount (the recorded amount) in which the transaction is recorded in the financial accounts of both Constituent Entities so that the recorded amount reflects the adjustments to the taxable income mentioned in paragraph (4)(b). (6) In this section, a reference to a tax/accounting permanent difference is a reference to a difference between the treatment of an amount for the purposes of Covered Taxes and for accounting purposes that is not eliminated over time (and accordingly does not give rise to deferred tax).