Step-by-step computation for Macro-step 1

Purpose

The purpose of the Scope and Perimeter analysis is to construct the GloBE perimeter by identifiying all the Constituent Entities and fixing their legal characteristic, thus allowing further treatment. It also allows to define the different sub-groups and sub-perimeters (JVs, MOMNEs, Investment entities...) in each jurisdiction that will be the basis of the next computational steps.

General Logic

In order to perform the Perimeter analysis a serie of computations on the shareholding graph needs to be perform. This will allow to finalize the direct and indirect ownership interests as well as the controlling interest necessary to draw the limits of the different sub-perimeters. Moreover a series of graph transversal will be necessary to qualify certain entities as member of Joint Ventures, Excluded Entities and or Investment entities.

Data Input

The Data input for Macro-step 1 consists in :

• The list of all potential entities and their characteristics;
• The list of all direct shareholdings and their characteristics or the ownership and controlling interest links

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Data Output

The Data output for Macro-step 1 consists in :

• The final characterization of each Constituent Entity and out of group entity with regard to GloBE rules, ready for input in the GIR;
• The final ownership and controlling interest matrices for use in Macro-step 3.'s re-allocations and various elections, as well as the Charging Mechanisms of Macro-step 5
• The final list of JVs and Minority-Owned sub-groups in each Jurisdictions as well as groups of Investment entities

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Detailed Step by step approach

Step 1.1. - Sanity checks on Ownership and Controlling interests

Purpose

The purpose of the Santity checks is identify and report all the data structure issues in the shareholding structure of the group, before computing the indirect ownership interests. It serves as an important reminder that the group's perimeter is at the basis of the Pillar 2 computation and that no accurate result can be achieved without ensuring its quality.

General Logic

This Step 1.1. will consist in a sequence of computations, checks and controls aiming at ensuring that depending on the level of input, the data provided is coherent and usable.

Data Input

The Data input for Step 1.1. consists in :

• The list of Entities for which legal characteristics are provided (within or outside the future GloBE Perimeter);
• The list of pre-calculated shareholding interests both ownership and controlling interests if links are available for each shareholding relationships as percentages;
• The list of shares, characteristics of these shares with regards to financial and control rights, for each Entity in the perimeter as well as outside;
• The list of Fall-back elections for the MNE group : assumptions for undocumented shares, ownership or controlling interests (re-normalization; auto-filling with either UPE or generic out-of-group entity or UPE)

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Data Output

The Data output for Step 1.1. consists in :

• The list of subsidiary entities absent from the list of Entities for which legal characteristics have been defined;
• The list of parent entities absent from the list of Entities for which legal characteristics have been defined;
• The list entities with Legal characteristics completely absent from the shareholding structure;
• The list of subsidiaries with incoherent shareholding structures : incoherent single values (negative, not numerical; higher than 100 for percentages...); incoherent aggregates values (totals not equal to 100%; computational errors...)
• The list of auto-cleaned elements of the structure using the fall-back mechanisms
• The list of errors for each faulty elements
  • unknown subsidiaries
  • unknown parents
  • unknown shareholding relations
  • typing errors
  • constraints errors
  • coherence controls

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Detailed computations

The list of Micro-Step is a follows :

• Micro-Step 1.1.1. Unknown subsidiaries
• Micro-Step 1.1.2. Unknown parents
• Micro-Step 1.1.3. Entity absent from the shareholding structure
• Micro-Step 1.1.4. Typing and constraints controls
• Micro-Step 1.1.5. Shareholding coherence controls

Micro-Step 1.1.1. Unknown subsidiaries

This step is pretty simple as it basically corresponds to a VLOOKUP between the matrix of shareholdings and the list of entities with characteristics to verify that any entity present as the target of a shareholding relationship from at least one parent entity is also present in the list of legal entities.

Micro-Step 1.1.2. Unknown parents

This step is pretty simple as it basically corresponds to a VLOOKUP between the matrix of shareholdings and the list of entities with characteristics to verify that any parent entity present as the owner of a shareholding relationship to any subsidiary entity is also present in the list of legal entities.

Micro-Step 1.1.3. Entity absent from the shareholding structure

This step is pretty simple as it basically corresponds to 2 VLOOKUPs between the matrix of shareholdings and the list of entities with characteristics to verify that any entity present in the list of entities is also present as the owner or the target of at least one shareholding link.

Micro-Step 1.1.4. Typing and constraints controls

This step is pretty simple as it basically corresponds to a verification of the different values according to their definition, typing and constraints.

The current list of these controls are as :

• percentages need to be doubles between 0 and 1;
• integers and doubles need to be positive or null;

Micro-Step 1.1.5. Shareholding coherence controls

This step requires to add the shareholding relationships to verify that the aggregates add-up to the given totals or percentages for each subsidiary entity and apply the fall-back mechanisms.

The current list of these controls and corrections are as follows :

• In any case, an error is returned containing the type of error and the correction made
• do the sum of percentages for both ownership and/or controlling interest sum to 100%, for each subsidiary entity;
  • If the fall-back election has been taken, the percentages are corrected to the choice made :
    • re-normalization (for total values strictly positive and lower or higher than 1): values are put back to 100%, by dividing to the total percentage reached;
    • automated allocation of the missing shareholding interests (for total values positive and lower than 1) to either :
      • a generic independent third party owner;
      • the UPE;
• do the sum of each Share type for the subsidiary entity and compre to the provided total (if not provided at all, or equal to 0, this test is skipped);
  • If the fall-back election has been taken, the numbers of shares are corrected according to the choice made :
    • re-normalization (for a total of different from the total provided): the new total is considered as true, unless equal to 0;
    • automated allocation of the missing shares (for positive totals lower than the total provided) to either :
      • a generic independent third party owner;
      • the UPE;

Step 1.2. - Generation of the Ownership Interests and Control matrices

Purpose

The purpose of this step is to build the necessary input for the various computations that will follow and may require matrix computations.

General Logic

This Step 1.2. will consist in the application of a few transformation of the data cleaned or checked at the Step 1.1. and form the initial ownership interest matrix and the controlling interest matrix if the data is available.

Data Input

The Data input for Step 1.2. consists in :

• The same input as the Step 1.1.
• The output of the Step 1.1.

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Data Output

The Data output for Step 1.2. consists in :

• The final direct ownership interest matrix;
• The final direct controlling interest matrix;

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Detailed computations

The list of Micro-Step is a follows :

• Micro-Step 1.2.1. Transformation of Shares data into percentages
• Micro-Step 1.2.2. Initial construction of the matrices
• Micro-Step 1.2.3. Removal of direct auto-circular rights

Micro-Step 1.2.1. Transformation of Shares data into percentages

This step applies to both financial and controlling rights, and consists in the computation of the ownership and controlling interests as percentages for each subsidiary-parent relationship present in the output data of Step 1.1. when the information provided is not directly provided as ownership and controlling interests but with detailed shares and share types.

Logic

The computation is quite straight forward :

• for each subsidiary entity, the total of financial rights (and controlling rights respectively) are computed as the sum for all share types of the produce of the number of shares of a given type across all of its shareholders multiplied by the financial (or control rights respectively) of the given type;
• for each shareholder of this entity, the financial rights (and controlling rights respectively) are computed as the sum for all share types of the produce of the number of shares of a given type owned by this specific shareholder multiplied by the financial (or control rights respectively) of the given type;
• for each shareholder of a given we can then generate a unique ownership interest (and controlling interest) value that corresponds to the ratio of the values determined in the previous two bullet points.

Example

• Input data

Entity: XYZ Corporation

Shareholders: Entity 1, Entity 2, Entity 3

Share Types: Type A, Type B

Share Types and Rights:

Share Type	Financial Rights	Controlling Rights
Type A	1.5	1.2
Type B	0.8	1.8

Share Distribution:

Shareholder	Type A Shares	Type B Shares
Entity 1	10	20
Entity 2	15	5
Entity 3	5	15

• Computation of Total Financial and Controlling Rights for XYZ Corporation:

Formula: TotalRights=∑(Number of shares of each type×Rights of that type)

Total Financial Rights	Total Controlling Rights
77.0	108.0

• Computation of Financial and Controlling Rights for Each Shareholder:

Formula: RightsforShareholder=∑(Number of shares of each type owned by shareholder×Rights of that type)

Shareholder	Financial Rights	Controlling Rights
Entity 1	31.0	48.0
Entity 2	26.5	27.0
Entity 3	19.5	33.0

• Computation of % interests

Formula: Interest=Shareholder’s Rights​/Total Rights

Shareholder	Financial Rights	Controlling Rights	Ownership Interest (%)	Controlling Interest (%)
Entity 1	31.0	48.0	40.26	44.44
Entity 2	26.5	27.0	34.42	25.00
Entity 3	19.5	33.0	25.32	30.56
Total	77.0	108.0	100.00	100.00

Micro-Step 1.2.2. Initial construction of the matrices

This step applies to both ownership and controlling interests, when already described as unique percentage values qualifying the rights of a given shareholder over one of its subsidiaries. At this stage there is a single value for a given couple entity-shareholder.

This may require to aggregate ownership and controlling interests that may have been expressed as multiple links even under their percentage form.

Once this preparation step is over, it consists in the construction of the Adjacency Matrix of the Shareholding Graph.

Micro-Step 1.2.3. Removal of direct auto-circular rights

Some Entities may hold ownership and/or controlling interests in themselves. It may make sense in the context of the management of shares in a legal entity, this makes the computation of indirect links impossible.

Therefore Micro-Step 1.2.3. empties the diagonal of the adjacency matrices of the shareholding graphs to remove of such links.

Once this is done, the matrices need to be re-normalized to reallocate the rights based on a total of rights that exclude the rights that were "self-owned" by the various entities. This normalization does not treat entities that have 0 parents in the shareholding structures to avoid division by 0.

Step 1.3. - Indirect ownership computation

Purpose

The purpose of this stage is to compute the Indirect ownership matrix, to allow all the computation that require indirect ownership values between entities.

General Logic

This Step 1.3. will be based on the Indirect ownership computation using Baldone ownership.

Data Input

The Data input for Step 1.3. consists in :

• The Ownership Interest Matrix computed in Step 1.2.

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Data Output

The Data output for Step 1.3. consists in :

• The Indirect Ownership Interest Matrix

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Detailed computations

The detailed computation is detailed in the Indirect ownership computation using Baldone ownership.

Step 1.4. - Controlling interest matrix computation

Purpose

The purpose of the the Step 1.4. is to compute the Controlling interest matrix. The ability to identify the shareholder having a direct or indirect Controlling interest in a given Entity is key at several stages of the Pillar 2 computation.

General Logic

This Step 1.4. will consist alternatively in the application of quality controls using the Share of Voting and/or ownership interest matrices, or in the computation of the controlling interests using majority rules along the shareholding chain.

Data Input

The Data input for Step 1.4. consists in :

• The precise Controlling Interest matrix;
• or alternatively the Indirect Share of Voting Rights matrix;
• or as a minimal requirement the Indirect ownership Matrix from Step 1.3.

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Data Output

The Data output for Step 1.4. consists in :

• The list of final Controlling Interest matrix;

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Detailed computations

The list of Micro-Step is a follows :

• Micro-Step 1.4.1. Verification of the unicity of the shareholder having a controlling interest at each level of the shareholding chain
• Micro-Step 1.4.2. Computation of the Controlling interest matrix using majority rules

Micro-Step 1.4.1. Verification of the unicity of the shareholder having a controlling interest at each level of the shareholding chain

This step .

Micro-Step 1.4.2. Computation of the Controlling interest matrix using majority rules

This .

Step 1.5. - Definition of the MNE Group

Purpose

The purpose of the Step 1.5. is to draw the perimeter of the MNE Group at the basis of the GloBE Perimeter, using the Controlling Interest Matrix and either the UPE or the Consolidation method.

General Logic

This Step 1.5. will consist in the use of the Controlling Interest Matrix to compute and/or verify the various elements that are used to compute and generate the GloBE Perimeter.

Data Input

The Data input for Step 1.5. consists in :

• The list of Entity Characteristics
• The Controlling Interest Matrix

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Data Output

The Data output for Step 1.5. consists in :

• The updated UPE list
• The updated list of "In group" entities
• The list of errors generated by the step

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Detailed computations

The list of Micro-Step is a follows :

• Micro-Step 1.2.1.

Micro-Step 1.5.1. UPE identification or control

This step is used to identify the UPE as either :

• the only entities with:
  • either :
    • no Controlling interests or,
    • which shareholder with Controlling Interest is not consolidated with no reasons listed in article 1.2.2.b) "size or materiality grounds"/, or "is held for sale",
  • and that has full consolidation as consolidation method;
• the only entities
  • marked "In group",
  • with no Controlling Interests of shareholders also marked "In group",
  • with consolidation method = full

If one or several entities are marked as UPE, errors should be returned in the following cases :

• Consolidation method for UPE is not full,
• UPE is has Controlling Interests, either
  • among the entities marked "in group"
  • that have a consolidation method different from "not consolidated" or that have selected one of the reasons listed in article 1.2.2.b) "size or materiality grounds"/, or "is held for sale"

Micro-Step 1.5.2. Control of the consolidation methods along shareholding chains

Explanation of the requested data structure

The method of consolidation plays a key role in the construction of the GloBE perimeter, as it is the main criterion used to define the Group. It is also combined with the ownership interests to identify the Joint Ventures.

It is also important to note that "JVs of JVs" are not included in the GloBE perimeter, and only subsidiaries of Heads of JVs that are consolidated on a line by line basis by the Head of JV are included.

When consolidation methods are stored as an entity characteristic, the interpretation becomes ambiguous. For instance, consider a scenario where 'full consolidation' is used as an entity characteristic. The immediate question that arises is whether this refers to the consolidation method employed by the Ultimate Parent Entity (UPE) or is it specific to the consolidating entity in the context of Joint Ventures. This distinction is crucial. If a subsidiary is fully consolidated by the UPE, it implies a different level of control and financial integration compared to a Joint Venture where full consolidation might denote a shared control scenario.

Moreover, if the consolidation method is recorded in the context of shareholding relationships, another layer of complexity is added. It becomes challenging to discern who exactly is consolidating. For example, in a multinational group with a web of cross-shareholdings, it might be unclear whether a particular entity is being consolidated proportionally by one member of the group and fully by another. This ambiguity can lead to significant issues in financial reporting and governance.

This explains the requested data structure, requiring a consolidation method both by the UPE and for JVs only by the first consolidating entity, to allow for the eliminations of "JVs of JVs" from the GloBE perimeter at Step 1.7..

Controls on consolidation methods

If entities sandwiched between fully or proportionally consolidated can be "not consolidated", the general tendency along the shareholding chain needs to be that a parent is supposed to have a "stronger" consolidation method as a subsidiary.

Therefore the following controls can be applied to check for the coherence of the consolidation methods either by the UPE or by a given first consolidating entity:

an entity cannot have consolidation method = full/proportional when its direct parent with Controlling Interest has consolidation method = equity OR (consolidation method = not consolidated AND NOT one of the reasons listed in article 1.2.2.b) "size or materiality grounds"/, or "is held for sale") 

This can be checked using a graph transversal algorithm on the direct shareholding structure, starting at either the UPE or any first consolidating entity and by testing for the existence of a Controlling Interest using the Controlling Interest Matrix.

The error is returned to indicate an incoherence in the consolidation method.

Micro-Step 1.5.3. Identification or control of the MNE group's perimeter

Entity is part of the MNE Group if :

• UPE has Controlling interest in the entity
• and consolidation method
  • full/proportional/equity
  • or not consolidated for reasons in article 1.2.2.b) "size or materiality grounds"/, or "is held for sale"

Control of the "In group" indicator : an error is returned if a entity is predicted as "in group" but marked out of group in the forced input

Step 1.9. - Specific CE treatments

Investment entity identification

Purpose

The purpose of the .

General Logic

This Step 1.2. will consist in .

Data Input

The Data input for Step 1.2. consists in :

• The list of

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Data Output

The Data output for Step 1.2. consists in :

• The list of

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Detailed computations

The list of Micro-Step is a follows :

• Micro-Step 1.2.1.

Micro-Step 1.2.1. Unknown subsidiaries

This step .

Micro-Step 1.2.2. Unknown parents

This .

Micro-Step 1.2.3. Entity absent from the shareholding structure

This .