XCo 1, a company located in jurisdiction X, has a branch located in jurisdiction Y.

The branch operates a business.

In a particular fiscal year:

• The branch derives 1,000 of revenue, and it has expenses of 600.
• Included in the 1,000 of revenue are: (i) 100 of interest income derived from ACo, a related company located in jurisdiction A; (ii) 150 of royalties derived from XCo 2, an unrelated company located in jurisdiction X; and (iii) 200 of service fees derived from the XCo 1 head office in jurisdiction X.
• 100 of interest income derived from ACo: 10% interest withholding tax (IWT) is deducted in jurisdiction A. The branch claims a full foreign tax credit for the IWT in its branch income tax return in jurisdiction Y.
• 150 of royalties derived from XCo 2: The 150 is treated as domestic source income in jurisdiction X. 10% royalty withholding tax (RWT) is deducted in jurisdiction X. The branch claims a full foreign tax credit for the RWT in its branch income tax return in jurisdiction Y.
• 200 of service fees derived from XCo 1 head office: The 200 is not recognised under the jurisdiction X corporate income tax (CIT) law.
• In its jurisdiction Y income tax return, the branch reports taxable income of 400, and an income tax liability (after claiming the 2 foreign tax credits) of 50.

For the same fiscal year:

• XCo 1 derives revenue of 2,000, and it has directly related expenses of 1,600.
• Included in the 2,000 of revenue is 300 of royalties derived from ZCo, a related company located in jurisdiction Z. 10% RWT is deducted in jurisdiction Z. XCo 1 claims a full foreign tax credit for the RWT in its CIT return.

Under the jurisdiction X CIT law:

• Tax (20% rate) is imposed on both domestic source income and foreign source income
• Credit is given for foreign tax paid on foreign source income
• Cross-crediting is allowed and there is only one “basket” – i.e., credit is calculated on total foreign tax paid on total foreign source income
• Credit is limited to the lower of foreign tax paid and X CIT on foreign income (credit limitation)
• In determining the credit limitation, only expenses which directly relate to foreign source income are taken into account
• Credit cannot be used against X CIT on domestic source income

Based on this limited information, what are the “Cross-Crediting Allocation Keys” (for the purposes of the allocation of cross-border current taxes under Art. 4.3.2) for the branch and XCo 1 head office for this fiscal year?

Answer will be revealed soon!

ACo, a company located in jurisdiction A, owns 100% of the shares in XCo, a company located in jurisdiction X.

XCo is treated as a disregarded entity for jurisdiction A corporate income tax (CIT) purposes.

Under the jurisdiction A CIT law:

1. Tax (15% rate) is imposed on both domestic source income and foreign source income
2. Credit is given for foreign tax paid on foreign source income
3. Cross-crediting is allowed and there is only one “basket” – i.e., credit is calculated on total foreign tax paid on total foreign source income
4. Credit is limited to the lower of foreign tax paid and A CIT on foreign income (credit limitation)
5. In determining the credit limitation, only expenses which directly relate to foreign source income are taken into account
6. Credit cannot be used against A CIT on domestic source income

In a particular fiscal year:

1. ACo directly derives 2,000 of domestic source revenue, and incurs 1,400 of expenses directly related to that revenue.
2. ACo is entitled to a Qualified Refundable Tax Credit of 30. ACo uses this credit to reduce its A CIT liability.
3. XCo derives 1,000 of revenue, and incurs 500 of expenses.
4. Included in XCo’s 1,000 of revenue is a payment of 200 from ACo. This amount is disregarded under the A CIT law. Therefore, the resulting net amount of XCo’s profits (1,000 – 200 – 500 = 300) is included in ACo’s taxable income for A CIT purposes.

Based on this limited information, what amount of “Allocable Covered Taxes” (for the purposes of the allocation of cross-border current taxes under Art. 4.3.2) does ACo have for this fiscal year?

Answer:

References are to paras. 52.13 to 52.23 of Comm to Art. 4.3.2.

Para. 52.13: Allocable Covered Taxes = A – B – C, where A = total current tax expense accrued by Main / Parent Entity with respect to applicable tax regime; B = domestic tax liability without regard to any foreign source income; and C = Blended CFC Taxes.

Item C is 0 in this example.

Item B …

Actual domestic source income: 2,000 – 1,400 = 600.

Deemed domestic source income (after adjustment for QRTC): 600 + 30 = 630 (para. 52.16).

Deemed domestic source income (after adjustment for disregarded payment): 630 – 200 = 430 (para. 52.19).

Item B = 430 x 15% = 64.5.

Item A …

Actual taxable income: (2,000 – 1,400) + (1,000 – 200 – 500) = 900 [See Note].

Actual current tax expense: (900 x 15%) – 30 = 105.

Item A = 105 + 30 = 135.

Therefore, Allocable Covered Taxes = 135 – 64.5 – 0 = 70.5.

Note: Although the 200 disregarded payment is taken into account in determining “foreign source income” in Step 1 (para. 52.8), I cannot find a requirement to take it into account in determining the total current tax expense in Step 2 – cf. the adjustment in the calculation of the domestic tax liability (para. 52.19).

Do you agree?

Parent Entity, a company located in jurisdiction P, owns 100% of the shares in (1) ACo, a company located in jurisdiction A; and (2) BCo, a company located in jurisdiction B.

ACo is treated as a disregarded entity for jurisdiction P corporate income tax (CIT) purposes.

Under the jurisdiction P CIT law:

• Tax is imposed on both domestic source income and foreign source income
• Credit is given for foreign tax paid on foreign source income
• Cross-crediting is allowed and there is only one “basket” – i.e., credit is calculated on total foreign tax paid on total foreign source income
• Credit is limited to the lower of foreign tax paid and P CIT on foreign income (credit limitation)
• Credit cannot be used against P CIT on domestic source income

In a particular fiscal year, ACo has gross revenue of 1,000, and gross expenses of 700.

Included in ACo’s gross revenue of 1,000 are 2 receipts:

• 100 service fee income received from Parent Entity. This receipt is disregarded under the P CIT.
• 150 royalty income received from PCo, an unrelated company located in jurisdiction P. This 150 is treated as domestic source income under P CIT law.

In the same fiscal year, BCo pays 500 of service fees to Parent Entity. This 500 is treated as domestic source income under P CIT law.

Based on this limited information, what amount of “foreign source income” (for the purposes of the allocation of cross-border current taxes under Art. 4.3.2) does Parent Entity have for this fiscal year?

Answer:

References are to paras. 52.1 to 52.34 of Comm to Art. 4.3.2.

Preliminary point: ACo is a “Hybrid Entity”: Art. 10.2.5.

(1) Parent Entity’s income through ACo:

ACo has gross revenue of 1,000, and expenses of 700. Therefore, Parent Entity’s prima facie “foreign source income” (for the purposes of Art. 4.3.2) (“FSI”) is 300: para. 52.3 (use of “net” amounts).

100 service fee income received from Parent Entity: Although this amount is disregarded under P CIT law, it is included in ACo’s GloBE Income or Loss. Thus, it is included in Parent Entity’s FSI (para. 52.8) – i.e., no adjustment for this amount.

150 royalty income received from PCo: Although this amount is treated as domestic source income under P CIT law, it is included in ACo’s GloBE Income or Loss. Thus, it is included in Parent Entity’s FSI (para. 52.6) – i.e., no adjustment for this amount.

Therefore, as no adjustments are made for the 100 or the 150, Parent Entity’s FSI remains at 300.

(2) Parent Entity’s income from BCo:

Parent Entity receives 500 of service fees from BCo. The 500 is treated as domestic source income under P CIT law. It is therefore excluded from FSI: para. 52.2.

Thus, final answer: Parent Entity’s FSI is 300.

Do you agree?

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules.

ACo has a business in jurisdiction A. It also has 3 PEs, one in each of jurisdiction B, C, and D, respectively. None of jurisdictions A, B, C or D has implemented the GloBE rules.

In a particular fiscal year:

• The B PE derives 1,000 of gross income, and it incurs 800 of expenses. It is subject to a 22% jurisdiction B CIT rate – therefore, it pays 44 of jurisdiction B CIT.
• The C PE derives 2,000 of gross income, and it incurs 1,600 of expenses. It is subject to a 12% jurisdiction C CIT rate – therefore, it pays 48 of jurisdiction C CIT.
• The D PE derives 1,500 of gross income, and it incurs 1,200 of expenses. It is subject to a 17% jurisdiction D CIT rate – therefore, it pays 51 of jurisdiction D CIT.
• ACo’s business in jurisdiction A derives 10,000 of gross income, and it incurs 8,000 of expenses. It is subject to a 20% jurisdiction A CIT rate – therefore, in regard to its business in jurisdiction A, it pays 400 of A CIT
• ACo derives 500 of royalty income from jurisdiction D, and incurs 10% (i.e., 50) of jurisdiction D royalty withholding tax.
• ACo incurs 1,000 of interest expense (included in 8,000 of expenses of ACo’s business in jurisdiction A).

Under the jurisdiction A CIT law, the profits made by the PEs and the royalties derived from jurisdiction D are taxable, and a credit is given for the foreign tax paid on those profits and royalties.

In computing the credit: (1) cross-crediting is allowed – i.e., the credit is calculated on the total foreign tax incurred on the total profits of the PEs and royalties, in a single “basket”; (2) the credit is limited to the lower of the foreign tax and the jurisdiction A tax on the foreign income; (3) in determining the jurisdiction A tax on the foreign income, ACo’s interest expense which is allocated to the foreign income is first deducted – the interest expense is apportioned between the domestic income and the foreign income (on a pro rata basis).

Based on this information, what amounts (if any) of jurisdiction A tax will be allocated to each PE under Art. 4.3.2?

Answer:

See paras. 52 to 54 of Comm to Art. 4.3.2.

1. Step 1: identify foreign source income (FSI):

A threshold issue is whether the allocated interest expense is deducted in computing FSI (GloBE concept) of each PE.

This will depend on whether the allocated interest expense is recognised as an expense in calculating the GloBE Income or Loss of each PE: paras. 52.11 & 52.12 of Comm. In the absence of any indication in the question that it is, I will assume that the allocated interest expense is not recognised for that purpose. This will mean that the allocated interest expense is not deducted in computing FSI (GloBE concept) of each PE.

Thus, the FSI is: (i) PE in B: 200; (ii) PE in C: 400; (iii) PE in D: 300; (iv) royalties: 500 (I assume the royalties are treated as foreign source under the jurisdiction A tax law).

Total FSI: 200 + 400 + 300 + 500 = 1,400.

2. Step 2: Allocable Covered Taxes (ACT):

ACo’s prima facie jurisdiction A corporate income tax (CIT): [2,000 + 1,400] x 20% = 680.

Interest allocated to FSI: 5,000 / 15,000 x 1,000 = 333 (allocation according to gross income).

FSI: 1,400 – 333 = 1,067.

FTC limitation = 1,067 x 20% = 213 (rounded).

Foreign tax = 44 + 48 + 51 + 50 = 193.

Thus, FTC = 193.

ACo’s actual jurisdiction A CIT: 680 – 193 = 487.

ACT = 487 – [2,000 x 20%] – 0 = 87.

3. Step 3: Cross-Crediting Allocation Key (CCAK):

CCAK for PEs: (i) B: [200 x 20%] – 44 = 0; (ii) C: [400 x 20%] – 48 = 32; (iii) D: [300 x 20%] – 51 = 9.

CCAK for ACo: [500 x 20%] – 50 = 50.

Sum of all CCAKs: 0 + 32 + 9 + 50 = 91.

4. Step 4: Allocation to PEs and ACo / Main Entity:

Allocations to PEs: (i) B: 87 x 0 / 91 = 0; (ii) C: 87 x 32 / 91 = 31 (rounded); (iii) D: 87 x 9 / 91 = 9 (rounded).

Allocation to ACo / Main Entity: 87 x 50 / 91 = 48 (rounded).

Thus, the allocations under Art. 4.3.2: (i) PE B: 0; (ii) PE C: 31; (iii) PE D: 9.

Do you agree?

XCo, a company located in jurisdiction X, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules. The UPE of the MNE Group is located in jurisdiction U, which implemented an IIR effective 1 January 2024. Please assume that all Fiscal Years are calendar years.

XCo has a significant business located in jurisdiction X. Also, for many years, XCo has had a branch located in jurisdiction Y. The branch has a significant business located in jurisdiction Y. The branch constitutes a PE under the X/Y double tax treaty. Please assume that the corporate income tax (CIT) rate in both jurisdiction X and jurisdiction Y is 15%.

Neither jurisdiction X nor jurisdiction Y has implemented a QDMTT.

In regard to jurisdiction X, the MNE Group qualifies for the Transitional CbCR Safe Harbour in 2024, 2025, and 2026.

On 1 July 2024, XCo’s head office “transferred” valuable IP to the branch. The “transaction” was reflected in the financial accounts of both the head office and the branch as occurring for a consideration equal to fair market value (which was 1,000 on 1 July 2024). For accounting and tax purposes, the branch depreciates the IP at 10% p.a.

At the time of the “transaction”, the IP had (1) accounting carrying value, (2) GloBE carrying value, and (3) jurisdiction X tax basis, all equal to nil.

Under the jurisdiction Y CIT law, the branch obtains a tax basis of 1,000 in the IP. The jurisdiction X CIT law does not tax capital gains – thus, the “transaction” is not taxable for the XCo head office.

Based on these limited facts, what is the GloBE carrying value of the IP as at 31 December 2024?

Answer:

For GloBE purposes: (1) XCo’s head office is a “Main Entity”; (2) the branch is a “Permanent Establishment” (PE); and (3) the Main Entity and the PE are both Constituent Entities.

The Transitional CbCR Safe Harbour (TCSH) applies in jurisdiction X in 2024, 2025, and 2026. This means that the “Transition Year” for jurisdiction X is 2027: para. 25 of TCSH chapter in Annex A of Comm. As the TCSH does not apply in jurisdiction Y, the Transition Year for jurisdiction Y is 2024.

Art. 6.3.2 (GloBE Reorganisation) does not apply, due to the “transfer” occurring before jurisdiction X’s Transition Year: para. 70.1 of Comm on Art. 6.3.

However, as 2024 is before jurisdiction X’s Transition Year, Art. 9.1.3 can apply: para. 10.1.1 of Comm to Art. 9.1.3.

The issue is: is the “transfer” of IP from the Main Entity to the PE (i.e., an intra-entity “transfer”) a “transfer of assets”, for the purposes of Art. 9.1.3?

Such a “transfer” is not expressly referred to in the Comm on Art. 9.1.3. However, para. 10.3 of that Comm says that “Article 9.1.3 also applies to a transfer or deemed transfer of assets within the same Entity”. As the “transfer” is accounted for as a transfer by both the head office and the branch (see para. 10.2 of that Comm), the “transfer” should qualify as a “transfer of assets”, for the purposes of Art. 9.1.3.

If that is correct, then Art. 9.1.3 would apply to treat the GloBE carrying value of the IP, immediately after the “transfer” (i.e., 1 July 2024), as nil. As no further facts are provided in the question, the GloBE carrying value as at 31 December 2024 would also be nil.

Do you agree?

ACo, a company located in jurisdiction X, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules. The UPE of the MNE Group is located in jurisdiction U, which implemented an IIR effective 1 January 2024. Please assume that all Fiscal Years are calendar years.

On 1 January 2026, ACo moves its place of effective management to jurisdiction Y. This has the effect of causing ACo to cease to be a resident under jurisdiction X corporate income tax (CIT) law, and it also causes ACo to become a resident under jurisdiction Y CIT law.

Under the jurisdiction X CIT law, ACo is deemed to sell and re-acquire all its assets for fair market value (FMV) at the time of the residence change. Also, under the jurisdiction Y CIT law, ACo is deemed to acquire all its assets for FMV at the time of the residence change.

Please assume that, at the time of the residence change, ACo’s assets had:

• FMV of 500
• Accounting carrying value of 280
• GloBE carrying value of 250
• Jurisdiction X tax basis of 200

Please also assume that all of ACo’s assets are depreciated at 10% per annum for accounting purposes.

Neither jurisdiction X nor jurisdiction Y has implemented a QDMTT.

In regard to both jurisdiction X and jurisdiction Y, the MNE Group qualifies for the Transitional CbCR Safe Harbour in 2024, 2025, and 2026.

Based on these limited facts, what will be the GloBE impact of the residence change?

Answer:

The change of residence is treated as a “transfer of assets” for the purposes of Art. 9.1.3: para. 10.3 of Comm to Art. 9.1.3.

The Transitional CbCR Safe Harbour (TCSH) applies in jurisdictions X and Y in 2024, 2025, and 2026. This means that the “Transition Year” for both jurisdictions is 2027: para. 25 of TCSH chapter in Annex A of Comm.

At the time of the residence change (1 January 2026), the GloBE carrying value of the assets is 250. That carrying value is then depreciated at 10% per annum straight line: para. 10 of Comm to Art. 9.1.3. Thus, at 1 January 2027 (the start of the Transition Year), the GloBE carrying value will be 250 x 90% = 225.

For juris. X CIT purposes, the residence change causes ACo to recognise a taxable gain of 500 – 200 = 300. The resulting tax liability gives ACo the right to recognise a deferred tax asset (DTA) at the time of the residence change: para. 10.8.1 of Comm to Art. 9.1.3. Prima facie, the amount of the DTA will be equal to the juris. X tax paid on the residence change, plus any DTA which was reversed or not created by ACo because of the gain. However, the amount of the DTA will be capped at 15% x (difference between (1) “local tax basis”, and (2) GloBE carrying value): para. 10.8.2 of Comm to Art. 9.1.3. Based on the IF’s Examples document, “local tax basis” refers to the stepped-up tax basis (500). If this is correct, then the cap will be: 15% x 250 = 37.5.

Assuming the DTA is 37.5 as at 1 January 2026, it will be reduced by 10% per annum. Thus, at 1 January 2027, the DTA will be 37.5 x 90% = 33.75.

Final answer: At 1 January 2027 (start of the Transition Year): (1) GloBE carrying value = 225; (2) DTA = 33.75.

On 1 January 2021, MNE Group 1 sells all the shares in ACo (a company located in jurisdiction A) to unrelated MNE Group 2 for a price of 300.

ACo owns a single asset and has no liabilities. That asset has accounting and tax carrying values of 120 at the time of sale.

The jurisdiction A corporate income tax (CIT) rate is 15%.

For jurisdiction A CIT purposes, the share sale is treated in the same manner as the sale of ACo’s single asset. Thus, MNE Group 1 is subject to tax on 300 – 120 = 180, and MNE Group 2 acquires a tax basis of 300.

The relevant accounting standard permits “push down” accounting. Thus, in ACo’s financial statements after the transaction, the asset is recognised with an accounting carrying value of 300.

For both accounting purposes and jurisdiction A CIT purposes, the asset is depreciated on a straight line basis over 10 years.

ACo’s Transition Year is the year commencing 1 January 2024.

Based on these limited facts, what is the GloBE carrying value of the asset as at 1 January 2024?

Answer:

As the sale occurred on 1 January 2021 (i.e., before the Transition Year), Art. 6.2.1(c) applies, and Art. 6.2.2 does not apply: para. 46.1 of Comm to Art. 6.2.

Thus, in accordance with Art. 6.2.1(c), “in the acquisition year [i.e., the year which commenced on 1 January 2021] and each succeeding year, [ACo] shall determine its GloBE Income or Loss and Adjusted Covered Taxes using its historical carrying value of the assets and liabilities”.

Prior to the sale, ACo’s asset had an historical accounting carrying value of 120. In ACo’s financial statements after the sale, the asset is recognised with an accounting carrying value of 300. Under paras. 50 & 51 of Comm to Art. 6.2.1(c), the GloBE carrying value as at 1 January 2021 would be 120, unless “the MNE Group [i.e., MNE Group 2] does not have sufficient records to determine [ACo’s FANIL] with reasonable accuracy based on the unadjusted carrying values of the acquired assets and liabilities”. Based on the limited information, it appears that this exception would not apply.

If, therefore, the asset’s GloBE carrying value was 120 as at 1 January 2021, its GloBE carrying value as at 1 January 2024 (i.e., after 3 years of 10% per annum depreciation) would be 120 x 70% = 84.

XCo, a company located in jurisdiction X, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules.

During the 202X year, XCo moves its place of effective management to jurisdiction Y. This has the effect of causing XCo to cease to be a resident under jurisdiction X corporate income tax (CIT) law, and it also causes XCo to become a resident under jurisdiction Y CIT law.

Under the jurisdiction X CIT law, XCo is deemed to sell and re-acquire all its assets for fair market value (FMV) at the time of the residence change. Also, under the jurisdiction Y CIT law, XCo is deemed to acquire all its assets for FMV at the time of the residence change.

Please assume that, at the time of the residence change, XCo’s assets had:

• FMV of 300
• Accounting carrying value of 220
• GloBE carrying value of 200
• Jurisdiction X tax basis of 180

Please also assume that year 202X is the Transition Year or a later Fiscal Year for both jurisdiction X and jurisdiction Y.

Based on these limited facts, what will be the GloBE impact of the residence change?

Answer:

(1) GloBE impact of jurisdiction X CIT on residence change

XCo will derive profit of 300 – 180 = 120 for jurisdiction X CIT purposes.

Depending on jurisdiction X CIT law, this will likely increase XCo’s Adjusted Covered Taxes in 202X, and reduce its Adjusted Covered Taxes (by virtue of tax depreciation or similar) in future years.

(2) GloBE impact of residence change

XCo will cease to be located in jurisdiction X, and it will commence to be located in jurisdiction Y, effective the year immediately following 202X: Art. 10.3.1 and Art. 10.3.6.

There will be no other GloBE impact, unless an election is made under Art. 6.3.4 …

(3) GloBE impact if election is made under Art. 6.3.4

The change of residence from jurisdiction X to jurisdiction Y is a situation which is covered by Art. 6.3.4: para. 78 of Comm on Art. 6.3.4.

If the election is made, XCo will include 300 – 220 = 80 in its GloBE Income. That amount is either included in GloBE Income in 202X, or is included in 5 equal instalments in 202X and in the 4 immediately subsequent years (subject to an acceleration if XCo leaves the MNE Group within this period).

XCo’s deferred tax assets and deferred tax liabilities which existed prior to the residence change, must be fully reversed: para. 81.1 of Comm to Art. 6.3.4.

XCo’s GloBE carrying value of its assets after the residence change will be 300.

As the jurisdiction Y tax basis and the GloBE carrying value are both 300, XCo will not recognise any deferred tax assets or liabilities (for GloBE purposes) on the residence change.

Do you agree?

The UPE of an MNE Group, a bank, has these figures in its consolidated income statement for each of years 1 to 4 (in EUR millions):

Interest income: 1,200
Interest expense: (900)
Net interest income: 300

Net fee and commission income: 100

Other income: 40

Total operating income: 440

This presentation is in accordance with the Acceptable Financial Accounting Standard (as defined in Art. 10.1.1) which applies in the UPE’s home jurisdiction.

Based on this limited information, does the MNE Group satisfy the revenue threshold test in Art. 1.1.1, in respect of year 5?

Answer:

The key issue is the interpretation of para. 10.5 in the Comm to Art. 1.1.1:

“For financial entities, which may not record gross amounts from transactions in their financial statements with respect to certain items, the item(s) considered similar to revenue under the [UPE’s] financial accounting standards should be used in the context of financial activities. Those items could be labelled as ‘net banking product’, ‘net revenues’, or others depending on the financial accounting standard. For example, if the income or gains from a financial transaction, such as an interest rate swap, is appropriately reported on a net basis under the [UPE’s] financial accounting standards, the term ‘revenue’ means the net amount from the transaction.”

Based on para. 10.5, the net fee and commission income of 100 should be counted on a net basis – i.e., 100. Clearly, the other income of 40 should also be counted.

But what about interest? The UPE’s consolidated income statement (1) does not report only gross interest income and (2) does not report only net interest income: it reports BOTH gross and net. How does para. 10.5 apply when a bank reports both gross and net interest income? The Comm on Art. 1.1.1 does not provide a clear answer.

The IF’s Guidance on Implementation of CbC Reporting (May 2024) says:

“For example, if the income statement prepared in accordance with the applicable accounting rules shows sales revenue, net capital gains from sales of assets, unrealized gains, interest received, and extraordinary income, the amount of those items reported in the income statement should be aggregated and reported as Revenues in Table 1. … The amount of any income items shown on the income statement need not be adjusted from a net amount.”

This guidance was not clearly written with financial entities in mind. Also, the last sentence does not address the situation where both gross and net interest income is reported.

I don’t think we can definitively say whether this UPE should count gross or net interest income, for the purposes of Art. 1.1.1.

If I had to express a preference for one view or the other, I would prefer the view that the net interest income should be counted.

MNE Group A owns 100% of the shares in YCo, a Constituent Entity located in jurisdiction Y.

MNE Group A sells 100% of the shares to unrelated MNE Group B for a price of 180.

Both MNE Group A and MNE Group B are “within scope” of the GloBE rules.

For jurisdiction Y corporate income tax purposes:

1. The share sale is treated in the same manner as the transfer of YCo’s assets.
2. A capital gains tax is imposed on the seller based on the difference between the price of 180 and the jurisdiction Y CIT tax basis of YCo’s assets (100).

Please assume that the GloBE carrying value of YCo’s assets, at the time of the share sale, was also 100.

Based on this limited information, what is the GloBE carrying value of the assets for MNE Group B?

Answer:

The share sale satisfies Art. 6.2.2, which will treat the share sale (for GloBE purposes) as a transfer of assets.

Under Art. 6.3.1:

1. MNE Group A will recognise a gain of 80 on the transfer of assets. The gain is computed as the difference between (i) price of 180, and (ii) GloBE carrying value of assets (100) – i.e., 80.
2. MNE Group B’s carrying value for GloBE purposes will be: “fair value [of the assets] to the extent gain or loss on those assets … was included in the GloBE Income or Loss computation of the disposing Constituent Entity” (para. 72 of Comm to Art. 6.3.1).

What does “to the extent” mean in this context? Does it mean that MNE Group B’s GloBE carrying value will be 80 (i.e., the amount of MNE Group A’s gain, which was included in its GloBE Income or Loss computation)? Or alternatively, does it mean that MNE Group B’s GloBE carrying value will be 180 (i.e., the fair value of the assets, because the whole amount of the fair value was taken into account in computing the gain, which was included in MNE Group A’s GloBE Income or Loss computation)?

My preference is for 180 (i.e., the alternative meaning). If the first meaning applied, there could be absurd outcomes – for example, if MNE Group A’s GloBE carrying value was 178, and thus its gain was 2, MNE Group B’s GloBE carrying value would be 2!

Do you agree?

XCo, a company located in jurisdiction X, is a 100%-owned Constituent Entity in MNE Group 1, which is “within scope” of the GloBE rules.

XCo owns plant and equipment (“assets”) with accounting carrying value, jurisdiction X corporate income tax (CIT) basis, and GloBE carrying value all equal to 100.

MNE Group 1 sells 100% of the shares in XCo to unrelated MNE Group 2, for a price of 250. This price reflects the fact that MNE Group 2 places a market value of 250 on XCo’s assets. Jurisdiction X corporate income tax does not treat the sale as a transfer of the assets.

XCo is the only Constituent Entity (in MNE Group 2) located in jurisdiction X.

Based on these limited facts, after the acquisition by MNE Group 2, what is: (i) the GloBE carrying value of XCo’s assets?; and (ii) the carrying value of XCo’s assets for the purposes of the tangible asset carve-out under the Substance-based Income Exclusion?

Answer:

This question was inspired by Example 6.2.1(e)-1 in the Inclusive Framework’s Examples document.

Q(i)

Art. 6.2.2 does not apply, because jurisdiction X does not treat the sale of shares as a transfer of assets.

The GloBE carrying value of XCo’s assets, after the acquisition by MNE Group 2, is 100: Art. 6.2.1(c).

Q(ii)

The computation of the carrying value of Eligible Tangible Assets for purposes of Art. 5.3.4 must be based on the average of the carrying value (net of depreciation, etc.) at the beginning and end of the Fiscal Year as recorded for the purposes of preparing the UPE’s consolidated financial statements: Art. 5.3.5. Also, a proportional reduction in accordance with Art. 6.2.1(e) must be made (see below).

The relevant consolidated financial statements are those of MNE Group 2.

At the beginning of the Fiscal Year, the carrying value is zero.

At the end of the Fiscal Year, the carrying value is 250 (i.e., fair value), less current year depreciation. Fair value (as recorded for purposes of preparing the consolidated financial statements – i.e., after taking into account purchase accounting adjustments) must be used for the purposes of the tangible asset carve-out: para. 49 of Comm to Art. 5.3.5.

The question does not provide information on the depreciation rate used for the assets for financial accounting purposes. For convenience, I will assume that the rate is 10%. Also, the question does not provide information on the timing of the sale. Again, for convenience, I will assume that the sale occurred on 30 September in a Fiscal Year which uses the calendar year.

Based on those assumptions, the end of Fiscal Year carrying value is: 250 – (250 x 10% x 25%) = 243.75. See Notes below.

Thus, the carrying value (for the Fiscal Year in which the sale occurs) for the purposes of the tangible asset carve-out is computed as: (0 + 243.75) x 50% x 25% = 30.47 (see Notes).

Notes

Note 1: Example 6.2.1(e)-1 does not take current year depreciation into account. I think that is incorrect. What do you think?

Note 2: 50% is used to compute the average between 0 and 243.75.

Note 3: 25% is used to effect the proportional reduction, in accordance with Art. 6.2.1(e).

Do you agree?

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules. ACo is the only Constituent Entity located in jurisdiction A.

ACo owns and operates in jurisdiction A a large item of plant & equipment (“asset”).

For a fiscal year, ACo has these numbers in respect of the asset:

• Accounting carrying value (before impairment): 200
• GloBE carrying value (before impairment): 150

During the fiscal year, ACo undertakes impairment testing in respect of the asset, which results in the post-impairment accounting carrying value of the asset being 170.

Q1: Based on this limited information, what is the asset’s (i) GloBE carrying value; and (ii) carrying value for the purposes of computing the tangible asset carve-out under the Substance-based Income Exclusion? Please ignore current year depreciation.

Q2: What would be your answer to Q1 if the post-impairment carrying value of the asset was 120?

Answer:

Q1 (post-impairment accounting carrying value = 170):

1. GloBE carrying value = 150: para. 68.5 of Comm to Art. 4.4.
2. Carrying value for tangible asset carve-out under Substance-based Income Exclusion (SBIE) = 170: paras. 49 & 50.1 of Comm to Art. 5.3.5.

Q2 (post-impairment accounting carrying value = 120):

1. GloBE carrying value = 120: para. 68.5 of Comm to Art. 4.4.
2. Carrying value for tangible asset carve-out under SBIE = 120: para. 50.1 of Comm to Art. 5.3.5.

Do you agree?

XCo, a company located in jurisdiction X, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules. XCo is the only Constituent Entity located in jurisdiction X.

YCo, a company located in jurisdiction Y, is also a Constituent Entity in the same MNE Group. YCo is the only Constituent Entity located in jurisdiction Y.

Jurisdiction X does not levy corporate income tax (CIT) on asset disposals (other than inventory).

Jurisdiction Y has a CIT rate of 25%.

XCo sells an asset (not inventory) to YCo for a price of 200 (which is its fair market value).

The cost and the accounting carrying value of the asset for XCo are both 120.

For accounting purposes, both XCo and YCo record the sale at cost (i.e., 120), in accordance with the relevant accounting standard.

YCo amortises the asset for accounting purposes on a straight-line basis over 10 years. However, YCo amortises the asset for jurisdiction Y CIT purposes on a straight-line basis over 5 years.

Based on this limited information, what will be the impact under the GloBE rules, for each of XCo and YCo?

Answer:

Art. 3.2.3 (transfer pricing) applies to the sale. This answer is based on the example in para. 104.2 of the Comm to Art. 3.2.3.

1. XCo

XCo will include 80 of gain in its GloBE Income.

There will be no impact on XCo’s Adjusted Covered Taxes.

2. YCo

Accounting carrying value = 120.

Jurisdiction Y CIT tax basis = 200.

For accounting purposes, YCo will record a deferred tax asset of 20 (i.e., 25% x (200 – 120)).

However, due to Art. 3.2.3, GloBE carrying value = 200.

Therefore, YCo will not record any deferred tax asset for GloBE purposes upon acquisition.

YCo will amortise the asset, under the relevant accounting standard, based on its GloBE carrying value. Thus, annual amortisation expense for GloBE purposes will be 20 (i.e., 200 x 10%).

Annual amortisation deduction for jurisdiction Y CIT purposes will be 40 (i.e., 200 x 20%).

Annual deferred tax expense for GloBE purposes will be 3 (i.e., 20 x 15%), after applying recasting at 15%, because the jurisdiction Y CIT rate is 25%.

DTL recapture under Art. 4.4.4 will apply, unless the DTL is a Recapture Exception Accrual in Art. 4.4.5.

If the asset qualifies for the tangible asset carve-out in the Substance-based Income Exclusion, the tangible asset carve-out will be computed based on YCo’s accounting carrying value of 120: see para. 49 of Comm to Art. 5.3.5.

Do you agree?

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules. ACo is the only Constituent Entity located in jurisdiction A.

BCo, a company located in jurisdiction B, is also a Constituent Entity in the same MNE Group. BCo is the only Constituent Entity located in jurisdiction B.

Prior to entering into the loan transaction described below, ACo has these expected tax numbers for the current year:

• GloBE Income (GI): 1,000
• Adjusted Covered Taxes (ACT): 130
• Substance-based Income Exclusion (SBIE): 900
• Taxable income (for jurisdiction A corporate income tax (CIT) purposes): 1,000
• CIT: 120 (12% CIT rate)
• Excess interest expense brought forward from previous years (available for deduction against current year interest income, if any (currently, nil)): 100

Also prior to entering into the loan transaction described below, BCo has these expected tax numbers for the current year:

• GI: 200
• ACT: 10
• SBIE: 0
• Taxable income (for jurisdiction B CIT purposes): 200
• CIT: 10 (5% CIT rate)

At the start of the current year, ACo lends money to BCo. The terms of the loan satisfy the arm’s length principle. The current year’s interest expense, which is deductible for jurisdiction B CIT purposes, is 100. Please assume that the full amount of 100 of ACo’s excess interest expense brought forward from previous years is deductible in the current year, against the 100 of ACo’s interest income.

Based on this limited information, what amounts of Top-up Tax will arise for the current year in regard to jurisdictions A and B?

Please ignore safe harbours and the de minimis exclusion.

Answer:

(1) ACo:

GloBE Income (GI) = 1,000 + 100 = 1,100.
Adjusted Covered Tax (ACT) = 130 + 12 = 142 [See Notes below].
ETR = 142 / 1,100 = 12.9%.
Top-up Tax Percentage (TUTP) = 2.1%.
SBIE = 900.
Excess Profit = 1,100 – 900 = 200.
Top-up Tax (TUT) = 200 x 2.1% = 4.2.

Notes:

1. The loan will not cause any change to ACo’s taxable income for jurisdiction A CIT purposes, and thus there will be no change to ACo’s current tax expense.
2. ACo would probably have a deferred tax asset (DTA) of 12 (100 x 12%) for the brought forward interest expense, after giving effect to Art. 4.4.1(c). The reversal of the DTA (caused by the use of the brought forward interest expense against the 100 of interest income) would cause a deferred tax expense of 12.

(2) BCo:

GI = 100 [See Note below].
ACT = 5.
ETR = 5%.
TUTP = 10%.
Excess Profit = 100.
TUT = 100 x 10% = 10.

Note:

1. The brought forward interest expense allows ACo to “shelter” the 100 of interest income from jurisdiction A CIT. Nevertheless, the intragroup loan is not an “Intragroup Financing Arrangement” (as defined in Art. 10.1.1), because ACo is not a “High Tax Counterparty” (also defined in Art. 10.1.1) – for the reason that jurisdiction A is a “Low-Tax Jurisdiction”, regardless of whether ACo’s ETR is determined with or without regard to the intragroup interest income. Therefore, the intragroup interest expense is not excluded (under Art. 3.2.7) from BCo’s GloBE Income.

This example illustrates a weakness in Art. 3.2.7: the provision does not apply if the lender is located in a “Low-Tax Jurisdiction”, and its Top-up Tax is significantly reduced by the Substance-based Income Exclusion.

Do you agree?

ACo is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules.

For a particular balance sheet account, ACo chooses to track DTLs (for the purposes of the DTL recapture rule) by reference to an Aggregate DTL Category which consists of all the general ledger accounts which comprise the balance sheet account.

ACo has pre-Transition Year DTLs of 100 in the Aggregate DTL Category.

The net DTL movement in the Aggregate DTL Category for each of 10 years is:

Year 1: 50
Year 2: 80
Year 3: (50)
Year 4: (10)
Year 5: 60
Year 6: (50)
Year 7: 30
Year 8: (40)
Year 9: 60
Year 10: 50

ACo qualifies to use the FIFO methodology, and it chooses to do so.

ACo makes an Unclaimed Accruals Annual Election, covering all DTLs in the Aggregate DTL Category, in each of years 2 and 5.

Based on this limited information, what will be the impact on ACo’s Top-up Tax in each of years 1 to 10?

Please ignore issues which might arise with Short-term DTLs.

Answer:

This answer is based on paras. 112.1 to 112.6 of Comm to Art. 4.4.7 and Examples 4.4.7-1 to 3 in the June 2024 AG …

Reversals allocated to pre-Transition Year DTLs:
Y3: (50)
Y4: (10)
Y6: (40)

Net DTL movement (after allocation to pre-Transition Year DTLs):
Y1: 50
Y2: 80
Y3: 0
Y4: 0
Y5: 60
Y6: (10)
Y7: 30
Y8: (40)
Y8: 60
Y10: 50

Exclusion of unclaimed DTL accruals:
Y2: (80)
Y5: (60)

Net DTL movement (after allocation to pre-Transition Year DTLs and after exclusion of unclaimed DTL accruals):
Y1: 50
Y2: 0
Y3: 0
Y4: 0
Y5: 0
Y6: (10)
Y7: 30
Y8: (40)
Y9: 60
Y10: 50

Outstanding Balance:
Y1: 50
Y2: 50
Y3: 50
Y4: 50
Y5: 50
Y6: 40
Y7: 70
Y8: 30
Y9: 90
Y10: 140

Maximum Justifiable Amount:
Y6: 0
Y7: 30
Y8: 30
Y9: 90
Y10: 140

Unjustified Balance:
Y6: 40
Y7: 40
Y8: 0
Y9: 0
Y10: 0

Unjustified Balance (yearly movement):
Y6: 40
Y7: 0
Y8: (40)
Y9: 0
Y10: 0

Impact on Top-up Tax computations:

Y6 (Current Fiscal Year) corresponds to Y1 (Tested Fiscal Year): 40 is treated as DTL recapture in Y1. If reduction in Adjusted Covered Taxes (ACT) causes increase in Y1 Top-up Tax, it will be treated as Additional Current Top-up Tax in Y6: Art. 5.4.

Y8: reversal of 40 of Y2 unclaimed DTL accrual of 80: if the 40 is reflected in current tax expense in Y8, the Y8 ACT will increase by 40.

Do you agree?

XCo is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules.

For a particular balance sheet account, XCo chooses to track DTLs (for the purposes of the DTL recapture rule) by reference to an Aggregate DTL Category which consists of all the general ledger accounts which comprise the balance sheet account.

XCo has pre-Transition Year DTLs of 150 in the Aggregate DTL Category.

The net DTL movement in the Aggregate DTL Category for each of 10 years is:

Year 1: 70
Year 2: 50
Year 3: (30)
Year 4: (40)
Year 5: 60
Year 6: 50
Year 7: (40)
Year 8: (60)
Year 9: 50
Year 10: 70

XCo qualifies to use the FIFO methodology, and it chooses to do so.

Based on this limited information, what will be the impact on XCo’s Top-up Tax computations for years 1 through 10?

Please ignore issues which might arise with Short-term DTLs.

Answer:

This answer is based on paras. 90.30 & 90.31 of Comm to Art. 4.4.4 and Example 4.4.4-4 in the June 2024 AG …

Reversals allocated to pre-Transition Year DTLs (FIFO methodology):

Y1: 0
Y2: 0
Y3: (30)
Y4: (40)
Y5: 0
Y6: 0
Y7: (40)
Y8: (40)
Y9: 0
Y10: 0

Net DTL movement (after allocation to pre-Transition Year DTLs):

Y1: 70
Y2: 50
Y3: 0
Y4: 0
Y5: 60
Y6: 50
Y7: 0
Y8: (20)
Y9: 50
Y10: 70

Outstanding Balance:

Y1: 70
Y2: 120
Y3: 120
Y4: 120
Y5: 180
Y6: 230
Y7: 230
Y8: 210
Y9: 260
Y10: 330

Maximum Justifiable Amount:

Y6: 160
Y7: 110
Y8: 110
Y9: 160
Y10: 170

Unjustified Balance:

Y6: 70
Y7: 120
Y8: 100
Y9: 100
Y10: 160

Unjustified Balance (yearly movement):

Y6: 70
Y7: 50
Y8: (20)
Y9: 0
Y10: 60

Impact on Top-up Tax computations:

1. Y6 (Current Fiscal Year, CFY) corresponds to Y1 (Tested Fiscal Year, TFY): 70 is treated as DTL recapture in Y1. If reduction in Adjusted Covered Taxes (ACT) causes increase in Y1 Top-up Tax, it will be treated as Additional Current Top-up Tax in Y6: Art. 5.4.
2. Y7 (CFY) corresponds to Y2 (TFY): 50 is treated as DTL recapture in Y2. If reduction in ACT causes increase in Y2 Top-up Tax, it will be treated as Additional Current Top-up Tax in Y7: Art. 5.4.
3. In Y8, 20 of recaptured DTLs is treated as reversed: Art. 4.4.2(b). This will increase ACT by 20 in Y8, which might cause a reduction in Top-up Tax in Y8.
4. Y10 (CFY) corresponds to Y5 (TFY): 60 is treated as DTL recapture in Y5. If reduction in ACT causes increase in Y5 Top-up Tax, it will be treated as Additional Current Top-up Tax in Y10: Art. 5.4.

Do you agree?

ACo is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules.

For a particular balance sheet account, ACo chooses to track DTLs (for the purposes of the DTL recapture rule) by reference to an Aggregate DTL Category which consists of all the general ledger accounts which comprise the balance sheet account.

The net DTL movement in this Aggregate DTL Category for each of 10 years is:

Year 1: 50
Year 2: 60
Year 3: 20
Year 4: (30)
Year 5: (20)
Year 6: 70
Year 7: 60
Year 8: (50)
Year 9: (80)
Year 10: 30

ACo does not qualify to use the FIFO methodology. It therefore uses the LIFO methodology.

Based on this limited information, what will be the impact on ACo’s Top-up Tax computations for years 1 through 10?

Please ignore issues which might arise with: (1) Short-term DTLs; and (2) Transition Year.

Answer:

This answer is based on paras. 90.22 & 90.24 of Comm to Art. 4.4.4 and Example 4.4.4-3 in the June 2024 AG …

Outstanding Balance:
Y1: 50
Y2: 110
Y3: 130
Y4: 100
Y5: 80
Y6: 150
Y7: 210
Y8: 160
Y9: 80
Y10: 110

Maximum Justifiable Amount:
Y6: 100
Y7: 100
Y8: 30
Y9: 0
Y10: 30

Unjustified Balance:
Y6: 50
Y7: 110
Y8: 130
Y9: 80
Y10: 80

Unjustified Balance (yearly movement):
Y6: 50
Y7: 60
Y8: 20
Y9: (50)
Y10: 0

Impact on Top-up Tax computations:

1. Y6 (Current Fiscal Year, CFY) corresponds to Y1 (Tested Fiscal Year, TFY): 50 is treated as DTL recapture in Y1. If reduction in Adjusted Covered Taxes (ACT) causes increase in Y1 Top-up Tax, it will be treated as Additional Current Top-up Tax in Y6: Art. 5.4.
2. Y7 (CFY) corresponds to Y2 (TFY): 60 is treated as DTL recapture in Y2. If reduction in ACT causes increase in Y2 Top-up Tax, it will be treated as Additional Current Top-up Tax in Y7: Art. 5.4.
3. Y8 (CFY) corresponds to Y3 (TFY): 20 is treated as DTL recapture in Y3. If reduction in ACT causes increase in Y3 Top-up Tax, it will be treated as Additional Current Top-up Tax in Y8: Art. 5.4.
4. In Y9, 50 of recaptured DTLs is treated as reversed: Art. 4.4.2(b).

Do you agree?

XCo is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules.

For a particular balance sheet account, XCo chooses to track DTLs (for the purposes of the DTL recapture rule) by reference to an Aggregate DTL Category which consists of all the general ledger accounts which comprise the balance sheet account..

The net DTL movement in this Aggregate DTL Category for each of 10 years is:

Year 1: 130
Year 2: 120
Year 3: (40)
Year 4: 0
Year 5: 80
Year 6: 90
Year 7: (100)
Year 8: 50
Year 9: 70
Year 10: 30

XCo qualifies to use the FIFO methodology, and it chooses to do so.

Based on this limited information, what will be the impact on XCo’s Top-up Tax computations for years 1 through 10?

Please ignore issues which might arise with: (1) Short-term DTLs; and (2) Transition Year.

Answer:

This answer is based on paras. 90.22 & 90.23 of Comm to Art. 4.4.4 and Example 4.4.4-2 in the June 2024 AG …

Outstanding Balance:

Y1: 130.
Y2: 130 + 120 = 250.
Y3: 250 + (40) = 210.
Y4: 210 + 0 = 210.
Y5: 210 + 80 = 290.
Y6: 290 + 90 = 380.
Y7: 380 + (100) = 280.
Y8: 280 + 50 = 330.
Y9: 330 + 70 = 400.
Y10: 400 + 30 = 430.

Maximum Justifiable Amount:

Y6: 120 + 80 + 90 = 290.
Y7: 80 + 90 = 170.
Y8: 80 + 90 + 50 = 220.
Y9: 80 + 90 + 50 + 70 = 290.
Y10: 90 + 50 + 70 + 30 = 240.

Unjustified Balance:

Y6: 380 – 290 = 90.
Y7: 280 – 170 = 110.
Y8: 330 – 220 = 110.
Y9: 400 – 290 = 110.
Y10: 430 – 240 = 190.

Unjustified Balance (yearly movement):

Y6: 90.
Y7: 20.
Y8: 0.
Y9: 0.
Y10: 80.

Impact on Top-up Tax computations:

1. Y6 (Current Fiscal Year, CFY) corresponds to Y1 (Tested Fiscal Year, TFY): 90 is treated as DTL recapture in Y1. If reduction in Adjusted Covered Taxes (ACT) causes increase in Y1 Top-up Tax, it will be treated as Additional Current Top-up Tax in Y6: Art. 5.4.
2. Y7 (CFY) corresponds to Y2 (TFY): 20 is treated as DTL recapture in Y2. If reduction in ACT causes increase in Y2 Top-up Tax, it will be treated as Additional Current Top-up Tax in Y7: Art. 5.4.
3. Y10 (CFY) corresponds to Y5 (TFY): 80 is treated as DTL recapture in Y5. If reduction in ACT causes increase in Y5 Top-up Tax, it will be treated as Additional Current Top-up Tax in Y10: Art. 5.4.
4. Based on the facts, there is no reversal of recaptured DTLs (Art. 4.4.2(b)).

Do you agree?

ACo, a Constituent Entity, has several balance sheet accounts, including:

1. Fixed Assets, which consists of 6 General Ledger (GL) accounts:
   • GL account 1: plant and equipment – 20 items
   • GL account 2: land and buildings – 4 items
   • GL account 3: non-amortisable goodwill – 1 item
   • GL account 4: patents with a life of over 10 years – 3 items
   • GL account 5: leasehold assets – 5 items (GL account 5 can produce, at different times, either a net deferred tax asset (DTA) or a net deferred tax liability (DTL))
   • GL account 6: computers and other office equipment – 15 items (DTLs for the computers and other office equipment will fully reverse after 3 years)
2. Trade receivables, which consists of 4 GL accounts:
   • GL account 7 – 3 items
   • GL account 8 – 5 items
   • GL account 9 – 1 item
   • GL account 10 – 1 item
3. Trade payables, which consists of 2 GL accounts:
   • GL account 11 – 25 items
   • GL account 12 – 10 items
4. Dividends receivable, which consists of 2 GL accounts:
   • GL account 13 – 1 item (dividends from ACo’s subsidiary, BCo)
   • GL account 14 – 1 item (dividends from ACo’s subsidiary, CCo)

Based on this limited information, which categories is ACo allowed to use, in order to apply the DTL recapture rule in Art. 4.4.4?

Answer:

This answer is based on paras. 90 to 90.11 in the Comm on Art. 4.4.4 (amended / introduced by June 2024 AG)…

2 or more of the 4 balance sheet accounts cannot comprise an Aggregate DTL Category (ADTLC): para. 90.6.

Fixed Assets (i.e., all 6 GL accounts) cannot comprise an ADTLC: 3 of the GL accounts are excluded from participating in an ADTLC: (i) GL account 3 (non-amortisable goodwill: para. 90.9(a)); (ii) GL account 4 (patents with life of 10 years: para. 90.9(b)); and (iii) GL account 5 (swinging account: para. 90.11). Each of these 3 exclusions must be separately tracked on a GL account basis or on an item-by-item basis. See Note below regarding GL account 5.

Tax expenses for GL accounts 1, 2, and 6 should qualify as Recapture Exception Accruals (defined in Art. 4.4.5(a): “Cost recovery allowances on tangible assets”). They should therefore be excluded from the DTL recapture rule: para. 90.5.

Trade receivables (i.e., all 4 GL accounts) can comprise an ADTLC. Alternatively, 2 or 3 of the GL accounts can comprise an ADTLC; or DTL tracking can be done on a GL account basis or on an item-by-item basis.

Trade payables (i.e., both of 2 GL accounts) can comprise an ADTLC. Alternatively, DTL tracking can be done on a GL account basis or an item-by-item basis.

Dividends receivable: both GL accounts are excluded from the DTL recapture rule, because the dividends are excluded from the computation of GloBE Income or Loss: para. 90.3.

Final answer: (i) GL accounts 3, 4, and 5 [see Note below] can be tracked on a GL account basis or on an item-by-item basis, but they cannot comprise an ADTLC; (ii) GL accounts 7, 8, 9, and 10 can comprise an ADTLC (any 2, 3 or all 4 of the accounts), or be tracked on a GL account basis or on an item-by-item basis; (iii) GL accounts 11 and 12 can comprise an ADTLC, or can be tracked on a GL account basis or on an item-by-item basis; (iv) the remaining accounts (GL accounts 1, 2, 6, 13, and 14) are excluded from the DTL recapture rule.

Note: It’s possible that tax expenses for GL account 5 (leasehold assets) would be Recapture Exception Accruals – in which case, GL account 5 would be excluded from the DTL recapture rule.

Do you agree?

XCo, a company located in jurisdiction X, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules. XCo is the only Constituent Entity located in jurisdiction X.

XCo is subject to a low effective tax rate in jurisdiction X, due to tax incentives.

XCo is planning a major acquisition program of plant and equipment, for use in its manufacturing business. The plan is that the plant and equipment will be acquired and installed for use, at some point in the 3 months period from 1 December in the current calendar year to 28 February in the next calendar year. XCo’s fiscal year is the calendar year.

XCo wants to maximise its Substance-based Income Exclusion for the next fiscal year. With that as an objective, XCo has asked you whether the acquisition and installation of the plant and equipment should be at any particular date during that 3 months period.

What is your advice?

Answer:

The tangible asset carve-out for the SBIE is equal to 5% (increased during the years through to 2032: Art. 9.2.2) of the carrying value of the Eligible Tangible Assets: Art. 5.3.4.

Carrying value is computed as the average of the carrying value (net of accumulated depreciation, etc.) at the beginning and ending of the Fiscal Year, as recorded for the purposes of preparing the Consolidated Financial Statements (CFS) of the UPE: Art. 5.3.5.

The impact of a delay in acquisition of plant can be illustrated:

Scenario (1): Plant acquired on 1 February for 1,000, 10% straight line annual depreciation rate …

Carrying value: at beginning of year (0) and end of year (1,000 – (1,000 x 10% x 11/12) = 908.3).

Average carrying value = 454.15.

Tangible asset carve-out (@ 5%) = 454.15 x 5% = 22.7.

Scenario (2): Plant acquired on 1 December for 1,000, 10% straight line annual depreciation rate … <br

Carrying value: at beginning of year (1,000 – (1,000 x 10% x 1/12) = 991.7) and end of year (991.7 – (1,000 x 10%) = 891.7).

Average carrying value = 941.7.

Tangible asset carve-out (@ 5%) = 941.7 x 5% = 47.1.

Thus, to maximise the SBIE in the next Fiscal Year, XCo must ensure that the plant and equipment is recorded as at the beginning of the Fiscal Year for the purposes of preparing the UPE’s CFS.

Two points should be noted:

1. It should be clarified whether that recording is dependent only on acquisition, or alternatively whether it requires both acquisition and installation ready for use.
2. It would be prudent to aim for an acquisition / installation date in early to mid December, to ensure that the recording is made as at the beginning of the next Fiscal Year. The amount of carrying value which is “lost” from depreciation in December should be minor, compared to the risk of missing the 1 January date: see above illustration.

Do you agree?

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules. ACo is the only Constituent Entity located in jurisdiction A.

BCo, a company located in jurisdiction B, is also a Constituent Entity in the same MNE Group. ACo owns 100% of the shares in BCo. BCo is treated as a disregarded entity for jurisdiction A tax purposes; however, for jurisdiction B tax purposes, BCo is treated as a taxable company. BCo is the only Constituent Entity located in jurisdiction B.

Jurisdiction A has a 25% corporate income tax, and a 15% QDMTT. The corporate income tax applies to foreign sourced income, and it includes a foreign tax credit.

Jurisdiction B has a 5% corporate income tax, and a 15% QDMTT.

ACo is a pure holding company. As noted above, it holds 100% of the shares in BCo. Also, ACo holds 2% of the shares in XCo (an unrelated company) – these shares were purchased by ACo during the fiscal year (see below).

BCo carries on a trading business. It buys goods from, and sells goods to, other members of the MNE Group.

In a particular fiscal year:

• ACo receives 60 of dividends from XCo – these dividends are tax-exempt under the jurisdiction A corporate income tax.
• ACo does not receive any dividends from BCo.
• BCo derives 100 of pre-tax profits. Please assume that there are no permanent or timing differences vs. the corporate income tax laws of jurisdictions A and B, respectively.

Based on this limited information, what amounts of corporate income tax and QDMTT will each of ACo and BCo be required to pay in respect of this fiscal year?

Answer:

Introductory point: BCo is a “Hybrid Entity” (Art. 10.2.5).

(1) BCo

Corporate income tax (CIT): 100 x 5% = 5.

QDMTT: 100 x 10% = 10

No Covered Tax is allocated from ACo to BCo: para. 118.30 of Comm to Art. 10.1.1 definition of “QDMTT”.

Total BCo tax = 5 + 10 = 15.

(2) ACo

CIT: [100 (i.e., inclusion from BCo) x 25%] – 15 [FTC for jurisdiction B’s CIT and QDMTT] = 10. The 60 of dividend from XCo is exempt.

Whether jurisdiction A allows an FTC for the jurisdiction B QDMTT will depend on the jurisdiction A law. In Notice 2023-80, the US IRS states that QDMTT should qualify for US FTC purposes: see ITQ195.

QDMTT:

GloBE Income: 60

2 points: (i) 60 is not an “Excluded Dividend” (defined in Art. 10.1.1), because ACo’s shareholding in XCo is a “Short-term Portfolio Shareholding” (defined in Art. 10.1.1) – thus, 60 is not excluded from GloBE Income under Art. 3.2.1(b); (ii) 100 is not included in ACo’s GloBE Income, despite the fact that BCo is treated as a disregarded entity for jurisdiction A tax purposes, because the 100 would not be included in ACo’s Financial Accounting Net Income or Loss: Arts. 3.1.1 & 3.1.2.

QDMTT Covered Tax: nil

The CIT of 10 does not qualify as Covered Tax for ACo’s QDMTT, because it relates to income (which is not “Passive Income”, as defined in Art. 10.1.1) derived through BCo, a Hybrid Entity: see paras. 118.28 & 118.29 of Comm to Art. 10.1.1 definition of “QDMTT”.

Thus, QDMTT: 60 x 15% = 9.

Total ACo tax = 10 + 9 = 19.

Do you agree?

XCo, a company located in jurisdiction X, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules.

YCo, a company located in jurisdiction Y, is also a Constituent Entity in the same MNE Group. XCo owns 100% of the shares in YCo.

Jurisdiction X has a 20% corporate income tax, and a 15% QDMTT. The corporate income tax includes CFC rules and a foreign tax credit.

Jurisdiction Y has a 5% corporate income tax, and a 15% QDMTT.

XCo is a pure holding company. Its only source of income is dividends received from YCo.

YCo carries on a trading business. It buys goods from, and sells goods to, other members of the MNE Group.

In a particular fiscal year:

• XCo derives no profits (i.e., it receives no dividends from YCo).
• YCo derives 100 of pre-tax profits. Please assume that there are no permanent or timing differences vs. the corporate income tax laws of jurisdictions X and Y, respectively.
• XCo includes 100 in its jurisdiction X taxable income, under the CFC rules, in respect of YCo.

Based on this limited information, what amounts of corporate income tax and QDMTT will each of XCo and YCo be required to pay in respect of this fiscal year?

Answer:

YCo:

Corporate income tax (CIT) = 100 x 5% = 5.

QDMTT = 100 x 10% = 10 (assuming that YCo’s SBIE is 0, or jurisdiction Y’s QDMTT does not provide for a SBIE).

In computing YCo’s QDMTT, there can be no allocation of XCo’s CFC tax: para. 118.30 of Comm to definition of “QDMTT” in Art. 10.1.1.

2. XCo:

CIT = [100 (i.e., CFC inclusion) x 20%] – 15 (i.e., FTC for YCo’s CIT and QDMTT) = 5.

Note that in Notice 2023-80, the US IRS states that QDMTT should qualify for US FTC purposes: see ITQ195. However, this would depend on each country’s FTC law.

QDMTT = 0, as XCo has no GloBE Income. If, hypothetically, XCo did have some GloBE Income, XCo’s CFC tax (i.e., 5) would not qualify as a Covered Tax for the purposes of XCo’s QDMTT: para. 118.28 of Comm to definition of “QDMTT” in Art. 10.1.1.

Thus, total tax = 15 (YCo) + 5 (XCo) = 20.

Do you agree?

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules.

BCo, a company located in jurisdiction B, is also a Constituent Entity in the same MNE Group. ACo owns 100% of the shares in BCo.

BCo is treated as fiscally transparent under the jurisdiction A corporate income tax law.

Jurisdictions A and B have a corporate income tax rate of 12% and 20%, respectively. Jurisdiction A provides a foreign tax credit for foreign tax incurred on foreign source taxable profits.

For the 2024 fiscal year:

• BCo derives pre-tax profits of 100. It has no permanent or timing differences vs. the corporate income tax laws of jurisdictions A and B, respectively.
• BCo pays a dividend of 30 (out of 2023 profits) to ACo. Dividend withholding tax of 3 is deducted by BCo and remitted to the jurisdiction B tax authorities.
• BCo incurs interest of 10 on a loan from ACo. Under the terms of the loan agreement, BCo “grosses up” the interest for the jurisdiction B withholding tax of 10%. Thus, BCo pays 10 to ACo and 1.11 to the jurisdiction B tax authorities.

Based on this limited information:

• Q1: Which taxes will each of ACo and BCo take into account in performing the Simplified ETR computation under the Transitional CbCR Safe Harbour?
• Q2: Which taxes will each of ACo and BCo take into account in computing their respective ETRs under the GloBE rules?

Answer:

1. BCo’s pre-tax profits of 100: With the relative corporate income tax rates and the jurisdiction A FTC, it is unlikely that there will be any ACo jurisdiction A tax in regard to BCo’s pre-tax profits of 100. However, to the extent that there is, then:

(Q1) Simplified ETR: The tax will be retained by ACo.

(Q2) GloBE ETR: As BCo is a Hybrid Entity, ACo’s jurisdiction A tax (if any) will be allocated to BCo, under Art. 4.3.2(d). To the extent that BCo derives Passive Income, the amount allocated to BCo might be capped by Art. 4.3.3.

BCo will incur 20 of jurisdiction B corporate income tax on its pre-tax profits of 100:

(Q1) + (Q2): For both the Simplified ETR and the GloBE ETR, the tax will be retained by BCo.

2. BCo’s dividend of 30: As BCo is treated as fiscally transparent by jurisdiction A, the dividend will not be recognised for jurisdiction A corporate income tax purposes. Thus, there will be no jurisdiction A tax on the dividend. In regard to the jurisdiction B DWT of 3:

(Q1) Simplified ETR: The jurisdiction B DWT of 3 will be retained by ACo.

(Q2) GloBE ETR: The jurisdiction B DWT of 3 will be allocated to BCo, under Art. 4.3.2(e).

3. BCo’s interest payment of 10: As BCo is treated as fiscally transparent by jurisdiction A, the interest will not be recognised for jurisdiction A corporate income tax purposes. Thus, there will be no jurisdiction A tax on the interest. In regard to the jurisdiction B IWT of 1.11:

(Q1) Simplified ETR: The tax will be retained by ACo – it will not be allocated to BCo. See Note.

(Q2) GloBE ETR: The tax will be retained by ACo – it will not be allocated to BCo. See Note.

Note: For both the Simplified ETR and the GloBE ETR, the IWT of 1.11 will qualify as Covered Tax only if it is included in ACo’s income tax expense. If this does not occur, and instead ACo accounts for 10 of interest income and no related tax (and the 1.11 is accounted by BCo), then the 1.11 will not qualify as Covered Tax for either Simplified ETR or GloBE ETR purposes.

Do you agree?

XCo, a company located in jurisdiction X, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules.

YCo, a company located in jurisdiction Y, is also a Constituent Entity in the same MNE Group.

Each of Jurisdiction X and Y has a corporate income tax rate of 20%.

XCo manufactures and sells goods to YCo. In each of years 1, 2 and 3, the consideration paid by YCo to XCo for the purchase of the goods is EUR 100m. This amount is reflected in the respective financial statements of XCo and YCo, in each of years 1, 2 and 3.

In year 4, prior to filing the corporate income tax returns in jurisdictions X and Y, the MNE Group agrees a bilateral APA (BAPA) with the tax authorities in jurisdictions X and Y. The BAPA applies to years 1 to 5 (i.e., there is a roll-back to years 1, 2 and 3). Under the BAPA, the arm’s length consideration for the purchase of the goods is agreed as EUR 90m for each of years 1, 2 and 3.

Based on this information, what impact will implementation of the BAPA have on the GloBE ETRs of XCo and YCo, in each of years 1, 2 and 3?

Answer:

Para. 99 of the Comm to Art. 3.2.3 directs that Art. 4.6.1 apply to implement the transfer pricing changes under a bilateral APA (BAPA).

Art. 4.6.1 distinguishes between 2 situations: (1) increases and non-material decreases in Covered Taxes, and (2) material decreases in Covered Taxes.

YCo falls within situation (1): the BAPA results in an increase of EUR 2m in Covered Taxes in each of years 1, 2 and 3. Art. 4.6.1 requires that the adjustments to Covered Taxes and GloBE Income be made to YCo in the current Fiscal Year – i.e., year 4. Thus, in year 4, YCo’s ETR will be computed, after: (i) increasing Covered Taxes by EUR 6m, and (ii) increasing GloBE Income by EUR 30m. There will be no adjustments to YCo’s ETR in years 1, 2 and 3.

In contrast, XCo falls within situation (2): the BAPA results in a material decrease (i.e., EUR 1m or more) in Covered Taxes in each of years 1, 2 and 3. Art. 4.6.1 requires that the adjustments to Covered Taxes and GloBE Income be made to XCo in each of years 1, 2 and 3. Thus, in each of those years, XCo’s ETR will be recalculated, under Art. 5.4.1, by: (i) decreasing Covered Taxes by EUR 2m, and (ii) decreasing GloBE Income by EUR 10m. Any amount of incremental Top-up Tax resulting from such recalculations shall be treated as Additional Current Top-up Tax under Art. 5.2.3 in year 4: Art. 5.4.1.

Do you agree?

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules.

BCo, a company located in jurisdiction B, is also a Constituent Entity in the same MNE Group.

Jurisdiction A has a corporate income tax rate of 20%, and jurisdiction B has a corporate income tax rate of 12.5%.

In the current Fiscal Year, and in the 2 preceding Fiscal Years, ACo’s ETR for GloBE purposes is/was 13%, 18%, and 19% (respectively). Also, in the current Fiscal Year, and in the 2 preceding Fiscal Years, BCo’s ETR for GloBE purposes is/was 17%, 16%, and 18% (respectively).

BCo provides services to ACo. In the current Fiscal Year, BCo charges ACo 100 for the services. The 100 is recognised as expense and as income in the Financial Accounting Net Income or Loss of ACo and BCo, respectively.

In its jurisdiction B corporate income tax return for the Fiscal Year, BCo makes a book-to-tax adjustment of 10 (i.e., BCo increases its income from the services to ACo by 10), in accordance with the jurisdiction B transfer pricing “safe harbour” rules. No adjustment is made by ACo.

What impact (if any) will Art. 3.2.3 have on ACo or BCo?

Answer:

The issue is whether adjustments of 10 should be made to the GloBE Income of ACo and BCo (respectively) under Art. 3.2.3.

In this scenario, the Comm to Art. 3.2.3 provides confusing guidance.

Firstly, para. 101 says:

“Specifically, a unilateral transfer pricing adjustment will result in a corresponding adjustment to the GloBE Income or Loss of all counterparties under Article 3.2.3, unless the transfer pricing adjustment increases or decreases the MNE Group’s taxable income in a jurisdiction that has a nominal tax rate below the Minimum Rate …”.

The “unless” part of that statement covers the facts here: BCo’s unilateral TP adjustment of 10 increases BCo’s taxable income in a jurisdiction with a 12.5% nominal tax rate. Thus, para. 101 indicates that there should be no adjustments to ACo’s and BCo’s GloBE Income or Loss under Art. 3.2.3.

Secondly, however, para. 103 says:

“Finally, a unilateral transfer pricing adjustment that increases taxable income in an under-taxed jurisdiction should not be reflected in the GloBE Income because such adjustment would produce double taxation under the GloBE Rules (i.e. the adjustment would expose the income to Top-up Tax in the jurisdiction in which the unilateral adjustment is made and the income is already subject to local tax in the other jurisdiction and/or Top-up Tax if the other jurisdiction is an under-taxed jurisdiction).”

The Comm’s definition of “under-taxed jurisdiction” in para. 101 indicates that it includes a jurisdiction in which the nominal tax rate is below 15%, without there being a requirement that the jurisdiction’s ETR in the current Fiscal Year is also below 15%.

The confusing guidance is that, in BCo’s case, an adjustment under Art. 3.2.3 would not “expose the income to Top-up Tax in the jurisdiction in which the unilateral adjustment is made”, as stated in the parentheses in the quote from para. 103: BCo’s ETR in the current Fiscal Year is 17%.

Nevertheless, despite that confusion in the parentheses, the 2 express statements in paras. 101 & 103 should require that no adjustments be made under Art. 3.2.3.

What do you think?

XCo, a company located in jurisdiction X, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules.

YCo, a company located in jurisdiction Y, is also a Constituent Entity in the same MNE Group.

Jurisdiction X has a corporate income tax rate of 20%, and jurisdiction Y has a corporate income tax rate of 25%.

YCo provides services to XCo. In a Fiscal Year, YCo charges XCo 100 for the services. The 100 is recognised as expense and as income in the Financial Accounting Net Income or Loss of XCo and YCo, respectively.

In its jurisdiction X corporate income tax return for the Fiscal Year, XCo makes a book-to-tax adjustment of 10 (i.e., XCo reduces its deduction claim by 10 to 90), in accordance with the jurisdiction X transfer pricing “safe harbour” rules. No adjustment is made by YCo.

Before considering Art. 3.2.3, the GloBE ETR of both XCo and YCo for the Fiscal Year is 15%.

What impact (if any) will Art. 3.2.3 have on XCo or YCo?

Answer:

The issue is whether adjustments of 10 should be made to the GloBE Income of ACo and BCo (respectively) under Art. 3.2.3.

According to para. 101 of the Comm to Art. 3.2.3:

“[When a unilateral transfer pricing adjustment is made], the transfer price used for taxable income purposes is presumed to be consistent with the Arm’s Length Principle. The GloBE Income or Loss should be adjusted accordingly under Article 3.2.3 where necessary to prevent double taxation or double non-taxation under the GloBE Rules. Specifically, a unilateral transfer pricing adjustment will result in a corresponding adjustment to the GloBE Income or Loss of all counterparties under Article 3.2.3, unless the transfer pricing adjustment increases or decreases the MNE Group’s taxable income in a jurisdiction that has a nominal tax rate below the Minimum Rate …”.

This means that the GloBE Income of XCo and YCo, respectively, will reflect a deemed transfer price of 90. This will cause XCo’s GloBE Income to increase by 10, and YCo’s GloBE Income to reduce by 10.

The ETR impact will be: XCo’s ETR will decrease below 15%, and YCo’s ETR will increase above 15%.

Therefore, the Art. 3.2.3 adjustment will cause a Top-up Tax liability in respect of XCo, but not in respect of YCo.

Accordingly, the MNE Group will be subject to some level of double taxation caused by the unilateral transfer pricing adjustment: (1) XCo’s increased corporate income tax liability; and (2) Top-up Tax liability in respect of XCo.

Note: The second sentence in para. 101 (see above) says: “The GloBE Income or Loss should be adjusted accordingly under Article 3.2.3 where necessary to prevent double taxation or double non-taxation under the GloBE Rules.” IMHO: the phrase, “double taxation or double non-taxation under the GloBE rules”, does not refer to double taxation between the GloBE rules and the domestic corporate income tax law, which is the situation faced here by XCo.

Do you agree?

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules.

BCo, a company located in jurisdiction B, is also a Constituent Entity in the same MNE Group.

Jurisdiction A has a corporate income tax rate of 20%, and jurisdiction B has a corporate income tax rate of 10%.

BCo provides services to ACo. In a Fiscal Year, BCo charges ACo 100 for the services. The 100 is recognised as expense and as income in the Financial Accounting Net Income or Loss of ACo and BCo, respectively.

In its jurisdiction B corporate income tax return for the Fiscal Year, BCo makes a book-to-tax adjustment of 10 (i.e., a further 10 of taxable income is recognised by BCo), in accordance with the jurisdiction B transfer pricing “safe harbour” rules. No adjustment is made by ACo.

What will be the impact under the GloBE rules, for each of ACo and BCo?

Answer:

The primary issue is whether adjustments of 10 should be made to the GloBE Income of ACo and BCo (respectively) under Art. 3.2.3.

According to paras. 101 & 103 of the Comm to Art. 3.2.3:

“[Adjustments should be made under Article 3.2.3], unless the transfer pricing adjustment increases … the MNE Group’s taxable income in a jurisdiction that has a nominal tax rate below the Minimum Rate … . [A] unilateral transfer pricing adjustment that increases taxable income in an under-taxed jurisdiction should not be reflected in the GloBE Income because such adjustment would produce double taxation under the GloBE Rules (i.e. the adjustment would expose the income to Top-up Tax in the jurisdiction in which the unilateral adjustment is made and the income is already subject to local tax in the other jurisdiction …)”.

Thus, there should be no adjustment to the GloBE Income of ACo and BCo (respectively).

The subsidiary issue is whether the jurisdiction B tax incurred by BCo on the additional 10 of taxable income qualifies as Adjusted Covered Tax for GloBE purposes. The answer is yes. Thus, BCo’s ETR will increase to that extent.

Note that this result does not impact the economic double taxation of the 10, under the corporate income tax laws of jurisdictions A and B.

Do you agree?

An MNE Group’s UPE, which is located in jurisdiction U, is subject to the jurisdiction U CFC rules. Those CFC rules qualify as a Blended CFC Tax Regime, as defined in the February 2023 AG. Under the CFC rules, the foreign effective tax rate must be 13.125% in order to generate sufficient foreign tax credits (ignoring any foreign tax credit limitation) to prevent the imposition of a tax charge. Also, under those CFC rules, a foreign tax credit is allowed for QDMTT on the same terms as any other creditable Covered Tax.

In the 2024 Fiscal Year, UPE has a tax charge of 30 under the CFC rules.

UPE directly owns shares in 3 CFCs. For the 2024 Fiscal Year, the CFCs have this information (all in EUR millions):

1. ACo 1 (located in jurisdiction A) (100% owned by UPE)
   • GloBE Income: 100
   • Covered Tax (disregarding any CFC tax): 8
   • QDMTT payable: 2
   • Qualifies for QDMTT Safe Harbour
   • Attributable income (for purposes of CFC rules): 80
   • Constituent Entity for GloBE purposes
2. ACo 2 (located in jurisdiction A) (50% owned by UPE)
   • Exempt from QDMTT
   • Qualifies for Transitional CbCR Safe Harbour, under de minimis test
   • Total Revenue: 8
   • Profit before Income Tax: 0.9
   • Simplified Covered Taxes: 0.1
   • Attributable income (for purposes of CFC rules): 5 (reflecting 50% ownership interest)
   • Joint Venture for GloBE purposes
3. ACo 3 (located in jurisdiction A) (40% owned by UPE)
   • Exempt from QDMTT
   • Attributable income (for purposes of CFC rules): 100 (reflecting 40% ownership interest)
   • Not a Constituent Entity or Joint Venture for GloBE purposes

Based on this information, what will be the allocation of CFC tax under Art. 4.3.2(c)? Please ignore any possible cap under Art. 4.3.3.

Answer:

A. Preliminary points:

ACo 3 is a non-GloBE Entity (i.e. an Entity which is not a Constituent Entity, Joint Venture, or JV Subsidiary), but it is a CFC. Thus, para. 58.7 (in the Commentary to Art. 4.3.2) sets out a special procedure for its role in the allocation of blended CFC tax.

Also, as ACo 2 is a Joint Venture, Art. 6.4 requires its ETR to be calculated separately from ACo 1. Therefore, for the purposes of para. 58.6.2, there are 2 blending groups in jurisdiction A: ACo 1 and ACo 2.

B. GloBE Jurisdictional ETRs:

(i) ACo 1: As ACo 1 qualifies for QDMTT Safe Harbour, it uses formula in para. 58.6.2(b): (8 + 2) / 100 = 10%.

(ii) ACo 2: As ACo 2 qualifies for Transitional CbCR Safe Harbour, para. 58.6.2(a) requires it to use the Simplified ETR (regardless of fact that it qualifies for the safe harbour under the de minimis test): 0.1 / 0.9 = 11.1111%.

(iii) ACo 3: Not applicable: para. 58.7.

C. Attributable income of Entity: (i) ACo 1: 80; (ii) ACo 2: 5; (iii) ACo 3: 100.

D. Blended CFC Allocation Key: (i) ACo 1: 80 x (13.125% – 10%) = 2.5; (ii) ACo 2: 5 x (13.125% – 11.1111%) = 0.1007; (iii) ACo 3: 2.5 (i.e., ACo 1’s Blended CFC Allocation Key, as required by para. 58.7).

E. Sum of All Blended CFC Allocation Keys: 2.5 + 0.1007 + 2.5 = 5.1007.

F. Blended CFC tax allocated to Entity: (i) ACo 1: 2.5 / 5.1007 x 30 = 14.7039; (ii) ACo 2: 0.1007 / 5.1007 x 30 = 0.5922; (iii) ACo 3: 2.5 / 5.1007 x 30 = 14.7039.

As ACo 3 is a non-GloBE Entity, the CFC tax allocated to it (14.7039) does not qualify as Covered Tax for the MNE Group.

Do you agree?

An MNE Group’s UPE, which is located in jurisdiction U, is subject to the jurisdiction U CFC rules. Those CFC rules qualify as a Blended CFC Tax Regime, as defined in the February 2023 AG. Under the CFC rules, the foreign effective tax rate must be 13.125% in order to generate sufficient foreign tax credits (ignoring any foreign tax credit limitation) to prevent the imposition of a tax charge.

In the 2025 Fiscal Year, UPE has a tax charge of 50 under the CFC rules.

UPE directly owns shares in 4 CFCs. For the 2025 Fiscal Year, the CFCs have this information:

1. XCo 1 (located in jurisdiction X) (100% owned by UPE)
   • GloBE Income: 200
   • Covered Tax: 12
   • Attributable Income (for purposes of CFC rules): 80
   • Constituent Entity for GloBE purposes
2. XCo 2 (located in jurisdiction X) (80% owned by UPE; 20% owned by third parties)
   • GloBE Income: Nil
   • Covered Tax: 10
   • Attributable Income (for purposes of CFC rules): 70 (at 100% level)
   • Constituent Entity for GloBE purposes
3. XCo 3 (located in jurisdiction X) (25% owned by UPE; 75% owned by third parties)
   • GloBE Income: 150
   • Covered Tax: 30
   • Attributable Income (for purposes of CFC rules): 100 (at 100% level)
   • Constituent Entity for GloBE purposes
4. YCo (located in jurisdiction Y) (100% owned by UPE)
   • GloBE Income: 150
   • Covered Tax: 15
   • Attributable Income (for purposes of CFC rules): 50
   • Constituent Entity for GloBE purposes

Jurisdictions X and Y do not impose QDMTTs.

Based on this information, what will be the allocation of CFC tax under Art. 4.3.2(c)? Please ignore any possible cap under Art. 4.3.3.

Answer:

Preliminary point

As XCo 3 is a Minority-Owned Constituent Entity (defined in Art. 10.1.1), Art. 5.6.2 requires its ETR to be calculated separately from XCo 1 and XCo 2. Therefore, for the purposes of the new para. 58.6.1 in the Commentary to Art. 4.3.2, there are 2 blending groups in jurisdiction X: XCo 1 and XCo 2 (together, a blending group) and XCo 3 (a blending group). New para. 58.6.1 was added by the December 2023 AG.

GloBE Jurisdictional ETRs: (i) XCo 1 / XCo 2: 22 / 200 = 11%; (ii) XCo 3: 30 / 150 = 20%; (iii) YCo: 15 / 150 = 10%.

Attributable Income of Entity: (i) XCo 1: 80; (ii) XCo 2: 56 (after applying 80% ownership level); (iii) XCo 3: 25 (after applying 25% ownership level); (iv) YCo : 50.

Blended CFC Allocation Key: (i) XCo 1: 80 x (13.125% – 11%) = 1.7; (ii) XCo 2: 56 x (13.125% – 11%) = 1.19; (iii) XCo 3: nil (as GloBE Jurisdictional ETR exceeds Applicable Rate of 13.125%); (iv) YCo: 50 x (13.125% – 10%) = 1.5625.

Sum of All Blended CFC Allocation Keys: 1.7 + 1.19 + 0 + 1.5625 = 4.4525.

Blended CFC tax allocated to Entity: (i) XCo 1: 1.7 / 4.4525 x 50 = 19.09; (ii) XCo 2: 1.19 / 4.4525 x 50 = 13.36; (iii) XCo 3: nil; (iv) YCo: 1.5625 / 4.4525 x 50 = 17.55.

Do you agree?

X MNE Group, which manufactures and sells consumer goods, includes the following items in its consolidated profit and loss statement for a Fiscal Year (all in EUR millions):

1. Sales (net of discounts, returns and allowances of 40): 600
2. Cost of Goods Sold: (400)
3. Selling, General and Administrative Expenses: (160)
4. Gains from investments – realised: 20
5. Gains from investments – unrealised: 30
6. Losses from investments – realised: (25)
7. Losses from investments – unrealised: (40)
8. Extraordinary or non-recurring items – income / gains: 35
9. Extraordinary or non-recurring items – expenses / losses: (30)
10. Interest income (on surplus cash): 5
11. Interest expense: (20)

Based on this limited information, what is X MNE Group’s annual revenue for the purposes of Art. 1.1.1 of the GloBE rules?

Answer:

Section 3.1 of December 2023 AG provides guidance on the computation of annual revenue for the purposes of Art. 1.1.1.

Treatment of each item:

Item (1) Sales (net of discounts, returns and allowances of 40): 600 added.

Item (2) COGS: no impact.

Item (3) SGA Expenses: no impact.

Items (4) to (7) Gains and losses from investments – realised and unrealised: gains are added, but losses are deducted “to the extent of gross gains from investments” (para. 10.4 in Comm to Art. 1.1). As there is an overall loss of (15), items (4) to (7) have no net impact on computation.

Item (8) Extraordinary or non-recurring items – income / gains: 35 added (para. 10.4 in Comm to Art. 1.1).

Item (9) Extraordinary or non-recurring items – expenses / losses: para. 10.4 in Comm to Art. 1.1 does not state that such expenses or losses should be deducted. Thus, no impact.

Item (10) Interest income (on surplus cash): no impact (see Example 1 in para. 10.6 in Comm to Art. 1.1).

Item (11) Interest expense: no impact.

Thus, annual revenue = 600 + 35 = 635.

Do you agree?

Can a Qualified Refundable Tax Credit of EUR 100 cause a larger increase in Top-up Tax under the GloBE rules, than a Non-Qualified Refundable Tax Credit (which is not transferable) of EUR 100?

Answer:

Note: I will assume that the tax credits are not subject to corporate income tax!

In most situations, a Qualified Refundable Tax Credit (QRTC) of EUR 100 will cause a smaller increase in Top-up Tax than a Non-Qualified Refundable Tax Credit (which is not transferable) (NQRTC) of EUR 100 …

Example A, assume: (1) GloBE Income (GI) = 1,000; (2) SBIE = 200; and Adjusted Covered Taxes (ACT) (before credit) = 120.

Therefore, before considering the credits: (1) ETR = 12%; (2) TUT% = 3%; (3) Excess Profit (EP) = 1,000 – 200 = 800; and (4) TUT = 800 x 3% = 24.

If QRTC = 100, then: (1) GI = 1,100; (2) ETR = 120 / 1,100 = 10.9091%; (3) TUT% = 4.0909%; (4) EP = 1,100 – 200 = 900; and (5) TUT = 900 x 4.0909% = 36.8181.

Alternatively, if NQRTC = 100, then: (1) GI = 1,000; (2) ACT = 120 – 100 = 20; (3) ETR = 20 / 1,000 = 2%; (4) TUT% = 13%; (5) EP = 800; and (6) TUT = 800 x 13% = 104.

However, in some situations, a QRTC of EUR 100 will cause a larger increase in TUT than a NQRTC of EUR 100 …

Example B, assume: GI = 1,000; (2) SBIE = 980; (3) ACT (before credit) = 120.

Therefore, before considering the credits: (1) ETR = 12%; (2) TUT% = 3%; (3) EP = 1,000 – 980 = 20; and (4) TUT = 20 x 3% = 0.6.

If QRTC = 100, then: (1) GI = 1,100; (2) ETR = 120 / 1,100 = 10.9091%; (3) TUT% = 4.0909%; (4) EP = 1,100 – 980 = 120; and (5) TUT = 120 x 4.0909% = 4.9091.

Alternatively, if NQRTC = 100, then: (1) GI = 1,000; (2) ACT = 120 – 100 = 20; (3) ETR = 20 / 1,000 = 2%; (4) TUT% = 13%; (5) EP = 20; and (6) TUT = 20 x 13% = 2.6.

As you can see, the proportion that SBIE is to GI is the key factor.

Do you agree?

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules. It is the only Constituent Entity located in jurisdiction A.

BCo, a company located in jurisdiction B, is also a Constituent Entity in the MNE Group. It is the only Constituent Entity located in jurisdiction B.

ACo directly owns 100% of the shares in BCo.

For the 2024 fiscal year, an amount of income is included in ACo’s jurisdiction A taxable income, under the jurisdiction A CFC rules. The income inclusion relates to certain CFC income derived by BCo during 2024. The jurisdiction A corporate income tax caused by this income inclusion is EUR 100,000.

Question 1: Based on this limited information, what impact (if any) will the EUR 100,000 have on the 2024 Simplified ETR computation (for the purposes of the Transitional CbCR Safe Harbour) for: (1) jurisdiction A; and (2) jurisdiction B?

Question 2: In 2024, ACo recharges the EUR 100,000 to BCo. Therefore, for the 2024 consolidation reporting packages (which are used to prepare the MNE Group’s CbCR report), the recharged EUR 100,000 is reflected as an income (or negative expense) item in ACo’s accounting profit, and as an expense item in BCo’s accounting profit. Based on this limited information, do your answers for Question 1 change?

Answer:

Safe Harbours and Penalty Relief (SHPR) report’s definitions:

• “Simplified ETR”: “is calculated by dividing the jurisdiction’s Simplified Covered Taxes by its Profit (Loss) before Income Tax as reported on the MNE Group’s Qualified CbC Report”.

• “Simplified Covered Taxes”: “is a jurisdiction’s income tax expense as reported on the MNE Group’s Qualified Financial Statements, after eliminating any taxes that are not Covered Taxes and uncertain tax positions in the MNE Group’s Qualified Financial Statements”.

Q1:

1. The EUR 100,000 would be included in jurisdiction A’s (i.e., ACo’s) income tax expense. It is thus included in jurisdiction A’s Simplified Covered Taxes (SCT). Allocation of CFC tax under Art. 4.3.2 is not required for the purposes of the Simplified ETR computation: para. 74.23, SHPR report (as inserted by the December 2023 AG).
2. The EUR 100,000 would not be included in jurisdiction B’s (i.e., BCo’s) income tax expense. It is thus not included in jurisdiction B’s SCT. Also, no allocation is done under Art. 4.3.2 (see above).

Q2:

1. If the recharged EUR 100,000 is reflected as a negative expense item in ACo’s income tax expense, then (presumably) the EUR 100,000 would not be included in jurisdiction A’s SCT. However, if the EUR 100,000 is reflected as an income item (not in the income tax expense), the EUR 100,000 recharge should have no impact on jurisdiction A’s SCT – i.e., the EUR 100,000 would remain as part of jurisdiction A’s SCT.
2. There would be no impact on jurisdiction B’s SCT, because ACo’s CFC tax does not qualify as a “Covered Tax” for BCo (see definition in Art. 4.2.1(a): “with respect to its income or profits”).

Do you agree?

XCo, a company located in jurisdiction X, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules. It is the only Constituent Entity located in jurisdiction X.

YCo, a company located in jurisdiction Y, is also a Constituent Entity in the MNE Group. It is the only Constituent Entity located in jurisdiction Y.

In 2023, XCo issued preference shares (“pref shares”) to YCo.

The pref shares, which carry an arm’s length coupon dividend rate, are treated as debt in XCo’s consolidation reporting package. However, for tax purposes in jurisdiction X, the pref shares are treated as equity.

The pref shares are also treated as debt in YCo’s consolidation reporting package. However, for tax purposes in jurisdiction Y, the pref shares are treated as equity. Consequently, the dividends received by YCo on the pref shares qualify for a 95% exemption under the jurisdiction Y corporate income tax law.

The 2 reporting packages are used by the MNE Group to prepare its CbC Report. In that CbC Report, the dividend on the pref shares is excluded from the jurisdiction Y Revenue and PBT numbers.

For the purposes of the De minimis test for the Transitional CbCR Safe Harbour, how should the dividend on the pref shares be treated: (1) for jurisdiction X; and (2) for jurisdiction Y?

Answer:

(1) Jurisdiction X

The pref shares constitute a “deduction / non-inclusion arrangement”: para. 74.27 of the Safe Harbours and Penalty Relief (SHPR) report, as added by para. 35 of the December 2023 AG. The pref shares are therefore a “hybrid arbitrage arrangement”: para. 74.25, SHPR report.

Therefore, for the purposes of the jurisdiction X De minimis test computation, the expense on the pref shares (i.e., the coupon dividend) is excluded: para. 74.26 of SHPR report. Thus, XCo’s PBT will be increased by the amount of the coupon dividend.

(2) Jurisdiction Y

The CbC Report correctly excludes the coupon dividend from the Revenue and PBT of YCo: answer to Question 7.1 in chapter 2 of October 2022 CbCR document, referenced by para. 17, December 2023 AG.

However, that treatment must be reversed for the purposes of the De minimis test: paras. 74.16-17 of SHPR report, as added by para. 18 of the December 2023 AG.

Therefore, for the purposes of the jurisdiction Y De minimis test computation, the coupon dividend is included in YCo’s Total Revenues and PBT.

Do you agree?

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules. It is the only Constituent Entity located in jurisdiction A.

BCo, a company located in jurisdiction B, is also a Constituent Entity in the MNE Group. It is the only Constituent Entity located in jurisdiction B.

BCo sells goods to ACo, which distributes the goods to third parties in jurisdiction A.

For 2024, the group determines that a year-end transfer pricing adjustment of EUR 0.5m should be made in regard to the sale of goods from BCo to ACo – i.e., the adjustment will reduce the sale price by EUR 0.5m. This adjustment will be made by BCo giving to ACo, before year-end, a credit note for EUR 0.5m.

The adjustment will be reflected in the 2024 local statutory financial statements of the 2 companies, and it will also be reflected in the 2024 corporate income tax returns of the 2 companies. However, it is not reflected in the 2 companies’ financial accounts (i.e., reporting packages) which are used to prepare the 2024 consolidated financial statements. Also, as the MNE Group uses those reporting packages to prepare the CbC Report, the adjustment will not be reflected in the CbC Report for 2024.

The reporting packages for 2024 show these numbers:

1. ACo: Total Revenue: EUR 9.5m; Profit Before Income Tax: EUR 0.7m
2. BCo: Total Revenue: EUR 10.2m; Profit Before Income Tax: EUR 1.3m

Based on this information, will jurisdictions A and B qualify for the Transitional CbCR Safe Harbour in 2024?

Answer:

The key point to note is that the MNE Group uses the consolidation reporting packages to prepare the CbC Report.

This means that the reporting packages for ACo and BCo are their Qualified Financial Statements (QFS): para. 17, Safe Harbour and Penalty Relief (SHPR) report.

For the purposes of the Transitional CbCR Safe Harbour (TCSH), year-end transfer pricing adjustments are not permitted to be made to the QFS: para. 74.15, SHPR report (added by December 2023 AG).

Therefore, the TCSH calculations must be based on the numbers in the reporting packages, without the TP adjustments.

Based on those numbers: (1) ACo will satisfy the De minimis test; and (2) BCo will fail the De minimis test.

Therefore, jurisdiction A will qualify for the TCSH.

The question does not provide sufficient information to determine whether jurisdiction B will satisfy either the Simplified ETR test or the Routine profits test.

Do you agree?

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules. It is the only Constituent Entity located in jurisdiction A. Both ACo and the MNE Group use the calendar year as their Fiscal Year.

100% of the shares in ACo were purchased by the MNE Group (from third parties) in 2024.

ACo’s financial accounts (i.e., reporting package) which are used in the preparation of the Group’s Consolidated Financial Statements for 2024, 2025, and 2026: (1) include the effect of purchase price accounting (PPA) adjustments relating to the purchase of ACo’s shares, (2) include the deferred tax expenses related to those PPA adjustments, and (3) do not include any impairment of goodwill.

Those financial accounts are used to prepare the MNE Group’s CbC Report for 2024, 2025, and 2026.

Based on this limited information, will the CbC Report for 2024, 2025, and 2026 constitute a Qualified CbC Report, for the purposes of the Transitional CbCR Safe Harbour (in regard to jurisdiction A)?

Answer:

A Qualified CbC Report is “a Country-by-Country Report prepared and filed using Qualified Financial Statements”: Safe Harbours and Penalty Relief report (SHPR) (issued by IF in December 2022).

Therefore, the question becomes this: are the financial accounts which are used to prepare the MNE Group’s CbC Report for 2024, 2025, and 2026 “Qualified Financial Statements” (QFS)?

Prima facie, ACo’s financial accounts (i.e., reporting package) which are used in the preparation of the Group’s Consolidated Financial Statements (CFS) for 2024, 2025, and 2026 satisfy the revised definition of QFS in the December 2023 AG (para. 17 of SHPR, as amended by section 1.3 of December 2023 AG).

However, do any of the subsequent comments in the December 2023 AG deem those financial accounts not to constitute QFS?

Issue (1): Inclusion of the effect of purchase price accounting (PPA) adjustments:

Such inclusion will not adversely impact the status of the financial accounts as QFS, if the “consistent reporting condition” (para. 17.4 of SHPR) is met, and the “goodwill impairment adjustment” (para. 17.5 of SHPR) is made.

Consistent reporting condition: “The MNE Group has not submitted a CbC Report for a fiscal year after 31 December 2022 that was based on the Constituent Entity’s reporting package … without the PPA adjustments, except where the Constituent Entity was required by law or regulation to change its reporting package … to include PPA adjustments.”

As ACo’s acquisition was in 2024, then the relevant PPA adjustments were not included in the MNE Group’s 2023 CbC Report. Does this mean that the condition is failed? Arguably not, because the 2023 CbC Report was not based on ACo’s reporting package: ACo was not yet a member of the group – therefore, the 2023 CbC Report was not based on ACo’s reporting package without the PPA adjustments.

Goodwill impairment adjustment: based on the facts, this adjustment is not relevant.

Issue (2): Inclusion of deferred tax expenses related to the PPA adjustments:

The inclusion of the deferred tax expenses will not adversely impact the status of the financial accounts as QFS: see Example 1 in para. 74.5 of SHPR (added by December 2023 AG).

Conclusion: the CbC Report for 2024, 2025, and 2026 respectively should constitute a Qualified CbC Report.

Do you agree?

The Jurisdiction X corporate income tax has a standard rate of 20%. However, for qualifying companies, a reduced income tax rate of 5% is imposed.

The government is concerned about the adverse impact of the GloBE rules on inbound investment.

It has suggested this proposal for companies which currently qualify for the 5% corporate income tax rate:

• An additional income tax (called an extra-profit tax) will be imposed on these companies. The extra-profit tax will have the same tax base as the corporate income tax, and it will have a 10% tax rate.
• The extra-profit tax will not be deductible or creditable for corporate income tax purposes, and vice versa.
• The extra-profit tax will reduce certain of the company’s jurisdiction B tax liabilities, other than corporate income tax, on a euro for euro basis – i.e., property tax, excise tax, and VAT (“specified taxes”). The reduction will not be in the form of a credit – instead, the legislation imposing the specified taxes will deduct the extra-profit tax, in computing the liability for the specified taxes. However, the extra-profit tax will not be refundable, in whole or part.

Based on this limited information: will the extra-profit tax qualify as a Covered Tax, under the GloBE rules?

Answer:

Assumption: the jurisdiction X corporate income tax (CIT) qualifies as a “Covered Tax”, under para. (a) of the definition in Art. 4.2.1 – i.e., a tax with respect to income or profits.

Prima facie, as the extra-profit tax (EPT) “will have the same tax base as the [CIT]”, it will also qualify as a “Covered Tax”, under para. (a).

Issue (1): Will the fact that the EPT will not be deductible or creditable for CIT purposes, and the CIT will not be deductible or creditable for EPT purposes, change the analysis?

IMHO: No – both taxes will continue to be imposed with respect to income or profits, although neither tax provides relief for the other.

Issue (2): Will the fact that the EPT will reduce the company’s jurisdiction X “specified tax” liabilities, on a euro for euro basis, change the analysis? (Note: (i) the 3 forms of “specified tax” are not “Covered Taxes”; (ii) the EPT will not be refundable, in whole or part.)

The Commentary on Art. 4.2.1 defines “tax” as: “a compulsory unrequited payment to General Government. … Taxes are unrequited in the sense that any benefits provided by government to the taxpayer are not in proportion to their payments.”

Is the EPT, to the extent it reduces the company’s “specified tax” liabilities, not unrequited? In other words: to the extent of the reduction in “specified taxes”, does the EPT generate a benefit provided by the government that is in proportion to the EPT payment? In addressing this question, the context is that other companies (i.e., companies which do not qualify for the 5% CIT rate) will generally be subject to the 3 forms of “specified tax”, without reduction.

I don’t know what the answer is. However, the fact that other companies will generally be subject to the 3 forms of “specified tax”, without reduction, suggests that an EPT taxpayer will receive a benefit in proportion to the EPT payment. Therefore, on balance, I favour a conclusion that the EPT (to the extent it reduces the 3 forms of “specified tax”) will not be a “tax”, and therefore will not be a “Covered Tax”.

What do you think?

Steve

PS: Under the US foreign tax credit regulations, the fact that the EPT will reduce the 3 forms of “specified tax” should not adversely impact its status as a foreign income tax.

ACo 1 and ACo 2 are both Constituent Entities in an MNE Group which is “within scope” of the GloBE rules. They are both located in jurisdiction A.

ACo 1 and ACo 2 are the only partners in a partnership formed under jurisdiction B law. They each have a 50% interest in the partnership. The partnership is tax-transparent in both jurisdiction A and jurisdiction B.

The partnership conducts a trading business in jurisdiction B.

In the 2030 fiscal year, these financial numbers are produced by the partnership’s business:

• GloBE Income: 100
• Adjusted Covered Taxes (i.e., jurisdiction B taxes): 5
• Payroll costs of employees: 40
• Carrying value of tangible assets: 80

The A/B double tax treaty is identical to the OECD model treaty.

The MNE Group has no operations in jurisdiction B, other than the partnership.

Based on this limited information, what will be the amount (if any) of jurisdiction B Top-up Tax for the MNE Group for the 2030 fiscal year?

Answer:

(1) Definitions

The partnership is an “Entity” (Art. 10.1.1), a “Flow-through Entity” (Art. 10.2.1), a “Tax Transparent Entity” (Art. 10.2.1(a)), a “stateless Entity” (Art. 10.3.2(b)), and a “Constituent Entity” (Art. 1.3.1(a)).

Its business in jurisdiction B is a “Permanent Establishment” (para. (a) of Art. 10.1.1 definition). [There is an issue as to whether there is 1 PE (i.e., a PE of the partnership) or 2 PEs (i.e., a PE of each of ACo 1 and ACo 2). IMHO: the better view is 1 PE.] The PE is “located” in jurisdiction B (Art. 10.3.3(a)), and therefore the PE can have a payroll carve-out (Art. 5.3.3) and a tangible asset carve-out (Art. 5.3.4).

The PE is not an “Entity” (Art. 10.1.1 – arguably), but it is a “Constituent Entity” (Art. 1.3.1(b)). Therefore, the partnership is a “Main Entity” (Art. 10.1.1).

(2) GloBE Income (GI)

The FANIL of the partnership is allocated to the PE (Arts. 3.4 & 3.5.1(a)). This causes the FANIL of the partnership to be nil (Art. 3.5.5).

Therefore, the PE has GI of 100, and the partnership has nil GI.

(3) Adjusted Covered Taxes (ACT)

The ACT of 5 is allocated to the PE (Art. 4.3.2(a)).

(4) SBIE

The payroll carve-out and tangible asset carve-out are determined for the PE (Art. 5.3.6).

Payroll carve-out: 7.4% x 40 = 2.96 (Art. 9.2).

Tangible asset carve-out: 6.2% x 80 = 4.96 (Art. 9.2).

Thus, SBIE for jurisdiction B = 2.96 + 4.96 = 7.92 (Art. 5.3.2).

(5) Top-up Tax (TUT)

ETR = 5 / 100 = 5%
TUT % = 10%

Excess Profit = 100 – 7.92 = 92.08

TUT = 10% x 92.08 = 9.208

Do you agree?

XCo (a company located in jurisdiction X) and YCo (a company located in jurisdiction Y) are Constituent Entities in an MNE Group which is “within scope” of the GloBE rules. Each of XCo and YCo is the only Constituent Entity located in its respective jurisdiction. XCo, YCo and the MNE Group use the calendar year as their Fiscal Year.

In January 2022, the UPE injected EUR-denominated share capital into XCo, XCo made a EUR-denominated loan to YCo, and YCo used the borrowed funds for working capital purposes in its business. This was done to allow YCo to claim a tax deduction on the interest expense, and to allow XCo to use its carryforward tax losses to avoid a tax liability in jurisdiction X.

The loan is repayable on demand, carries an interest rate of €STR (Euro Short-Term Rate) + 300 basis points, and the interest is payable (in cash) quarterly in arrears. Please assume that the interest rate satisfies the arm’s length principle. The €STR is an overnight (i.e., floating) rate.

In 2024, the loan is still outstanding. In 2024, it is expected that the interest on the loan will be EUR 0.3 million.

It is expected that, in the MNE Group’s CbC Report for 2024, these financial numbers will apply:

1. XCo: (i) Total Revenue: EUR 5 million; (ii) Profit (Loss) before Income Tax: EUR 0.5 million (this includes the EUR 0.3 million of interest income).
2. YCo: (i) Total Revenue: EUR 8 million; (ii) Profit (Loss) before Income Tax: EUR 0.9 million (this is after deducting the EUR 0.3 million interest expense).

At the beginning of 2024, XCo has EUR 2 million of carryforward tax losses. Tax losses can be carried forward indefinitely in jurisdiction X, subject to compliance with ownership and business continuity tests. A deferred tax asset for the tax losses is not recognised in XCo’s financial statements or in the MNE Group’s consolidated financial statements.

Based on this limited information, will jurisdiction X and jurisdiction Y each qualify for the Transitional CbCR Safe Harbour in 2024?

Answer:

Subject to one issue (see below), both jurisdiction X and jurisdiction Y will satisfy the “de minimis test” and therefore the Transitional CbCR Safe Harbour in 2024.

The issue concerns whether the loan is a Hybrid Arbitrage Arrangement which was entered into after 15 December 2022: see paras. 74.25 to 74.31 of the “Safe Harbours and Penalty Relief” report, as added by the December 2023 AG.

That raises 2 sub-issues.

(1) Is the loan a Hybrid Arbitrage Arrangement?

Probably yes. It is probably a “deduction / non-inclusion arrangement”: para. 74.27. The critical question is whether the Constituent Entity counterparty (i.e., XCo) “is not reasonably expected over the life of the arrangement [i.e., loan] to have a commensurate increase in its taxable income”.

Under para. 74.30(d)(i), that assessment is to be made by ignoring any amount of taxable income which is offset by XCo’s tax losses. Having regard to the fact that the loan is repayable on demand, the expected quantum of the interest income and XCo’s other profits in 2024, and the quantum of XCo’s carryforward tax losses, XCo should not be reasonably expected over the life of the loan to have a commensurate increase in its taxable income.

(2) Was the loan entered into after 15 December 2022?

Prima facie: no – it was entered into in January 2022.

But does para. 74.30(c) deem the loan to have been entered into after 15 December 2022?

The only relevant provision in para. 74.30(c) is clause (ii): “the performance of any rights or obligations under the arrangement differs from the performance prior to 15 December 2022”.

What does “performance … differs” mean in this context? Does it mean that the rights and obligations remain the same, but the result (i.e., performance) of those rights and obligations “differs”?

Note that the interest rate is a floating rate, on a daily basis. Thus, the interest rate each day will generally “differ” (be higher or lower) than the interest rate for the day earlier. Therefore, the quantum of interest payable each quarter would generally “differ”. Is this sufficient to conclude that clause (ii) is satisfied?

I don’t know the answer. It would be surprising if the loan in the present case were caught by clause (ii) – however, what does “performance … differs” mean?

What do you think?

I should add: if clause (ii) is satisfied, then jurisdiction Y will fail the “de minimis test” (the Profit (Loss) before Income Tax would not be less than EUR 1 million), and therefore would fail the Transitional CbCR Safe Harbour; however, there would be no adverse impact on jurisdiction X.

UCo 1, a company located in jurisdiction U, is the UPE of an MNE Group, which is “in scope” of the GloBE rules.

UCo 1 directly owns 70% of the shares in XCo 1, a company located in jurisdiction X. The other 30% of the shares in XCo 1 are held by numerous small investors. XCo 1’s shares are listed on the X stock exchange.

XCo 1 directly owns 100% of the shares in each of 2 subsidiaries: XCo 2 (a company located in jurisdiction X), and UCo 2 (a company located in jurisdiction U) – i.e., XCo 2 and UCo 2 are sister subsidiaries.

XCo 1, XCo 2, and UCo 2 are all members of UCo 1’s MNE Group.

Jurisdiction U and jurisdiction X have each implemented an IIR, but neither jurisdiction has implemented a QDMTT.

In the current year, please assume that UCo 1, UCo 2, XCo 1, and XCo 2 each has: (i) GloBE Income of 110, and (ii) Adjusted Covered Taxes of 5. Also, please assume that each of the 2 jurisdictions has SBIE of 20.

Finally, please assume that there are no other Constituent Entities located in either of the 2 jurisdictions.

Based on this limited information: (1) which companies (if any) will be required to pay IIR tax, and (2) what is the amount of that tax?

Would your answers be different if both jurisdiction U and jurisdiction X are EU Member States?

Answer:

1. Juris. X TUT:

GI = 110 + 110 = 220
ACT = 5 + 5 = 10
SBIE = 20
EP = 200
ETR = 10 / 220 = 4.5455% (to 4 decimal places)
TUT% = 10.4545% x 200 = 20.909

2. Juris. U TUT:

Same as Juris. X – i.e., 20.909

3.Non-EU:

3.1 Juris. X TUT:

IIR levied on XCo 1: nil (Art. 2.1.6)

IIR levied on UCo 1:
70% x 20.909 = 14.6363

3.2 Juris. U TUT:

IIR levied on UCo 1: nil (Art. 2.1.6)

IIR levied on XCo 1 (POPE):
Limited to TUT of UCo 2 (computed under Art. 5.2.4) – i.e., 20.909 x 110 / 220 = 10.4545

4. EU:

4.1 Juris. X TUT:

IIR levied on XCo 1: 20.909 (Arts. 8(2) & 9(3), GloBE Directive)

IIR levied on UCo 1:

Prima facie: 14.6363
IIR offset applies when UPE holds an ownership interest “indirectly through” an IPE or a POPE: Art. 10, GloBE Directive.
That is the case for XCo 2, but not for XCo 1!
Thus, IIR levied on UCo 1 (in respect of XCo 1’s TUT) = 14.6363 / 2 = 7.3186

Thus, double tax (on XCo 1 and UCo 1) in respect of XCo 1’s TUT! Is this correct? See Note below.

4.2 Juris. U TUT:

IIR levied on XCo 1 (in respect of UCo 2’s TUT): 20.909 x 110 / 220 = 10.4545

IIR levied on UCo 1:
In respect of UCo 2’s TUT = nil (Art. 10, GloBE Directive)
In respect of UCo 1’s TUT: 20.909 x 110 / 220 = 10.4545

5. Final answer:

Non-EU:
UCo 1: 14.6363
XCo 1: 10.4545

EU:
UCo 1: 7.3186 + 10.4545 = 17.7731
XCo 1: 20.909 + 10.4545 = 31.3635

In the EU scenario, there is an apparent double counting, due to the drafting of Art. 10, GloBE Directive!

Note on Art. 10, GloBE Directive:

This possible outcome is contrary to the purpose of Art. 10 (which corresponds to Art. 2.3 of the GloBE model rules). This possible outcome is caused by the extension of the IIR (in Art. 8(2) and Art. 9(3) of the GloBE Directive) to the Top-up Tax of the POPE. That situation is not provided for in the GloBE model rules. Thus, as Art. 10 is relevantly the same as Art. 2.3, the drafting issue has arisen.

Do you agree?

UCo, a company located in jurisdiction U, is the UPE of an MNE Group which is “within scope” of the GloBE rules.

UCo directly owns 50% of the shares in YCo, a company resident in jurisdiction Y. YCo’s shares are listed on a stock exchange in jurisdiction Y. The other 50% of the shares are held by numerous investors. YCo is controlled by UCo, and therefore YCo is included in UCo’s consolidated financial statements. YCo is the only Constituent Entity located in jurisdiction Y.

UCo also directly owns 60% of the shares in XCo2, a company located in jurisdiction X. The other 40% of the shares in XCo2 are owned by XCo1, an unrelated company located in jurisdiction X. XCo2 is the only Constituent Entity located in jurisdiction X.

Please assume that jurisdiction Y has Jurisdictional Top-up Tax of 100, for both GloBE and QDMTT purposes.

Based on this limited information:

1. If (i) jurisdiction Y has implemented a QDMTT, and (ii) the QDMTT is imposed on YCo: what is the amount of QDMTT tax which would be levied on YCo?
2. If jurisdiction U has implemented an IIR (and if jurisdiction Y has not implemented a QDMTT): what is the amount of IIR tax which would be levied on UCo?
3. If (i) jurisdiction Y has not implemented a QDMTT, (ii) jurisdiction U has not implemented an IIR, and (iii) jurisdiction X is the only jurisdiction (in which a Constituent Entity is located) to have implemented a UTPR: what is the amount of UTPR tax which would be levied on XCo2?

Answer:

Q1:

If the QDMTT is imposed on YCo, the amount must be 100.

The Feb 2023 AG does not allow the amount of QDMTT to be “scaled down”, to reflect UCo’s 50% Ownership Interest. If the jurisdiction Y DMTT were to do so, it would lose its “qualified” status. See para. 118.10 of Comm to “QDMTT” definition in Art. 10.1.1 (added to Comm by Feb 2023 AG). Also, see ITQ193.

Para. 118.10 does allow jurisdiction Y not to impose QDMTT on YCo. However, as the question states that “the QDMTT is imposed on YCo”, the amount must be 100.

Q2:

The amount of IIR tax imposed on UCo would be 50, reflecting UCo’s 50% Ownership Interest in YCo: see Art. 2.2.

Q3:

The amount of UTPR tax imposed on XCo2 would be 100: see Arts. 2.5 and 2.6. Note that the GloBE rules do not “scale down” the amount of UTPR tax, to reflect UCo’s 50% Ownership Interest.

Comment:

This example shows 2 counter-intuitive aspects of the GloBE rules: (1) the fact that the amount of QDMTT is not “scaled down”, to reflect UCo’s 50% Ownership Interest (i.e., the QDMTT must be either 100 or 0), despite the fact that the potential IIR tax is only 50; and (2) the fact that the amount of UTPR tax is also not “scaled down”, to reflect UCo’s 50% Ownership Interest (i.e., the UTPR tax must be 100), again despite the fact that the potential IIR tax is only 50.

Do you agree?

USCo, a company situated in the US, is the UPE of an MNE Group which is “in scope” of the GloBE rules.

USCo owns 100% of the shares in ACo, a company located in jurisdiction A.

ACo owns 100% of the shares in BCo, a company located in jurisdiction B. BCo is the only Constituent Entity located in jurisdiction B.

Q1: Assume that jurisdiction B levies 100 of QDMTT tax on BCo. Will USCo obtain a US foreign tax credit for that tax?

Q2: Assume that jurisdiction A levies 100 of IIR tax on ACo (in respect of the jurisdiction B Top-up Tax – i.e., on the assumption that jurisdiction B has not implemented a QDMTT). Will USCo obtain a US foreign tax credit for the jurisdiction A IIR tax?

Answer:

Preliminary comments

Both questions require the application of Notice 2023-80, which was recently released by the US Treasury and IRS.

ACo and BCo are USCo’s CFCs for the purposes of the US Subpart F and GILTI rules.

Therefore, in determining the jurisdiction B Jurisdictional Top-up Tax under the GloBE rules, USCo’s US tax under Subpart F or GILTI which relates to BCo is allocable to BCo, pursuant to Art. 4.3.2(c).

Q1

Q1 refers to BCo’s QDMTT tax liability.

Allocation of Subpart F or GILTI tax is not permitted in computing QDMTT.

Accordingly, the jurisdiction B QDMTT is not a “final top-up tax” (as defined in Notice 2023-80).

A foreign tax credit (FTC) is therefore allowed to USCo in regard to the QDMTT. The amount of the FTC is 80 (i.e., 100 x 80%), after the “20% haircut” under US section 960(d).

Q2

Q2 refers to ACo’s IIR tax liability in regard to the jurisdiction B Jurisdictional Top-up Tax.

Allocation of Subpart F or GILTI tax is required in computing that IIR tax.

Accordingly, the jurisdiction A IIR tax is a “final top-up tax” (as defined in Notice 2023-80), regardless of whether there is any Subpart F or GILTI tax to actually allocate.

An FTC is therefore not allowed to USCo in regard to the IIR tax.

Do you agree?

XCo, a large operating company located in jurisdiction X, is the UPE of an MNE Group which is “within scope” of the GloBE rules. XCo uses the calendar year as its fiscal year. XCo is the only Constituent Entity located in jurisdiction X.

Jurisdiction X has not implemented either the GloBE rules or a QDMTT. However, the GloBE rules (IIR and UTPR) and QDMTTs have been implemented in several jurisdictions where the MNE Group’s Constituent Entities are located.

Jurisdiction X has both Federal and State income taxes. The State income taxes are fully deductible for Federal income tax purposes (i.e., for Federal income tax purposes, State income tax is a deduction in computing taxable income). Jurisdiction X has 6 States (A to F).

The Federal and State income taxes are all imposed on a comprehensive measure of income.

The respective statutory income tax rates are:

• Federal: 15%
• A: 5%
• B: 8%
• C: 6%
• D: 4%
• E: 5%
• F: 10%

Jurisdiction X offers various income tax incentives. In 2025, XCo qualifies for an income tax exemption: it is liable for zero income tax, both Federally and in the 2 States (B and F) in which XCo operates.

In 2025, XCo has the following numbers for GloBE purposes:

• GloBE Income: EUR 100 million
• Substance-based Income Exclusion: EUR 20 million
• Adjusted Covered Taxes: zero

Based on this information, will there be any tax liability under the GloBE rules for 2025 in respect of jurisdiction X?

Answer:

This question focuses on whether the Transitional UTPR Safe Harbour (UTPR SH) will be available to the MNE Group in 2025. Based on the facts, the MNE Group will not qualify for the Transitional CbCR Safe Harbour in respect of jurisdiction X.

To qualify for the UTPR SH, jurisdiction X must have “a corporate income tax rate that applies at a rate of at least 20 percent”. (Section 5.2 in July 2023 AG).

Para. 5 says this: “The corporate income tax rate for each jurisdiction is the nominal statutory tax rate generally imposed on in-scope MNE Groups on a comprehensive measure of income. This rate may take into account sub-national taxes provided that such taxes are structured so that in the case of all sub-national jurisdictions, the combined rate generally applicable to in-scope MNE Groups will be equal to or greater than 20%.”

The facts raise 2 issues:

Issue 1: what impact does the deductibility of the State income taxes (for Federal income tax purposes) have on the “corporate income tax rate”?

In my view, no impact – para. 5 refers to “nominal statutory tax rate”.

Issue 2: what impact does State D have on the “corporate income tax rate”?

For all the other States, the combined rate of Federal and State nominal statutory income tax rates is 20% or greater.

However, for State D, the combined rate is 19%.

XCo does not operate in State D. Nevertheless, para. 5 requires consideration of the combined rate “in the case of all sub-national jurisdictions”.

Therefore, State D’s combined Federal / State rate of 19% will cause XCo to fail the “corporate income tax rate” condition.

Accordingly, the MNE Group will not qualify for the UTPR SH.

Final answer: For 2025, UTPR Top-up Tax liabilities will exist in one or more jurisdictions where the MNE Group has Constituent Entities, based on a Total UTPR Top-up Tax Amount of: 15% x EUR 80 million = EUR 12 million.

Do you agree?

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules. It is the only Constituent Entity located in jurisdiction A.

The UPE (which is located in jurisdiction U) directly owns 90% of the shares in ACo. The other 10% of the shares are owned by the senior management of ACo.

Both jurisdiction A and jurisdiction U have implemented the GloBE rules. Also, jurisdiction A has introduced a Domestic Minimum Top-up Tax (DMTT), which is intended to be a QDMTT.

Jurisdiction A’s DMTT is identical to the GloBE rules, except for: (i) the 2 “mandatory variations” described in chapter 5 of the July 2023 AG; and (ii) the DMTT “scales down” the amount of the tax, to reflect the MNE Group’s percentage ownership (see below for example).

Under the GloBE rules, the jurisdiction A Jurisdictional Top-up Tax (before deducting “QDMTT payable”) is EUR 10 million.

Under jurisdiction A’s DMTT, ACo’s prima facie top-up tax is EUR 10 million. However, that amount is then “scaled down” to EUR 9 million, to reflect the fact that the MNE Group’s percentage ownership in ACo is 90%. Thus, the DMTT payable by ACo is EUR 9 million.

Q1: Should the jurisdiction A DMTT qualify as a QDMTT?
Q2: What amount of IIR tax will be imposed on the UPE, in respect of jurisdiction A?

Answer:

Preliminary point: The jurisdiction A DMTT is EUR 9 million. The IIR tax imposed on the UPE (before considering the jurisdiction A DMTT) is also EUR 9 million.

Q1:

The DMTT should not qualify as a QDMTT.

Para. 118.10 of the February 2023 AG: “The Jurisdictional Top-up Tax that is subject to the QDMTT is based on the whole amount of the Jurisdictional Top-up Tax computed under Article 5.2.3 …, irrespective of the Ownership Interests held in the Constituent Entities located in the QDMTT jurisdiction by any Parent Entity of the MNE Group.”

If the relevant Ownership Interest is less than 100%, para. 118.10 permits the QDMTT jurisdiction to not apply its QDMTT to that Constituent Entity – but it does not permit the “scaling down” of the QDMTT, to reflect the Ownership Interest.

Q2:

The DMTT should qualify as a Covered Tax (defined in Art. 4.2).

Thus, the Jurisdictional Top-up Tax for GloBE purposes will need to be computed after taking the DMTT into account as a Covered Tax.

UPE’s IIR tax liability will be 90% of the Jurisdictional Top-up Tax (so computed).

Do you agree?

XCo, a company located in jurisdiction X, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules. XCo is the only Constituent Entity located in jurisdiction X.

The UPE is a company located in jurisdiction U, which has implemented the GloBE rules. The UPE’s “Ownership Interest” in XCo is 100%.

Jurisdiction X has also implemented the GloBE rules and a QDMTT.

For the purpose of computing GloBE Income under the QDMTT, jurisdiction X requires its local accounting standard to be used, instead of the accounting standard which applies for the consolidated group accounts. That local accounting standard is an “Acceptable Financial Accounting Standard” for the purposes of the GloBE rules. Jurisdiction X also requires that local accounting standard to be used for the purpose of computing its corporate income tax.

Apart from that difference in accounting standard and apart from the 2 “mandatory variations” described in chapter 5 of the July 2023 AG, jurisdiction X’s QDMTT is identical to the GloBE rules.

For the purposes of the GloBE rules, the jurisdiction X Jurisdictional Top-up Tax (before deducting QDMTT payable) in a fiscal year is EUR 2 million.

The jurisdiction X QDMTT charge imposed on XCo for that fiscal year is EUR 1.4 million.

Q1: Based on this information, what amount of IIR tax is payable by UPE, in regard to jurisdiction X?

Q2: What would be your answer to Q1, if the UPE’s “Ownership Interest” in XCo is 80%, but all other facts and figures are unchanged?

Answer:

Q1:

Unless a Safe Harbour applies, the IIR tax will be: 100% x (EUR 2.0m – EUR 1.4m) = EUR 0.6m (Art. 5.2.3).

However, if a Safe Harbour is available and is elected by the Filing Constituent Entity, the IIR tax will be deemed to be zero: Art. 8.2.1.

Based on the facts, it appears that the QDMTT Safe Harbour will be available:

1. QDMTT Accounting Standard is satisfied, because: (i) the QDMTT is computed based on the local financial accounting standard (which is an “Acceptable Financial Accounting Standard”); and (ii) that local financial accounting standard is required to be used for the purpose of computing the jurisdiction X corporate income tax (paras. 2 & 3 of “Standards for a QDMTT Safe Harbour”, in chapter 5 of the July 2023 AG).
2. Consistency Standard is satisfied: para. 4 of “Standards …” (see above).
3. Administration Standard: I will assume this is satisfied: para. 5 of “Standards …” (see above).

Q2:

The question assumes this situation: UPE’s “Ownership Interest” in XCo is 80%, but all other facts and figures are unchanged.

The fact that “all other facts and figures are unchanged” means that: (1) the X Jurisdictional Top-up Tax (before deducting QDMTT payable) is EUR 2m; and (2) the X QDMTT charge is EUR 1.4m.

Unless a Safe Harbour applies, the IIR tax will be: 80% x (EUR 2m – EUR 1.4m) = EUR 0.48m.

Is the QDMTT Safe Harbour available?

Based on the facts, jurisdiction X imposes the QDMTT on 100% of the Jurisdictional Top-up Tax, notwithstanding that the UPE’s “Ownership Interest” is 80%. Thus, the Consistency Standard is satisfied: para. 46, chapter 5 of July 2023 AG.

As the other standards are satisfied (see above), the QDNTT Safe Harbour should be available.

Thus, if the QDMTT Safe Harbour is elected by the Filing Constituent Entity, the IIR tax will be zero: Art. 8.2.1.

Do you agree?

YCo, a company located in jurisdiction Y, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules. YCo is the only Constituent Entity located in jurisdiction Y.

The UPE, a company located in jurisdiction U, directly owns 100% of the shares in XCo, a company located in jurisdiction X.

XCo directly owns 100% of the shares in YCo.

Both the U/Y double tax treaty and the X/Y double tax treaty are identical to the 2017 OECD model treaty.

For the 2024 fiscal year:

1. Jurisdiction Y has implemented a QDMTT
2. Jurisdictions U, X and Y have not implemented IIRs or UTPRs
3. No other jurisdiction in which the MNE Group operates has implemented a UTPR

Jurisdiction Y’s QDMTT is identical to the GloBE rules, except that it complies with the 2 mandatory variations described in chapter 5 of the July 2023 AG.

YCo forecasts that it will be subject to QDMTT tax for 2024.

YCo has asked you whether it will be able to avoid paying the QDMTT, based on either the U/Y or X/Y double tax treaty.

What is your advice?

Answer:

1. Art. 2 (U/Y and X/Y treaties)

QDMTT should be a tax “on income”, and therefore within the scope of the treaty: Art. 2(1).

2. Art. 4 (U/Y and X/Y treaties)

The question states that YCo is “located” in Y, under the GloBE rules.

I will assume that this means that YCo is resident in Y only, under each of the 2 treaties.

3. Scope of Y’s QDMTT

The question states that Y’s QDMTT “is identical to the GloBE rules, except that it complies with the 2 mandatory variations described in chapter 5 of the July 2023 AG.”

This means that Y’s QDMTT applies only to Constituent Entities (located in Y) of MNE Groups which are “within scope” of the GloBE rules.

Therefore, Y’s QDMTT does not apply to Y-resident companies which are members of groups which are not “within scope” of the GloBE rules – e.g., (i) MNE Groups which fall outside the scope of the GloBE rules, and (ii) 100% domestic groups.

4. Art. 24(5) (U/Y and X/Y treaties)

[Note: (a) Art. 24(1) to (5) apply to taxes of every kind and description, notwithstanding Art. 2: Art. 24(6); and (b) Art. 24 is an exception to the “saving clause” in Art. 1(3).]

Under Art. 24(5) of each treaty, YCo is an “enterprise of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State”.

Therefore, Art. 24(5) requires that YCo not be subjected in Y “to any taxation … which is other or more burdensome than the taxation … to which other similar enterprises of [Y] are or may be subjected.”

Which companies are the “other similar enterprises of [Y]”?

A possible answer is that “other similar enterprises of [Y]” would include Y-resident companies which are members of groups which are not “within scope” of the GloBE rules – e.g., (i) MNE Groups which fall outside the scope of the GloBE rules, and (ii) 100% domestic groups.

If that were the correct answer, then Art. 24(5) would prevent Y’s QDMTT from applying to YCo.

An alternative approach would be to argue that Y’s QDMTT is imposed on YCo because it is a member of an “in scope” MNE Group; however, it is not imposed on YCo because its capital is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State. In other words, the ownership or control by UPE or XCo is not the reason for Y’s QDMTT to be imposed on YCo. And, therefore, Y’s QDMTT imposed on YCo would not be impacted by Art. 24(5).

This alternative approach, although not self-evident on the face of Art. 24(5), is consistent with the narrow view of Art. 24 which has been taken by the OECD Comm.

At present, there is no guidance on the treatment of QDMTTs under Art. 24. On balance, I think that the alternative approach will probably be endorsed by the IF.

5. Final answer

YCo will probably not be able to avoid paying the QDMTT, based on either the U/Y or the X/Y treaty.

Do you agree?

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group, which is “within scope” of the GloBE rules. ACo is the only Constituent Entity located in jurisdiction A.

The UPE is located in jurisdiction U, which has implemented the GloBE rules.

ACo conducts mining operations in jurisdiction A. Before commencing those operations, ACo signed a “tax stabilisation agreement” with the then government of jurisdiction A. Under this agreement, for a 20-year period from 2015, the government has agreed that the total amount of taxes imposed on ACo’s profits for any year shall not exceed EUR 1 million. The agreement was not confirmed in any legislation enacted by jurisdiction A.

Some years after the agreement was signed, the government was defeated in a general election.

Jurisdiction A has introduced a QDMTT.

In 2025, the jurisdiction A tax authorities impose EUR 3 million of taxes on ACo. The EUR 3 million is comprised of: corporate income tax (EUR 0.4 million) and QDMTT (EUR 2.6 million).

ACo has objected to this total amount of taxes. It claims that, under the “tax stabilisation agreement”, its taxes on profits for 2025 cannot exceed EUR 1 million. It therefore has asked that the total tax claim be reduced by EUR 2 million.

The jurisdiction A tax authorities have (so far) resisted ACo’s claim, on the basis that (1) the “tax stabilisation agreement”, which was signed by the previous government, was not properly authorised by the head of State; and (2) the “tax stabilisation agreement” was not confirmed by legislation.

Due to the uncertainty on whether the “tax stabilisation agreement” will be respected, the MNE Group has recorded a tax expense of EUR 1 million in its 2025 consolidated financial statements, and has disclosed a contingent liability of EUR 2 million in the notes to those financial statements.

Under the GloBE rules, is there any Top-up Tax for 2025 in respect of jurisdiction A? If so, what is the amount?

Would your answers be different if the MNE Group recorded a tax expense of EUR 3 million in its 2025 consolidated financial statements?

For both sets of questions, please ignore the QDMTT Safe Harbour.

Answer:

Scenario 1: EUR 1 million tax expense, EUR 2 million contingent liability

The fundamental issue is this: what is the “amount payable”, under a QDMTT, for the purposes of the Top-up Tax formula in Art. 5.2.3?

Under the general rule, the amount of the “QDMTT payable” “shall be equal to the amount accrued by the Constituent Entities in the jurisdiction for the Fiscal Year”: para. 20.1 of Comm to Art. 5.2.3.

Threshold issue: has the contingent liability been “accrued”?

Under IAS 37 (Provisions, Contingent Liabilities and Contingent Assets), an entity shall not recognise a contingent liability (para. 37), but instead shall disclose the contingent liability (para. 86).

Para. 20.1 and related paragraphs do not discuss the meaning of the word, “accrued”.

On balance, I think that a contingent liability is not “accrued”, for the purposes of para. 20.1.

If that is correct, then the next issue is this: how much of the tax expense of EUR 1 million relates to corporate income tax (CIT) and how much relates to QDMTT?

Again, there is no guidance on this issue in the Comm. I think a reasonable approach would be to pro-rate the EUR 1 million tax expense between the 2 types of taxes. This would mean that EUR 133,333 would relate to CIT and EUR 866,667 would relate to QDMTT.

Under the exception to para. 20.1, the balance of the QDMTT (i.e., EUR 1,733,333) would not be “QDMTT payable”. This would mean that the Top-up Tax under Art. 5.2.3 would be EUR 1,733,333.

Scenario 2: EUR 3 million tax expense

We need to work out how much of the EUR 1 million cap under the “tax stabilisation agreement” relates to CIT and how much relates to QDMTT.

Using the same “pro-rating” approach as above, we would compute the same numbers: EUR 133,333 would relate to CIT and EUR 866,667 would relate to QDMTT.

Under the exception to para. 20.1, the balance of the QDMTT (i.e., EUR 1,733,333) would not be “QDMTT payable”. This would mean that the Top-up Tax under Art. 5.2.3 would be EUR 1,733,333.

Do you agree?

XCo, a company located in jurisdiction X, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules. In particular, the UPE of the MNE Group is not an “Excluded Entity”, as defined in Art. 1.5.1 of the GloBE rules.

XCo operates in several different sectors, including real estate. One of its real estate investments is an office building located in jurisdiction Y. All of the offices in the building are leased by XCo to unrelated lessees, in return for market-based rent. To facilitate the leasing activity (e.g., negotiate and enter into leases with lessees), and to manage the maintenance of the building, XCo employs 5 employees who are permanently located in a management office in the building. For regulatory purposes in jurisdiction Y, the leasing activity and the building are registered as a branch in jurisdiction Y.

The X/Y double tax treaty is identical to the 2017 OECD model treaty (with Art. 23B). Under the jurisdiction X corporate income tax law, the income derived in jurisdiction Y is taxable, with a credit for any jurisdiction Y tax paid.

Jurisdiction Y has implemented a QDMTT.

Is jurisdiction Y permitted to impose QDMTT on XCo’s jurisdiction Y branch?

Answer:

(1) Treatment of building / branch under X/Y double tax treaty

XCo derives income from immovable property situated in Y. Therefore, Art. 6(1) allows Y to impose tax on that income, without limitation.

XCo’s management office in the building would constitute a PE, as defined in Art. 5. The offices which are leased to lessees might not be part of that PE, or individual PEs in their own right, on the basis that they are not “at the disposal” of XCo: see para. 36 of 2017 OECD Comm to Art. 5.

In any event, regardless of the scope of the PE, Art. 7 does not apply: Art. 7(4) gives priority to Art. 6(1).

(2) Treatment of building / branch under GloBE rules

Is the definition of “Permanent Establishment” in Art. 10.1.1 satisfied?

Para. (a): no – Y does not tax the income attributable to XCo’s place of business “in accordance with a provision similar to Article 7 of the OECD [model treaty]”. Art. 6 is not similar to Art. 7.

Para. (b): no – There is an applicable treaty.

Para. (c): no – Y has a corporate income tax system in place.

Para. (d): no – X does not exempt the income attributable to the building / branch in Y.

As the “PE” definition in Art. 10.1.1 is exhaustive (“means”), the conclusion is that the building / branch is not a PE for GloBE purposes.

Therefore, the building / branch is not a “Constituent Entity”: Art. 1.3.1.

[Aside: Is it possible that the building / branch is an “Entity”, as defined in Art. 10.1.1: “an arrangement that prepares separate financial accounts, such as a partnership or trust”? IMHO: no – such a conclusion would make the reference to PEs in para. (b) of Art. 1.3.1 largely redundant. Also, the word, “arrangement”, suggests the involvement of one or more other persons, such as in a partnership or trust – a building or branch does not have that attribute.]

(3) QDMTT

Para. 118.4 (of the Art. 10.1.1 definition of “QDMTT”) requires that: “(a) the definition of … Constituent Entity in the QDMTT [needs] to correspond with the [definition] in the GloBE Rules; and (b) the QDMTT must compute the tax liability for the jurisdiction by taking into account the income and covered taxes of Constituent Entities that are located in the jurisdiction as determined under the GloBE Rules.”

As the building / branch is not a “Constituent Entity”, there is no income and covered taxes, and therefore no Top-up Tax, for QDMTT purposes.

[Note that XCo is located, for GloBE purposes, in X: Art. 10.3.1. Thus, Y cannot impose QDMTT on XCo as a Constituent Entity.]

Thus, final answer: no, Y is not permitted to impose QDMTT on XCo’s Y branch.

Do you agree?

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules.

ACo conducts a manufacturing business in jurisdiction A. ACo uses its own patents in its manufacturing business.

ACo also owns 100% of the shares in BCo, a company located in jurisdiction B. Jurisdiction B is a “developing country”, as defined in the July 2023 Subject to Tax Rule (STTR) Report.

At the beginning of Year 20X1, ACo licenses its patents to BCo for 10 years, for a royalty of EUR 3 million per annum. The royalty is due and payable on the last day of each year.

The jurisdiction A corporate income tax law does not tax foreign source income unless and until it is repatriated (or deemed to be repatriated) to jurisdiction A. Knowing this, and on the basis that the BCo royalties would be characterised as foreign source income under jurisdiction A law, ACo includes in the terms of the licence agreement a requirement that BCo pay the royalties into ACo’s bank account in jurisdiction C. Due to ACo’s control over BCo, BCo agrees to that requirement. It is ACo’s intention that the royalties will never be repatriated (or deemed to be repatriated) to jurisdiction A.

The A/B treaty is identical to the 2017 OECD model treaty, with the addition of the STTR.

Under the jurisdiction B corporate income tax law, outbound royalties are subject to a 10% final withholding tax.

With respect to the EUR 3 million royalty to be paid in 20X1:

1. Does the treaty permit jurisdiction B to impose withholding tax on the royalty?
2. If the answer to (1) is yes: (a) what will be the amount of withholding tax?; and (b) when will that withholding tax be required to be paid?
3. Also if the answer to (1) is yes: how will the withholding tax be treated under the GloBE rules?

Answer:

Q (1)

Art. 12(1) provides an exemption from jurisdiction B tax on the royalty.

However, does the STTR apply?

The key issue is whether the exemption from jurisdiction A tax (for as long as the royalty is not repatriated or deemed to be repatriated to A) is a “preferential adjustment”, as defined in Art. 1(6)(a). That in turn raises the issue of whether that exemption is a “permanent reduction”, which is defined in Art. 1(6)(b)(ii).

ACo “has control over the point at which that income is recognised for tax purposes” in A, and (I assume) the royalty is not repatriated (or deemed repatriated) within 3 years following the end of 20X1. Therefore, Art. 1(6)(b)(ii) will deem the exemption to be a “permanent reduction”, at the expiration of 20X4.

[Two other points to note on the “permanent reduction” definition:

1. The fact that ACo controls the terms of the licence agreement is irrelevant: para. 82 of STTR Report.
2. The fact that ACo’s intention is that the royalties will never be repatriated (or deemed repatriated) to jurisdiction A might allow an argument that the reduction is “not expected to reverse over time” – which would mean that the definition is satisfied in 20X1. What do you think?]

The other 2 conditions in Art. 1(6)(a) will be satisfied: there is a full exemption from income, that is directly linked to the item of covered income (i.e., the royalty).

Thus, the “tax rate” on the royalty will be 0% (Art. 1(5)(a)), and the “materiality threshold” is satisfied (Art. 1(12)(a)).

Therefore, Art. 1(1) allows jurisdiction B to impose tax on the royalty.

Q (2)(a)

The rate will be 9%: Art. 1(2). Thus, the jurisdiction B tax will be EUR 270,000.

Q (2)(b)

The treaty conditions allowing the jurisdiction B tax to be imposed will not be satisfied until the expiration of 20X4: see above.

Therefore, I expect that the tax will be paid in 20X5, pursuant to the administrative arrangements agreed between the 2 competent authorities under Art. 1(14).

Note, however, that for jurisdiction B domestic law purposes, the tax is imposed for 20X1.

Q (3)

The jurisdiction B tax will qualify as ACo’s “Covered Tax” for GloBE purposes.

In regard to timing, the tax should relate to 20X1. However, as the adjustment is an increase in ACo’s liability for Covered Taxes for a previous Fiscal Year, it should be treated as ACo’s “Covered Tax” in 20X5: Art. 4.6.1 (GloBE rules).

Do you agree?

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules.

ACo operates a cargo air transport business between several jurisdictions in the region, including jurisdiction B.

ACo has a branch in jurisdiction B. The branch, which has 20 employees and operates from an office in an airport in jurisdiction B, enters into cargo air transport contracts with customers which want to export goods from jurisdiction B. In addition, the branch manages the logistics and customs arrangements in regard to such contracts (e.g., presenting the relevant documents to the jurisdiction B customs authorities, receiving the goods from the customers, etc.). The branch also invoices and collects payments from such customers. Finally, the branch manages the logistics and customs arrangements for goods which are imported into jurisdiction B.

The A/B double tax treaty is identical to the 2017 OECD model treaty.

Under the jurisdiction A corporate income tax law, foreign sourced “active income” (i.e., income from the conduct of a business) is exempt.

ACo also owns 70% of the shares in BCo, a company located in jurisdiction B. BCo operates a cargo air transport business within jurisdiction B. The other 30% of the shares are owned by third party investors in jurisdiction B.

Jurisdiction B has implemented a QDMTT.

Is jurisdiction B permitted to impose its QDMTT on (i) BCo; and (ii) ACo’s jurisdiction B branch?

Answer:

BCo

Jurisdiction B is permitted to impose its QDMTT on 100% of the Top-up Tax in respect of BCo, even though the MNE Group owns only 70% of the shares in BCo: para. 118.10 of Comm on the definition of “QDMTT” in Art. 10.1.1 (introduced by Feb 2023 AG).

ACo’s jurisdiction B branch

(a) 1st issue: exemption under A/B treaty?

ACo’s business is the operation of aircraft in international traffic.

Although the branch would constitute a PE under Art. 5(1), the profits from the operation of aircraft in international traffic would be exempt from jurisdiction B tax under Art. 8(1).

2 sub-issues arise:

1. Would all of the branch’s activities fall within the phrase, “the operation of aircraft in international traffic”? Based on the discussion in paras. 4 to 4.2 of the OECD Comm on Art. 8, in my opinion: yes, all of the branch’s activities would fall within that phrase.
2. Is jurisdiction B’s QDMTT a “covered tax”? In my opinion: yes, QDMTT should be a “tax on income” (Art. 2(1)). Interestingly, the OECD / IF have not yet discussed the question of whether an exemption from QDMTT should be able to be claimed under a treaty.

(b) 2nd issue: is jurisdiction B’s QDMTT not permitted to apply anyway?

The branch should be a “permanent establishment” under para. (d) of the definition of that term in Art. 10.1.1. [Para. (a) should not apply, because jurisdiction B does not tax the income attributable to the branch in accordance with a provision similar to Art. 7 of the OECD model treaty.]

The branch is therefore a stateless PE (Art. 10.3.3(d)), and therefore a “Stateless Constituent Entity” (Art. 10.1.1 definition).

Para. 118.8.1 of Comm to definition of “QDMTT” in Art. 10.1.1 (introduced by July 2023 AG):

“In the case of Permanent Establishments that are Stateless Constituent Entities, jurisdictions are free to impose the QDMTT on these Entities provided that the place of business (or deemed place of business) is located therein and either there is no tax treaty applicable or there is an applicable tax treaty and the jurisdiction where the place of business (or deemed place of business) is located has the right to tax in accordance with such treaty.”

In ACo’s case, there is an applicable tax treaty, but jurisdiction B does not have the right to tax in accordance with such treaty. Thus, the jurisdiction B QDMTT is not permitted to apply to ACo’s jurisdiction B branch.

Do you agree?

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules.

ACo owns 100% of the shares in BCo, a company located in jurisdiction B. BCo is the only Constituent Entity located in jurisdiction B.

Both ACo and BCo use the calendar year as their fiscal year.

For the year ending 31 December 20X1, BCo derives a significant after-tax profit.

In March 20X2, BCo’s board of directors accepts the audited 20X1 financial statements, and it resolves that a final dividend of 100 (from the 20X1 profit) be paid to ACo on 1 May 20X2.

That dividend of 100 is paid on 1 May 20X2. In accordance with the jurisdiction B law, BCo deducts withholding tax of 10 from the dividend, and pays the remainder of 90 to ACo. The jurisdiction B withholding tax is a final tax.

For jurisdiction A tax purposes, ACo is entitled to a 95% participation exemption, and a foreign tax credit for part of the withholding tax. After applying both of these reliefs, ACo is liable for 1 of jurisdiction A tax on the dividend.

Question 1: For the purpose of computing the jurisdiction B Top-up Tax under the GloBE rules, will any tax in respect of the dividend be taken into account: (a) for the 20X1 fiscal year; or (b) for the 20X2 fiscal year?

Question 2: For the purpose of computing the jurisdiction B Top-up Tax under jurisdiction B’s QDMTT, will any tax in respect of the dividend be taken into account: (a) for the 20X1 fiscal year; or (b) for the 20X2 fiscal year?

Answer:

This question focuses on the application of Art. 4.3.2(e), for GloBE and QDMTT purposes…

Q1(a): No: Art. 4.3.2(e) allocates taxes on distributions during the Fiscal Year. As the dividend was paid in 20X2, the taxes on the dividend are not allocated for 20X1.

Q1(b): Yes, both the jurisdiction B withholding tax of 10 and the jurisdiction A tax of 1, will be allocated to BCo for 20X2.

Q2(a): No, for the same reason as given for Q1(a) above.

Q2(b): Yes, the jurisdiction B withholding tax of 10 will be allocated to BCo for 20X2. However, the jurisdiction A tax of 1 will not be allocated to BCo, for QDMTT purposes: para. 118.30 of Comm on definition of “Qualified Domestic Minimum Top-up Tax” in Art.10.1.1, as amended by July 2023 AG.

Do you agree?

XCo, a general partnership formed under jurisdiction A law, has 2 partners: UCo (75% interest) and Third Party (25% interest). UCo, a company located in jurisdiction U, is the UPE of an MNE Group which is “within scope” of the GloBE rules. Third Party is also located in jurisdiction U.

XCo is treated as tax transparent in jurisdictions A, B and U.

UCo owns 100% of the shares in ACo, a company located in jurisdiction A.

XCo owns 100% of the shares in several companies located in jurisdiction B.

Jurisdictions U and A have each implemented the GloBE rules, including a QDMTT. Jurisdiction B has not implemented a QDMTT.

In the relevant fiscal year, the MNE Group has an amount of Top-up Tax in jurisdiction B.

Question 1: (a) Will IIR apply in respect of the jurisdiction B Top-up Tax?; (b) If so, on which entity or entities will the IIR tax be imposed?

Question 2: (a) In determining whether the MNE Group has a QDMTT liability in jurisdiction A, will the ETR and Top-up Tax be calculated on a jurisdictional basis or not?; (b) If there is a QDMTT liability in jurisdiction A, on which entity or entities will the tax be imposed?

Answer:

1. Introduction
   1. XCo is an Entity (defined in Art. 10.1.1).
   2. XCo is a Constituent Entity (defined in Art. 1.3.1).
   3. XCo is a Flow-through Entity and Tax Transparent Entity (both terms defined in Art. 10.2.1).
   4. Due to its requirement to apply an IIR under Art. 2.1 (see below), XCo is located in jurisdiction A (Art. 10.3.2).
   5. XCo is a POPE (defined in Art. 10.1.1), on the assumption that it is not an Investment Entity.
2. IIR
   1. XCo will be liable for IIR tax (in jurisdiction A) equal to 100% of the jurisdiction B Top-up Tax (Art. 2.1.4).
   2. Prima facie, UPE will be liable for IIR tax (in jurisdiction U) equal to 75% of the jurisdiction B Top-up Tax (Art. 2.1.1). However, Art. 2.3.2 will reduce that IIR tax to nil.
3. QDMTT
   1. In principle, the ETR and Top-up Tax for QDMTT purposes will be calculated on a jurisdictional blending basis (i.e., XCo plus ACo): see para. 118.8.3 of Comm to definition of QDMTT in Art. 10.1.1 (introduced by July 2023 AG).
   2. However, XCo itself probably has no GloBE Income and no Covered Taxes. It should have no GloBE Income, due to the allocation of all its Financial Accounting Net Income or Loss to UPE and Third Party (Arts. 3.5.1, 3.5.3 & 3.5.5). And it should have no Covered Taxes, due to the fact that it is tax transparent in jurisdictions A and B, and also because of Art. 4.3.2(b).
   3. So, the only GloBE Income and Covered Taxes which will be available for jurisdictional blending should be ACo’s.
   4. If there is a QDMTT liability, jurisdiction A is permitted to impose the QDMTT tax charge on ACo, or XCo, or “introduce a different mechanism to ensure that the tax liability … is enforceable”: see para. 118.8.3 of Comm to definition of QDMTT in Art. 10.1.1.

Do you agree?

ACo, a company located in jurisdiction X, is a Constituent Entity in an MNE Group, which is “within scope” of the GloBE rules. ACo carries on a securities trading business from an office building which it owns in jurisdiction X.

ACo also leases some assets to other companies:

1. Lease to BCo

ACo leases (under an operating lease) 30% of the floor space of the building to BCo, a company located in jurisdiction X. BCo is not related to ACo and is not a member of any MNE Group.

In the 2031 fiscal year:

1. ACo’s carrying value of the building: (i) start of year: 3,000; (ii) end of year: 2,900.
2. BCo’s right-of-use asset recognised in its financial accounts: (i) start of year: 150; (ii) end of year: 75.

2. Lease to CCo

ACo also leases (under an operating lease) some office equipment to CCo, which is also a company located in jurisdiction X. The office equipment is located in jurisdiction X. CCo is not related to ACo and is not a member of any MNE Group.

In the 2031 fiscal year:

1. ACo’s carrying value of office equipment: (i) start of year: 100; (ii) end of year: 80.
2. CCo does not recognise a right-of-use asset for the office equipment in its financial accounts.

3. Lease to DCo

ACo leases (under an operating lease) a motor vehicle to the jurisdiction X branch of DCo, a company located in jurisdiction Y. The vehicle is located in jurisdiction X. DCo is not related to ACo, but it is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules.

In the 2031 fiscal year:

1. ACo’s carrying value of vehicle: (i) start of year: 200; (ii) end of year: 160.
2. DCo’s right-of-use asset recognised in its financial accounts: (i) start of year: 40; (ii) end of year: 20.

Based on this information, what is ACo’s tangible asset carve-out in the 2031 fiscal year?

Answer:

See July 2023 AG, chapter 3 …

1. Lease to BCo

1. ACo’s average carrying value: 2,950.
2. Allocation of carrying value, using percentage of floor space as the allocation key, between leased part and residual part: (i) leased part: 30% x 2,950 = 885; (ii) residual part: 70% x 2,950 = 2,065.
3. BCo’s average amount of right-of-use asset: 112.5.

ACo’s Eligible Tangible Asset = 2,065 + (885 – 112.5) = 2,837.5.

(See para. 43.1.7 of Comm to Art. 5.3.4).

2. Lease to CCo

1. ACo’s average carrying value: 90.
2. CCo’s right-of-use asset = 0.

ACo’s Eligible Tangible Asset = 90.

(See para. 43.1.1 of Comm to Art. 5.3.4).

3. Lease to DCo

1. ACo’s average carrying value: 180.
2. DCo’s average amount of right-of-use asset: 30.

ACo’s Eligible Tangible Asset = 180 – 30 = 150.

(See para. 43.1.5 of Comm to Art. 5.3.4).

4. Thus

ACo’s aggregate Eligible Tangible Assets = 2,837.5 + 90 + 150 = 3,077.5.

Art. 5.3.4 rate in 2031: 5.8% (see Art. 9.2.2).

ACo’s tangible asset carveout = 5.8% x 3,077.5 = 153.875.

Do you agree?

LCo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group, which is “within scope” of the GloBE rules.

LCo carries on a leasing business.

In the 2030 fiscal year, LCo owns 3 items of plant and equipment which it has leased to other companies:

1. Lease of asset under operating lease to XCo, an unrelated company located in jurisdiction A:
   1. LCo’s carrying value of asset: (i) start of year: 1,200; (ii) end of year: 1,100.
   2. XCo’s right-of-use asset recognised in its financial accounts: (i) start of year: 250; (ii) end of year: 150.
2. Lease of asset under operating lease to YCo, an unrelated company located in jurisdiction B:
   1. LCo’s carrying value of asset: (i) start of year: 1,500; (ii) end of year: 1,350.
   2. YCo’s right-of-use asset recognised in its financial accounts: (i) start of year: 400; (ii) end of year: 300.
3. Lease of asset under operating lease to ZCo, which is a Constituent Entity in LCo’s MNE Group and which is located in jurisdiction A:
   1. LCo’s carrying value of asset: (i) start of year: 2,000; (ii) end of year: 1,800.
   2. ZCo’s right-of-use asset recognised in its financial accounts: (i) start of year: 300; (ii) end of year: 200.

Please assume that each asset is located in the jurisdiction in which the relevant lessee is located.

Based on this information, what is LCo’s tangible asset carve-out in the 2030 fiscal year?

Answer:

See July 2023 AG, chapter 3…

1. Lease to XCo

1. LCo’s average carrying value: 1,150.
2. XCo’s average amount of right-of-use asset: 200.

LCo’s Eligible Tangible Asset = 1,150 – 200 = 950.

(See para. 43.1.5 of Comm to Art. 5.3.4).

2. Lease to YCo

As the asset is not located in jurisdiction A, LCo’s Eligible Tangible Asset = 0.

(See para. 43.1.5 of Comm to Art. 5.3.4).

Note: I have assumed that the presence of the asset in jurisdiction B does not cause LCo to have a PE in jurisdiction B – see the definition of “Permanent Establishment” in Art. 10.1.1.

3. Lease to ZCo

LCo’s average carrying value: 1,900.

LCo’s Eligible Tangible Asset = 1,900.

(See para. 43.1.6 of Comm to Art. 5.3.4: “The carrying value of Eligible Tangible Assets is determined after taking into account elimination entries for intercompany leases. … Consequently, the lessee in an intercompany operating lease will not have a right-of-use asset and the lessor’s carrying values for purposes of preparing the Consolidated Financial Statements are used to compute its carveout.”).

4. Thus

LCo’s aggregate Eligible Tangible Assets = 950 + 1,900 = 2,850.

Art. 5.3.4 rate in 2030: 6.2% (see Art. 9.2.2).

LCo’s tangible asset carveout = 6.2% x 2,850 = 176.7.

Do you agree?

ACo, a company located in jurisdiction Y, is a Constituent Entity in the A MNE Group, which is “within scope” of the GloBE rules.

ACo incurs “green energy” expenditure in jurisdiction Y, which entitles ACo to a EUR 100 tax credit.

The tax credit entitles the holder to a credit of EUR 100 against its corporate income tax liabilities for the current tax year (which I will call year 1) or for any of the 4 subsequent tax years. The credit can be claimed in whole in one of those years, or in part in one or more years (providing the aggregate does not exceed EUR 100).

The tax credit:

1. Is not refundable
2. However, it can be transferred up to 2 times, at any time during the 5 years, to a related or unrelated party
3. In the situation where the tax credit is transferred, the jurisdiction Y tax law requires that the transfer price be at least 85% of the face value of the tax credit.

As ACo does not have sufficient tax capacity to use the tax credit, it transfers the tax credit in year 2 to BCo, for a price of EUR 88.

BCo, a company located in jurisdiction Y, is a Constituent Entity in the B MNE Group, which is “within scope” of the GloBE rules.

ACo and BCo are unrelated.

BCo acquired the tax credit for the purpose of deriving a profit on its sale.

In year 2, BCo transfers the tax credit to CCo, for a price of EUR 92.

CCo, a company located in jurisdiction Y, is a Constituent Entity in the C MNE Group, which is “within scope” of the GloBE rules.

ACo, BCo and CCo are unrelated.

CCo uses EUR 40 of the tax credit in year 2, and EUR 60 of the tax credit in year 3, in both cases against its jurisdiction Y corporate income tax liability.

Based on these facts, what is the GloBE treatment of ACo, BCo, and CCo?

Answer:

The following analysis is based on July 2023 AG, chapter 2…

1. ACo

ACo is the Originator of the tax credit (amended para. 111 of Comm to Art. 3.2.4).

The tax credit is not a QRTC or NQRTC, because it is not refundable.

The tax credit is an MTTC in ACo’s hands, because:

1. Legal transferability standard is satisfied – tax credit can be transferred to an unrelated party during year 1 or within 15 months of the end of year 1.
2. Marketability standard is satisfied – transfer price (EUR 88) for transfer to BCo exceeds 80% of the net present value (NPV) of the tax credit (EUR 100).

(See para. 112.1 in Comm to Art. 3.2.4).

Thus, ACo’s GloBE treatment:

1. Transfer price (EUR 88) included in ACo’s GloBE Income in year 1 (in lieu of EUR 100).
2. Tax credit is not taken into account in computing ACo’s Adjusted Covered Taxes.

(See para. 112.5 in Comm to Art. 3.2.4; and amended para. 5 of Comm to Art. 4.1.2(d)).

2. BCo

BCo is a purchaser of the tax credit.

The tax credit is an MTTC in BCo’s hands, because:

1. Legal transferability standard is satisfied – tax credit can be transferred to an unrelated party in year 2.
2. Marketability standard is satisfied – BCo’s purchase price (EUR 88) exceeds 80% of the NPV of the tax credit (EUR 100).

(See para. 112.1 in Comm to Art. 3.2.4).

Thus, BCo’s GloBE treatment:

1. Inclusion in BCo’s GloBE Income in year 2: (EUR 92 – EUR 88) = EUR 4.
2. Tax credit is not taken into account in computing BCo’s Adjusted Covered Taxes.

(See para. 112.6 in Comm to Art. 3.2.4; and amended para. 5 of Comm to Art. 4.1.2(d)).

3. CCo

CCo is also a purchaser of the tax credit.

The tax credit is not an MTTC in CCo’s hands, because:

1. Legal transferability standard is not satisfied – as the tax credit can be transferred only 2 times, CCo cannot transfer the tax credit.
2. Marketability standard is satisfied – CCo’s purchase price (EUR 92) exceeds 80% of the NPV of the tax credit (EUR 100).

(See para. 112.1 in Comm to Art. 3.2.4).

The tax credit is a Non-MTTC in CCo’s hands, because:

1. The tax credit is not an MTTC.
2. CCo is a purchaser.

(See para. 14.2 of Comm to Art. 4.1.3(c)).

Thus, CCo’s GloBE treatment:

1. The tax credit is not taken into account in computing CCo’s GloBE Income
2. CCo’s Covered Taxes in year 2 are reduced by (EUR 100 – EUR 92) x 40% = EUR 3.2
3. CCo’s Covered Taxes in year 3 are reduced by (EUR 100 – EUR 92) x 60% = EUR 4.8

(See amended para. 113 of Comm to Art. 3.2.4; and para. 14.3(b) of Comm to Art. 4.1.3(c)).

Do you agree?

ACo, a company located in jurisdiction X, is a Constituent Entity in the A MNE Group, which is “within scope” of the GloBE rules.

ACo incurs R&D expenditure in jurisdiction X, which entitles ACo to a EUR 100 tax credit.

The tax credit entitles the holder to a credit of EUR 100 against its corporate income tax liabilities for the current tax year (year 1) or for either of the 2 subsequent tax years. The credit can be claimed in whole in one of those years, or in part in one or more years (providing the aggregate does not exceed EUR 100).

The tax credit:

• Is not refundable
• However, it can be transferred up to 2 times, at any time during the 3 years, to a related or unrelated party
• In the situation where the tax credit is transferred, the jurisdiction X tax law has no requirements in regard to the price (if any) for the transfer

There is an established market in jurisdiction X for the transfer of tax credits.

ACo does not have sufficient tax capacity in year 1 to use any of the tax credit. ACo transfers the tax credit in year 2 to BCo, for a price of EUR 90.

BCo, a company located in jurisdiction X, is a Constituent Entity in the B MNE Group, which is “within scope” of the GloBE rules.

ACo and BCo are unrelated.

BCo uses EUR 70 of the tax credit in year 2, and the remaining EUR 30 of the tax credit in year 3, in both cases against BCo’s jurisdiction X corporate income tax liability.

Based on these facts, what is the GloBE treatment of ACo and BCo?

Answer:

The following analysis is based on July 2023 AG, chapter 2…

1. ACo

ACo is the Originator of the tax credit (amended para. 111 of Comm to Art. 3.2.4).

The tax credit is not a QRTC or NQRTC, because it is not refundable.

The tax credit is an MTTC in ACo’s hands, because:

1. Legal transferability standard is satisfied – tax credit can be transferred to an unrelated party during year 1 or within 15 months of the end of year 1.
2. Marketability standard is satisfied – transfer price (EUR 90) for transfer to BCo exceeds 80% of the net present value (NPV) of the tax credit (EUR 100).

(See para. 112.1 in Comm to Art. 3.2.4).

Thus, ACo’s GloBE treatment:

1. Transfer price (EUR 90) included in ACo’s GloBE Income in year 1 (in lieu of EUR 100).
2. Tax credit is not taken into account in computing ACo’s Adjusted Covered Taxes.

(See para. 112.5 in Comm to Art. 3.2.4; and amended para. 5 of Comm to Art. 4.1.2(d)).

2. BCo

BCo is a purchaser of the tax credit.

The tax credit is an MTTC in BCo’s hands, because:

1. Legal transferability standard is satisfied – tax credit can be transferred to an unrelated party in year 2.
2. Marketability standard is satisfied – BCo’s purchase price (EUR 90) exceeds 80% of the NPV of the tax credit (EUR 100).

(See para. 112.1 in Comm to Art. 3.2.4).

Thus, BCo’s GloBE treatment:

1. Inclusion in BCo’s GloBE Income in year 2: (EUR 100 – EUR 90) x 70% = EUR 7.
2. Inclusion in BCo’s GloBE Income in year 3: (EUR 100 – EUR 90) x 30% = EUR 3.
3. The tax credit is not taken into account in computing BCo’s Adjusted Covered Taxes.

(See para. 112.6 in Comm to Art. 3.2.4; and amended para. 5 of Comm to Art. 4.1.2(d)).

Do you agree?

ACo, a company located in jurisdiction X, is a Constituent Entity in the A MNE Group, which is “within scope” of the GloBE rules.

ACo makes energy-saving investments in jurisdiction X, which entitles ACo to a EUR 100 tax credit.

The tax credit entitles the holder to a credit of EUR 100 against its corporate income tax liabilities for the current tax year (year 1) and for any of the 3 subsequent tax years. The credit can be claimed in whole or in part in any of those 4 years (provided the aggregate does not exceed EUR 100).

The tax credit is not refundable. However, it is transferable (once only) to a related or unrelated party. If it is transferred, jurisdiction X law has no requirements regarding the price (if any) for the transfer.

As ACo does not have sufficient tax capacity in year 1 to use the tax credit, ACo transfers it in year 1 to BCo, for a price of EUR 90.

BCo, a company located in jurisdiction X, is a Constituent Entity in the B MNE Group, which is “within scope” of the GloBE rules.

ACo and BCo are not related.

BCo uses EUR 60 of the tax credit in year 2, and the remaining EUR 40 of the tax credit in year 3, against its jurisdiction X corporate income tax liabilities.

The jurisdiction X tax year and the Fiscal Year (for GloBE purposes) for ACo and BCo (respectively), is the calendar year.

Based on this information, what is the GloBE treatment of ACo and BCo in respect of the tax credit?

Answer:

The following analysis is based on July 2023 AG, chapter 2…

1. ACo:

ACo is the Originator of the tax credit (amended para. 111 of Comm to Art. 3.2.4).

The tax credit is not a QRTC or NQRTC, because it is not refundable.

The tax credit is an MTTC in ACo’s hands, because:

1. Legal transferability standard is satisfied – ACo transfers the tax credit to an unrelated party (BCo) in year 1.
2. Marketability standard is satisfied – transfer price (EUR 90) exceeds 80% of the net present value (NPV) of the tax credit (EUR 100).

(See para. 112.1 in Comm to Art. 3.2.4).

Thus, ACo’s GloBE treatment:

1. Transfer price (EUR 90) included in ACo’s GloBE Income in year 1.
2. The tax credit is not taken into account in computing ACo’s Adjusted Covered Taxes.

(See para. 112.5 in Comm to Art. 3.2.4; and amended para. 5 of Comm to Art. 4.1.2(d).)

2. BCo:

BCo is a purchaser of the tax credit.

The tax credit is not an MTTC in BCo’s hands, because:

1. Legal transferability standard is not satisfied – as the tax credit can be transferred only once, BCo cannot transfer the tax credit.
2. Marketability standard is satisfied – BCo’s purchase price (EUR 90) exceeds 80% of the NPV of the tax credit (EUR 100).

(See para. 112.1 in Comm to Art. 3.2.4).

The tax credit is a Non-MTTC in BCo’s hands, because:

1. The tax credit is not an MTTC.
2. BCo is a purchaser.

(See para. 14.2 of Comm to Art. 4.1.3(c)).

Thus, BCo’s GloBE treatment:

1. The tax credit is not taken into account in computing BCo’s GloBE Income
2. BCo’s Covered Taxes in year 2 are reduced by (EUR 100 – EUR 90) x 60% = EUR 6
3. BCo’s Covered Taxes in year 3 are reduced by (EUR 100 – EUR 90) X 40% = EUR 4

(See amended para. 113 of Comm to Art. 3.2.4; and para. 14.3(b) of Comm to Art. 4.1.3(c)).

Do you agree?

From the archive (May 2022)…

An MNE Group consists of a UPE (located in U), XCo 1 (located in X), XCo 2 (located in X), YCo (located in Y), ZCo (located in Z), and UCo (located in U).

The Ownership Interests are directly owned as follows:

• XCo 1: 100% owned by UPE
• XCo 2: 60% owned by XCo 1, 10% owned by UPE, and 30% owned by third parties
• YCo: 60% owned by XCo 2, 30% owned by UPE, and 10% owned by third parties
• ZCo: 100% owned by YCo
• UCo: 100% owned by YCo

All shares in all companies are common shares, which carry an equal right to profit distributions and capital.

None of the Constituent Entities is an Investment Entity or a Flow-through Entity.

All of the jurisdictions have implemented the GloBE rules.

For the current Fiscal Year:

• ZCo has Top-up Tax of 1,000, and GloBE Income of 25,000
• UCo has Top-up Tax of 3,000, and GloBE Income of 10,000

Based on these facts, what are the amounts of IIR tax imposed on UPE, XCo 1, XCo 2 and YCo for the current Fiscal Year?

Answer:

1. XCo 1 is an Intermediate Parent Entity (IPE) (100% directly owned by UPE).

No Top-up Tax will be imposed on XCo 1, due to the fact that a Qualified IIR applies to UPE: Art. 2.1.3(a).

2. YCo is a Partially-Owned Parent Entity (POPE) (28% directly or indirectly owned by third parties).

In regard to ZCo: YCo’s Allocable Share is 100%: Art. 2.2. Thus, Top-up Tax of 1,000 is imposed on YCo: Art. 2.1.4.

In regard to UCo: YCo’s Allocable Share is 100%: Art. 2.2. Thus, Top-up Tax of 3,000 is imposed on YCo: Art. 2.1.4. Note that the fact that UCo is located in U (same as UPE) has no impact on the application of Art. 2.1 to YCo: see Art. 2.1.6.

3. XCo 2 is a POPE (30% directly owned by third parties).

Art. 2.1.5 does not apply to exclude XCo 2 from IIR tax, as XCo 2 does not wholly own YCo.

In regard to ZCo: XCo 2’s Allocable Share is 60%: Art. 2.2. Prima facie, Top-up Tax of 600 is imposed on XCo 2. However, Art. 2.3.1 reduces that Top-up Tax to nil.

In regard to UCo: XCo 2’s Allocable Share is 60%: Art. 2.2. Prima facie, Top-up Tax of 1,800 is imposed on XCo 2. However, Art. 2.3.1 reduces that Top-up Tax to nil.

4. UPE:

In regard to ZCo: UPE’s Allocable Share is 72% (i.e., 30% owned directly in YCo, plus 42% owned indirectly in YCo through XCo 1 and XCo 2): Art. 2.2. Prima facie, Top-up Tax of 720 is imposed on UPE. However, Art. 2.3.1 reduces that Top-up Tax to nil, due to the fact that all 72% is owned through YCo, which applies a Qualified IIR.

In regard to UCo: As UCo is located in U (same as UPE), Art. 2.1.6 provides an exclusion. Note: the Commentary allows jurisdictions to delete Art. 2.1.6 when they transpose the GloBE rules into domestic law.

5. Summary:

ZCo: Top-up Tax imposed on YCo: 1,000.

UCo: Top-up Tax imposed on YCo: 3,000.

Do you agree?

ACo (a company located in jurisdiction A) and BCo (a company located in jurisdiction B) are both Constituent Entities in an MNE Group which will be “within scope” of the GloBE rules, when the rules commence (on 1 January 2024). ACo and BCo are the only Constituent Entities located in their respective jurisdictions. Jurisdiction U (in which the UPE is located) has enacted the IIR, but it does not have any CFC rules.

Jurisdiction A has no corporate income tax. Jurisdiction B has a corporate income tax with a 20% tax rate. Neither jurisdiction A nor jurisdiction B has a QDMTT.

For many years, ACo has been the owner of IP, which it licenses to group companies in return for arm’s length royalties (totalling EUR 40m annually). No foreign withholding tax is imposed on the royalties. ACo’s accounting carrying value in the IP is zero. ACo has a zero tax basis in the IP, and there are no deferred taxes relating to the IP.

The MNE Group is concerned about the IIR Top-up Tax which will be triggered in respect of jurisdiction A, when the GloBE rules commence.

The MNE Group has suggested this “solution”: Before the GloBE rules commence, ACo will sell the IP (together with the licences) to BCo for fair market value (which is EUR 400m). This will mean that, when the GloBE rules commence, BCo will derive the EUR 40m of annual royalties, not ACo.

The MNE Group has estimated that, in the first year of operation of the GloBE rules (2024), BCo’s GloBE position (before considering the impact of its purchase of the IP) would be this:

1. GloBE Income: EUR 200m
2. Adjusted Covered Taxes: EUR 40m
3. Substance-based Income Exclusion: EUR 20m

Under the applicable accounting standard, BCo will have an accounting carrying value in the IP of zero.

For jurisdiction B corporate income tax purposes, BCo’s tax basis in the IP will be EUR 400m. For tax purposes, BCo will amortise the IP at a rate of 25% per annum, straight line.

Based on this information, will the MNE Group’s Top-up Tax in 2024 be lower if the above-mentioned “solution” is implemented, or if the status quo (i.e., ACo retains the IP) is maintained?

Please (1) assume that the sale transaction would be undertaken on 31 December 2023; and (2) ignore any possible safe harbour or de minimis exclusion.

Answer:

1. If status quo (i.e., ACo retains IP) is maintained

a. ACo:

GloBE Income: EUR 40m.

Adjusted Covered Taxes (ACT): zero.

ETR: 0%.

Top-up Tax (assuming ACo has zero SBIE): EUR 40m x 15% = EUR 6m.

b. BCo:

GloBE Income: EUR 200m.

ACT: EUR 40m.

ETR: 40m / 200m = 20%.

Top-up Tax = zero.

Thus, total Top-up Tax = EUR 6m.

2. If “solution” is implemented

a. ACo:

The question does not indicate what ACo does with the EUR 400m sale price. If ACo is immediately liquidated or immediately pays a dividend of the full EUR 400m, ACo should have no GloBE Income, and thus no Top-up Tax, in 2024.

However, if ACo invests the EUR 400m (e.g., intra-group loan), the income on the investment would generally produce GloBE Income and thus Top-up Tax. For example, if ACo lends the EUR 400m intra-group at 8% p.a. interest, its GloBE Income for 2024 should be EUR 32m, and its Top-up Tax should be EUR 4.8m. But, against this, we would need to consider whether the group borrower would obtain a tax deduction for the interest expense and, if so, the tax effect of that deduction.

b. BCo:

GloBE Income (see Note 1): EUR 200m + EUR 40m = EUR 240m.

ACT (see Note 2): EUR 28m.

SBIE: EUR 20m.

ETR: EUR 28m / EUR 240m = 11.7%.

Excess Profits: EUR 240m – EUR 20m = EUR 220m.

Top-up Tax: EUR 220m x 3.3% = EUR 7.26m.

Note 1: Under Art. 9.1.3, BCo’s GloBE carrying value in the IP would be equal to ACo’s accounting carrying value – i.e., zero. Thus, no IP amortisation would be deducted in computing GloBE Income. See para. 10.1 of Comm to Art. 9.1.3 (added by Feb23 AG, section 4.3.3).

Note 2:

1. Tax depreciation on IP for 2024: EUR 400m x 25% = EUR 100m.
2. 2024 taxable income: EUR 240m – EUR 100m = EUR 140m.
3. ACT: EUR 140m x 20% = EUR 28m.

To determine the final tax cost with the “solution”, we would need to determine what ACo does with the EUR 400m sales price.

If ACo is immediately liquidated or if it immediately pays a dividend of the full EUR 400m, ACo should have no Top-up Tax in 2024 – and thus, the conclusion would be that the status quo would produce a lower Top-up Tax liability for the MNE Group than the “solution”.

However, the analysis becomes more complicated if ACo invests the EUR 400m – particularly if it lends the cash intra-group, because then we would need to take into account both ACo’s Top-up Tax and the tax effect on the borrower.

Do you agree?

XCo (a company located in jurisdiction X) and YCo (a company located in jurisdiction Y) are both Constituent Entities in an MNE Group which is “within scope” of the GloBE rules. XCo and YCo have been members of the MNE Group for over 10 years.

For the MNE Group, the Transition Year for both jurisdiction X and jurisdiction Y is the 2024 fiscal year (31 December year-end).

Jurisdiction X imposes a 20% corporate income tax, and jurisdiction Y imposes a 25% corporate income tax.

XCo was the owner of IP. The IP had a carrying value in XCo’s balance sheet of EUR 5m. However, its fair market value was EUR 150m.

XCo’s tax basis in the IP was zero, and XCo had a deferred tax liability of EUR 1m in respect of the IP, due to accelerated tax depreciation.

On 1 January 2022, XCo sold the IP to YCo for a price of EUR 150m. XCo derived a taxable gain of EUR 150m on the sale.

Under the accounting standard used to prepare the MNE Group’s consolidated financial statements: (1) At the purchase date, YCo has an accounting carrying value in the IP equal to XCo’s accounting carrying value at disposition (i.e., EUR 5m); and (2) YCo amortises the IP at the rate of 10% per annum (reducing balance method).

For jurisdiction Y corporate income tax purposes: (1) At the purchase date, YCo has a tax basis of EUR 150m in the IP; and (2) YCo amortises the IP at the rate of 20% per annum (reducing balance method).

At the start of the 2024 fiscal year, what will be YCo’s treatment under Art. 9.1.3 in respect of the IP?

Answer:

(1) YCo’s GloBE carrying value in IP:

As at the purchase date (1 January 2022), YCo’s GloBE carrying value in the IP is EUR 5m (i.e., XCo’s accounting carrying value on that date).

To determine the GloBE carrying value at 1 January 2024 (the start of the Transition Year), we must deduct 2 years of amortisation, using the accounting amortisation rate and method, but applied to the GloBE carrying value (and not YCo’s accounting carrying value).

The amortisation in 2022 is: EUR 5m x 10% = EUR 0.5m (giving a carrying value at 31 December 2022 of EUR 4.5m).

The amortisation in 2023 is: EUR 4.5m x 10% = EUR 0.45m.

Thus, YCo’s GloBE carrying value at 1 January 2024 is EUR 4.05m.

[See para. 10.1 of Comm to Art. 9.1.3 (added by Feb23 AG, section 4.3.3)].

(2) YCo’s deferred taxes relating to IP:

In accordance with para. 10.9 of Comm to Art. 9.1.3 (added by Feb23 AG, section 4.3.3) …

As at the purchase date, YCo’s prima facie deferred tax asset relating to the IP would be: [EUR 150m x 20%] + [EUR (1m)] = EUR 29m.

However, “[a] deferred tax asset created under this rule shall not exceed the Minimum Rate multiplied by the difference in the local tax basis in the asset and the GloBE carrying value of the asset …”. This limitation is: [EUR 150m – EUR 5m] x 15% = EUR 21.75m.

Thus, as at the purchase date, YCo would have (for GloBE purposes) a deferred tax asset of EUR 21.75m relating to the IP.

Para. 10.9 says: “This deferred tax asset is adjusted annually in proportion to any decrease in the carrying value of the asset for the year, for example due to depreciation, amortization, or impairment.”

The meaning of this sentence is not totally clear – however, my “best guess” is this: Over the 2022 and 2023 years, the GloBE carrying value of the IP is reduced by an aggregate of 19% (i.e., 10% per annum reducing balance) – the deferred tax asset should also be reduced by 19%.

If this is correct, then YCo’s deferred tax asset (for GloBE purposes) in the IP as at 1 January 2024 would be: EUR 21.75m x 81% = EUR 17.62m.

(3) Final answer:

GloBE carrying value: EUR 4.05m.
Deferred tax asset (for GloBE purposes): EUR 17.62m.

Do you agree?

XCo, a company located in jurisdiction X, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules. The jurisdiction X corporate income tax rate is 20%. XCo is the only Constituent Entity located in jurisdiction X.

XCo owns 100% of the shares in YCo, a company located in jurisdiction Y. The jurisdiction Y corporate income tax rate is 10%. YCo is treated as a resident company for jurisdiction Y tax purposes; however, it is treated as tax transparent (a “disregarded entity”) for jurisdiction X tax purposes. YCo is the only Constituent Entity located in jurisdiction Y.

Anti-hybrid mismatch rules are not included in the corporate income tax law of either jurisdiction X or Y. However, both jurisdictions have implemented the GloBE rules, including a QDMTT (in effectively the same form as the GloBE model rules).

For a fiscal year, YCo’s GloBE Income is 100. Its taxable income (for jurisdiction Y corporate income tax purposes) is also 100. In computing the 100, these items are taken into account:

1. Interest expense of 30 (on a loan from XCo) is deducted.
2. Interest income of 10 (on a loan to a third party bank) is included.
3. Fee income of 15 (for provision of know-how to third parties) is included.

For jurisdiction X purposes, YCo’s before-tax profit is included in XCo’s taxable income. The amount of profit so included is 130, after “adding back” the disregarded interest expense of 30. XCo is entitled to a foreign tax credit for the jurisdiction Y corporate income tax paid by YCo on that profit. In calculating the foreign tax credit, please assume that no expenses or losses are deducted from the foreign source income.

Based on this information, what is YCo’s Adjusted Covered Taxes for that fiscal year?

Answer:

YCo’s Adjusted Covered Taxes:

1. YCo’s current tax expense: 10% x 100 = 10.
2. YCo’s deferred tax expense: 0.
3. XCo’s Covered Tax allocated to YCo under Art. 4.3.2(d) [see Note A below]: 14.9.
4. Adjusted Covered Taxes: 10 + 14.9 = 24.9. [See Note B below]

Note A:

1. YCo is a “Hybrid Entity” (defined in Art. 10.2.5).
2. XCo’s Covered Tax on YCo’s profit (after foreign tax credit 10): (20% x 130) – 10 = 16.
3. Art. 4.3.3 limitation must be determined …
4. YCo’s “Passive Income” (defined in Art. 10.1.1): know-how fee income is probably not a “royalty” (not defined), and therefore not “Passive Income”. However, YCo’s interest income of 10 would be Passive Income. The question does not provide full information on YCo’s expenses, although the interest expense incurred to XCo is mentioned. The Comm does not discuss whether Passive Income is determined before or after deducting related expenses. Based on the wording of the definition in Art. 10.1.1, my preferred view is that related expenses are not deducted. If this is correct, YCo’s Passive Income is 10.
5. Art. 4.3.3, para. (a) should be: 16 x (10 / 100) = 1.6
6. Art. 4.3.3, para. (b) should be: 5% x 10 = 0.5.
7. Thus, Art. 4.3.3 limitation is 0.5.
8. XCo’s Covered Tax on YCo’s profit (excluding YCo’s Passive Income): 16 x (90 / 100) = 14.4.
9. XCo’s Covered Tax allocated to YCo under Art. 4.3.2(d) (after applying Art. 4.3.3 limitation): 14.4 + 0.5 = 14.9.

Note B: In discussing QDMTTs, AG (section 5.1.3) addresses the allocation of CFC tax under Art. 4.3.2(c) and “Main Entity” tax under Art. 4.3.2(a), but it does not address the allocation of “Hybrid Entity” tax under Art. 4.3.2(d). Accordingly, I have assumed that Art. 4.3.2(d) applies for the purposes of a QDMTT.

Do you agree?

XCo 1, a company located in jurisdiction X, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules. The UPE (located in jurisdiction U) owns 100% of the shares in XCo 1.

XCo 1 owns (1) 8% of the shares in XCo 2, which is another company located in jurisdiction X (the other shares in XCo 2 are owned by unrelated parties); and (2) 30% of the shares in YCo, which is a company located in jurisdiction Y (the other shares in YCo are owned by unrelated parties).

XCo 1 has the following financial income for the fiscal year (determined in accordance with the Acceptable Accounting Standard used by the UPE in preparing its Consolidated Financial Statements):

1. Profit (i.e., net income after tax) (in P&L): 40,000.
2. Equity method of accounting:
   1. Deducted in computing Profit: XCo 1’s share of loss from YCo: (10,000).
   2. YCo is treated as tax transparent in jurisdiction X (but not jurisdiction Y) – for X corporate income tax purposes, the share of YCo’s loss is deductible for XCo 1.
   3. No dividend or other distribution was paid by YCo.
3. 8% shareholding in XCo 2 (all of XCo 1’s shares were held for 14 months):
   1. Included in Profit: dividend from XCo 2: 3,000 (tax exempt for X corporate income tax purposes).
   2. Included in Profit: gain on sale of all of XCo 1’s shares in XCo 2: 5,000 (tax exempt for X corporate income tax purposes).
4. Change in accounting policy, causing an adjustment to the opening equity in XCo 1’s balance sheet for the fiscal year:
   1. Adjustment is an increase of 10,000 to opening equity.
   2. The change in accounting policy relates equally to the 5 preceding fiscal years (i.e., an adjustment of 2,000 relates to each of the 5 preceding fiscal years) – 2 of these fiscal years were prior to, and the other 3 fiscal years were after, the application of the GloBE rules to XCo 1.
   3. In computing the adjustment of 10,000, X corporate income tax of 2,000 has been deducted.
5. Income tax expense (deducted in computing Profit):
   1. 20,000.
   2. Included in the 20,000 is 12,000, which is refundable by jurisdiction X to the UPE when dividends are paid by XCo 1 to the UPE. The dividends will be tax-exempt to the UPE under jurisdiction X law.

Based on this information, what is XCo 1’s GloBE Income or Loss for the fiscal year?

Answer:

Computation of GloBE Income or Loss:

1. Profit: 40,000
2. YCo:
   1. YCo is a “Hybrid Entity” (defined in Art. 10.2.5). However, that status has an impact only on Art. 4.3.2(d), which is irrelevant to this question.
   2. If the MNE Group does not make an Equity Investment Inclusion Election (EIIE) (see AG, section 2.9.2), the 10,000 allocated loss would be added back as an “Excluded Equity Gain or Loss” (defined in Art. 10.1.1) under Art. 3.2.1(c). As the allocated loss is deductible for X tax purposes, this would cause a reduction in XCo 1’s ETR.
   3. If the MNE Group makes an EIIE, the 10,000 would not be added back. I will assume that an EIIE is made – thus: no adjustment.
3. XCo 2:
   1. 3,000 dividend is an “Excluded Dividend” (defined in Art. 10.1.1), as the 8% shareholding is not a “Short-term Portfolio Shareholding”. (I have assumed that XCo 2 is not an Investment Entity.) Deducted under Art. 3.2.1(b). Thus: (3,000) deducted.
   2. 5,000 gain is not an “Excluded Equity Gain or Loss” (defined Art. 10.1.1), as the 8% shareholding is a “Portfolio Shareholding”. Not added back under Art. 3.2.1(c). Thus: no adjustment.
4. Change in accounting policy:
   1. This item qualifies as “Prior Period Errors and Changes in Accounting Principles” (defined in Art. 10.1.1). As it is an increase to opening equity, the adjustment is an add back under Art. 3.2.1(h).
   2. There are 2 issues with the amount of add back: (i) transition between pre- and post-GloBE fiscal years; and (ii) deduction of X corporate income tax of 2,000.
   3. First issue: Only the amounts relating to the 3 fiscal years after the introduction of GloBE rules, will be adjusted: Comm on Art. 3.2.1(h), para. 83.
   4. Second issue: Although not discussed in the Comm, it would make sense to add back the pre-tax amount. The relevant tax should qualify as Adjusted Covered Taxes under Art. 4.1.1(c). Therefore, if the pre-tax amount is not added back, the ETR could be materially increased.
   5. Thus: 12,000 x 3/5 = 7,200 added.
5. Income tax expense:
   1. Prima facie, 20,000 is added back.
   2. 12,000 is a “Disqualified Refundable Imputation Tax” (defined in Art. 10.1.1). It is not a “Qualified Imputation Tax” (defined in Art. 10.1.1), as the UPE is tax-exempt on the dividend in jurisdiction X. Thus, the 12,000 is included in “Net Taxes Expense” (defined in Art. 10.1.1).
   3. Thus, the whole 20,000 is added back under Art. 3.2.1(a). Thus: 20,000 added.

GloBE Income = 40,000 – 3,000 + 7,200 + 20,000 = 64,200.

Do you agree?

XCo, a company located in jurisdiction X, is a Constituent Entity in an MNE Group. The MNE Group will become subject to the GloBE rules, for the first time, for the fiscal year ending 31 December 2024. XCo’s tax year for jurisdiction X purposes also ends on 31 December.

Jurisdiction X imposes a 20% corporate income tax, and applies a worldwide tax system. It provides non-transferable foreign tax credits (FTCs) to relieve double taxation. Excess FTCs can be carried forward for 5 years – at the end of 5 years, remaining FTCs lapse. The jurisdiction X tax law also provides non-transferable investment tax credits (ITCs) for qualifying expenditure. Excess ITCs can be carried forward for 6 years, for offset against the taxpayer’s income tax liability. To the extent an ITC has not been offset after 6 years, it becomes refundable – i.e., the remaining amount of ITC is paid to the taxpayer as cash.

In the 2023 year, XCo receives a dividend from its 100% subsidiary, YCo, which is located in jurisdiction Y. The dividend brings with it an FTC of 35, which is a combination of jurisdiction Y dividend withholding tax and underlying corporate tax. XCo uses 20 of the FTC in 2023, and carries forward the balance of 15. XCo’s 2023 financial statements do not recognise a deferred tax asset for the FTC, because the recognition criteria are not met.

Also in 2023, XCo qualifies for an ITC of 25. XCo does not have a sufficient tax liability in 2023 to use any of the ITC. The full amount of 25 is therefore carried forward. XCo’s 2023 financial statements treat the 25 ITC as income.

In 2024:

• XCo’s Adjusted Covered Taxes (before considering the FTC and ITC carried forward from 2023) is 200.
• XCo uses all of its carried forward FTC and ITC to offset its income tax liability.

Based on this information, what is the amount of XCo’s Adjusted Covered Taxes in 2024?

Answer:

2024 is the “Transition Year” for the MNE Group (definition in Art. 10.1.1).

This question requires the application of Art. 9.1.1.

1. FTC (15)

The fact that no deferred tax asset (DTA) is recognised in XCo’s 2023 financial statements for the FTC because the accounting recognition criteria are not met, will not prevent such a DTA being recognised, for GloBE purposes: AG, section 4.1.3 (new Comm, para. 6.3); also, text of Art. 9.1.1.

By virtue of AG, section 4.1.3 (new Comm, para. 6.1), Art. 4.4.1(e) does not apply to DTAs arising prior to the Transition Year.

The dividend from YCo is an “Excluded Dividend” (definition in Art. 10.1.1). Prima facie, Art. 4.4.1(a) would probably prevent the recognition, for GloBE purposes, of a DTA with respect to the FTC. However, the restriction in Art. 4.4.1(a) does not apply to attributes imported into the GloBE rules by Art. 9.1.1, unless Art. 9.1.2 applies: see AG, section 4.1.3 (new Comm, para. 6.3). Art. 9.1.2 will exclude the DTA if it is “generated in a transaction that takes place after 30 November 2021”. Is the declaration and payment of the dividend by YCo, in 2023, such a “transaction”? The Comm to Art. 9.1.2 suggests that the provision is targeted at transfers of assets involving the Constituent Entity, not a dividend received by the Constituent Entity – although this is not totally clear. Nevertheless, my preferred view is that Art. 9.1.2 should not apply to the dividend from YCo.

As jurisdiction X’s corporate income tax rate is 20%, the amount of the DTA will be reduced, in accordance with the formula in AG, section 4.1.3 (new Comm, para. 6.1): 15 / 20% x 15% = 11.25.

Thus, for GloBE purposes, a DTA of 11.25 will be recognised at the beginning of the Transition Year.

2. ITC (25)

The threshold issue is whether the ITC is a “Non-Qualified Refundable Tax Credit” (NQRTC) (defined in Art. 10.1.1). [It is clearly not a “Qualified Refundable Tax Credit” (QRTC), due to the breach of the 4-year condition.] The definition of NQRTC refers to “refundable in whole or in part”. The ITC is refundable, but only after 6 years – does this qualify as “refundable in whole or in part”? Based on the Comm to the Art. 10.1.1 definition of QRTC, it seems that the ITC would be “refundable”.

XCo treats the ITC as income in its 2023 financial statements. Therefore, those financial statements do not reflect any DTA for the ITC.

According to AG, section 4.1.3 (new Comm, para. 6.2): “[The] settlement of refundable tax credits that accrued prior to the beginning of the Transition Year, whether or not the amount satisfies an income tax liability, generally should not be treated as a reduction to Adjusted Covered Taxes.”

3. Adjusted Covered Taxes (ACT) computation

XCo’s ACT (before considering the FTC and ITC carried froward from 2023): 200

Impact of offsetting FTC:

1. Current tax expense: (15)
2. DTA reversal: 11.25

Impact of offsetting ITC:

1. Current tax expense: Nil (see above).

Thus, XCo’s ACT: 200 + (15) + 11.25 = 196.25

Do you agree?

XCo 1 and XCo 2 are members of an “in scope” MNE Group. They are the only Constituent Entities located in jurisdiction X, which has a corporate income tax rate of 25%.

XCo 1 owns 100% of the shares in XCo 2.

Before considering the equity investments of the 2 companies, they have these respective GloBE numbers for a fiscal year:

• XCo 1:
  • GloBE Income: 1,600
  • Adjusted Covered Taxes: 300
• XCo 2:
  • GloBE Income: 800
  • Adjusted Covered Taxes: 200

At the start of the fiscal year, XCo 1 became a tax equity investor in a newly formed tax-transparent partnership in jurisdiction X, which will undertake an energy project. There is one other partner in the partnership: a jurisdiction X energy project developer, which is unrelated to XCo 1.

XCo 1 invested 1,000 in the partnership at the start of the fiscal year. At that time, XCo 1’s expected return on its ownership interest was positive, but only because of the expected non-refundable tax credits (see below).

XCo 1 uses the equity method to account for its ownership interest.

For the fiscal year, the partnership allocates to XCo 1:

• A financial statement loss and a tax loss of 200
• A non-refundable, non-transferable tax credit of 180

These allocations are effective for jurisdiction X tax purposes.

During the fiscal year, XCo 2 sells all of its 20% shareholding in XCo 3, an unrelated company. XCo 2 derives a profit of 1,200 on the sale. Under the jurisdiction X tax law, 20% of the profit is taxable at the standard 25% tax rate (i.e., 80% is excluded). Prior to the sale, XCo 2 used the equity method to account for its ownership interest in XCo 3.

Based on this information, what is the jurisdiction X Top-up Tax for the fiscal year? Please ignore the Substance-based Income Exclusion.

Answer:

(1) If no Equity Investment Inclusion Election (EIIE) is made for jurisdiction X

XCo 1:

GloBE Income (GI): 1,600 (the loss of 200 is excluded by Art. 3.2.1(c)).
Adjusted Covered Taxes (ACT): 300 – (200 x 25%) – 180 = 70 (see AG, section 2.9.1).

XCo 2:

GI: 800 (the profit of 1,200 is excluded by Art. 3.2.1(c)).
ACT: 200 (the tax of 60, which is included in XCo 2’s current tax expense, is excluded by Art. 4.1.3(a)).

Jurisdiction X ETR: (70 + 200) / (1,600 + 800) = 270 / 2,400 = 11.25%
Jurisdiction X Top-up Tax: 4.75% x 2,400 = 114

(2) If an EIIE is made for jurisdiction X

XCo 1’s Ownership Interest in the partnership should be a “Qualified Ownership Interest” (New Comm, para. 57.8).

Both the tax loss and the non-refundable, non-transferrable tax credit should be “Qualified Flow-through Tax Benefits” (New Comm, para. 57.5).

Thus, the treatment described in the new Comm, paras. 57.5 to 57.7 should apply to XCo 1 (New Comm, para. 57.4).

XCo 1:

GI: 1,600 (the loss of 200 is excluded by Art. 3.2.1(c)).
ACT: 300 (New Comm, para. 57.5).

XCo 2:

The making of the EIIE will also impact XCo 2’s computations:
GI: 800 + (1,200 x 20%) = 800 + 240 = 1,040 [See Note 1]
ACT: 200 + (240 x 25%) = 200 + 60 = 260 [See Note 2]

Note 1: See new Comm, para. 57.2(a)(iii): the taxable proportion of the profit (i.e., 1,200 x 20% = 240) is included in GloBE Income.
Note 2: See new Comm, para. 57.2(b): the current and deferred tax expense “associated with [this item]” is 240 x 25% = 60.

Jurisdiction X ETR: (300 + 260) / (1,600 + 1,040) = 560 / 2,640 = 21.2%
Jurisdiction X Top-up Tax: 0

Do you agree?

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules. ACo is the only Constituent Entity located in jurisdiction A. The jurisdiction A corporate income tax rate is 20%.

Before considering its investment in partnerships, ACo has these financial numbers for a fiscal year:

• GloBE Income: 2,000
• Adjusted Covered Taxes: 310

ACo is a partner in 2 jurisdiction A partnerships. Both partnerships are tax transparent under the jurisdiction A corporate income tax law. ACo accounts for its investment in both partnerships using the equity method.

The relevant information for the 2 partnerships:

• Partnership A1:
  • ACo’s ownership interest: 25%.
  • In the fiscal year, the partnership incurs a financial statement and tax loss of 800. Under the jurisdiction A corporate income tax law, ACo’s share of the tax loss (i.e., 25% x 800 = 200) is included as a deduction in the computation of its corporate income tax.

• Partnership A2:
  • ACo’s ownership interest: 20%.
  • In the fiscal year, the partnership derives a financial statement and tax profit of 200. Under the jurisdiction A corporate income tax law, ACo’s share of the tax profit (i.e., 20% x 200 = 40) is included as income in the computation of its corporate income tax.

Based on this information, what is the jurisdiction A Top-up Tax in the fiscal year? Please ignore the Substance-based Income Exclusion.

Answer:

1. If no Equity Investment Inclusion Election is made

1. GloBE Income: 2,000 (i.e., no inclusion from the 2 partnerships, due to Art. 3.2.1(c)).
2. Adjusted Covered Taxes: 310 – (200 x 20% = 40) = 270 (i.e., (i) inclusion of (40) from partnership A1, as Art. 4.1.3(a) does not apply; (ii) no positive inclusion from partnership A2, due to Art. 4.1.3(a)) [See AG, section 2.9.1: the use of “income excluded”, but not “loss excluded”, in Art. 4.1.3(a) causes an asymmetrical outcome].
3. ETR: 270 / 2,000 = 13.5%.
4. Top-up Tax = 1.5% x 2,000 = 30.

2. If Equity Investment Inclusion Election is made

1. GloBE Income: 2,000 – 200 + 40 = 1,840 (i.e., election de-activates Art. 3.2.1(c)).
2. Adjusted Covered Taxes: 310 – (200 x 20% = 40) + (40 x 20% = 8) = 278.
3. ETR: 278 / 1,840 = 15.1%.
4. Top-up Tax: 0.

Do you agree?

BCo, a company located in jurisdiction B, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules.

BCo has the following financial income for a fiscal year (determined in accordance with the Acceptable Accounting Standard used by the UPE in preparing its Consolidated Financial Statements):

1. Profit (i.e., net income, after tax) (in P&L): 50,000.
2. Equity accounting method in respect of associated company, CCo (BCo holds 30% Ownership Interest in CCo):
   1. Included in Profit: share of net income from CCo: 10,000.
   2. Not included in Profit: gross dividend received from CCo: 7,000 (this dividend is taxable in Jurisdiction B).
   3. Included as expense in computing Profit: Jurisdiction C withholding tax on dividend: 1,400.
   4. Included as expense in computing Profit: BCo’s management expenses directly relating to investment in CCo: 1,000.
3. Other foreign sourced income (not derived from CCo):
   1. Included in Profit: Jurisdiction D gross interest: 2,000.
   2. Included as expense in computing Profit: Jurisdiction D withholding tax on interest: 200.
   3. Included in Profit: Jurisdiction D digital services income: 3,000.
   4. Included as expense in computing Profit: Jurisdiction D digital services tax (imposed on gross revenue): 900.
   5. Included as expense in computing Profit: BCo’s employment expenses directly relating to Jurisdiction D digital services income: 2,000.
4. Jurisdiction B tax (included as expense in computing BCo’s Profit):
   1. Alternative Minimum Tax (AMT) (not computed on GloBE Income): 10,000. [Note: BCo is subject to AMT because its Jurisdiction B regular income tax liability has fallen below the AMT threshold. The AMT is calculated by applying a 5% tax rate to gross revenue, and then subtracting foreign tax credits.]
   2. In computing AMT, foreign tax credits have been subtracted:
      1. Dividend withholding tax (Jurisdiction C): 1,200.
      2. Interest withholding tax (Jurisdiction D): 200.
      3. Digital services tax (Jurisdiction D): 200.

Based on this information, what is BCo’s GloBE Income or Loss for the fiscal year?

Answer:

Computation of BCo’s GloBE Income:

1. Profit: 50,000.
2. Equity accounting method in respect of CCo:
   1. Included in Profit: share of net income from CCo – adjust: (10,000).
   2. Not included in Profit: gross dividend (Excluded Dividend) – do not adjust: 0.
   3. Included as expense in computing Profit: Juris. C dividend withholding tax – included in “Net Taxes Expense” – adjust: 1,400.
   4. Included as expense in computing Profit: management expenses – see Note 1 below – adjust: 1,000.
3. Other foreign sourced income (not derived from CCo):
   1. Included in Profit: Juris. D gross interest – do not adjust: 0.
   2. Included as expense in computing Profit: Juris. D interest withholding tax – included in “Net Taxes Expense” – adjust: 200.
   3. Included in Profit: Juris. D digital services income – do not adjust: 0.
   4. Included as expense in computing Profit: Juris. D digital services tax – not included in “Net Taxes Expense” (see Note 2 below) – do not adjust: 0.
   5. Included as expense in computing Profit: employment income – do not adjust: 0.
4. Juris. B taxes:
   1. AMT – included in “Net Taxes Expense” (see Note 3 below) – adjust: 10,000.
   2. In computing AMT, foreign tax credits have been subtracted – i.e., AMT of 10,000 is net of the FTCs – do not adjust: 0.

Thus, GloBE Income = 50,000 + (10,000) + 1,400 + 1,000 + 200 + 10,000 = 52,600.

Note 1: Does the definition of “Excluded Equity Gain or Loss” in Art. 10.1.1 include directly related expenses? No guidance is provided in the Comm, Examples or AG. Based on the fact that the definition refers to “gain, profit or loss”, I favour the view that directly related expenses are included in the definition.

Note 2: Is a DST a Covered Tax (defined in Art. 4.2)? As the Juris. D DST is imposed on a gross basis, then it probably is not a “Covered Tax”, on the basis that it is not imposed in lieu of a generally applicable corporate income tax.

Note 3: Is the AMT a Covered Tax (defined in Art. 4.2), having regard to the fact that it is imposed on a gross basis? No guidance is provided in the Comm, Examples or AG. Based on the fact that the AMT applies in place of the regular corporate income tax, I favour the view that it is imposed in lieu of a generally applicable corporate income tax.

Do you agree?

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules. It is the only Constituent Entity located in jurisdiction A. Jurisdiction A has a corporate income tax rate of 25%.

ACo directly owns 100% of the shares in 2 subsidiaries: BCo (located in jurisdiction B) and CCo (located in jurisdiction C).

(1) Year 1:

ACo’s jurisdiction A corporate income tax computation has these financial numbers:

• Domestic source tax loss: (300)
• Income inclusion under jurisdiction A CFC rules, in respect of BCo: 100
• Foreign tax credit (FTC) in respect of that CFC inclusion: 20
• Dividend income received from CCo: 100 (such dividend income is taxable under jurisdiction A law)
• FTC in respect of that dividend income: 22
• Royalties received from DCo, an unrelated company resident in jurisdiction D: 100 (such royalties are treated as foreign source income under jurisdiction A law)
• FTC in respect of those royalties: 10

Please assume that under the jurisdiction A corporate income tax law: (1) for FTC purposes, all foreign source income is placed in the same “basket”; (2) for FTC purposes, no expenses are allocated against foreign source income; (3) all foreign source income numbers described above include the “gross-up” for the relevant FTC; (4) a domestic source tax loss is offset against foreign source income, before application of FTCs; and (5) all excess FTCs are carried forward to future years, to be offset against tax on domestic source income which is recharacterized (i.e., “re-sourced”) as foreign source income.

Also in Year 1, ACo has a GloBE Loss: (300).

(2) Year 2:

ACo’s jurisdiction A corporate income tax computation has these financial numbers:

• Domestic source taxable income: 300
• Actual foreign source income (from CFC inclusions, foreign source dividends, foreign source royalties, or other): 0

Also, in Year 2, ACo has GloBE Income of 300 (and its Substance-based Income Exclusion is zero).

Based on this limited information, what is ACo’s jurisdiction A corporate income tax and Top-up Tax for Year 1 and Year 2?

Answer:

(1) Year 1

(a) Corporate income tax (CIT):

Domestic source loss: (300)
Foreign source income: 100 + 100 + 100 = 300
Taxable income: (300) + 300 = 0
CIT payable: 0
Carry-forward loss: 0
Carry-forward FTCs: 20 + 22 + 10 = 52

(b) GloBE rules:

GloBE Loss: (300)
Current tax expense: 0
Substitute Loss Carry-forward DTA recognised : 30 (52 of carry-forward FTCs, recast at 15%; adjusted to 30 by Art. 4.4.1(a): see note 1 below)
Adjusted Covered Taxes: (30)
No ETR and no Top-up Tax (see note 2 below)

Note 1:

1. AG, section 2.8 sets out an exception to Art. 4.4.1(e).
2. The amount of the Substitute Loss Carry-forward DTA is (prima facie) the lesser of (1) Carry-forward FTCs (52), and (2) domestic source tax loss x tax rate (75) – i.e., 52.
3. However, Art. 4.4.1(a) applies to exclude the deferred tax expense with respect to the FTC on the dividend from CCo (which would qualify as an “Excluded Dividend”).
4. Thus, the Substitute Loss Carry-forward DTA should be: 20 + 10 = 30 (which happens to equal 15% x 200).

Note 2: There will be no ETR because jurisdiction A does not have Net GloBE Income: Art. 5.1.1. In regard to Top-up Tax: Art. 4.1.5 will not apply, because the Adjusted Covered Taxes is not less than the Expected Adjusted Covered Taxes.

(2) Year 2

(a) CIT:

Domestic source income (prima facie): 300
Actual foreign source income: 0
Domestic source income re-sourced as foreign source income: 300
Tax (prima facie): 25% x 300 = 75
FTCs: 52
CIT payable: 75 – 52 = 23

(b) GloBE rules:

GloBE Income: 300
Current tax expense: 23
Deferred tax expense on reversal of Substitute Loss Carry-forward DTA: 30
Adjusted Covered Taxes: 23 + 30 = 53
ETR: 53 / 300 = 17.7%
Top-up Tax: 0

Do you agree?

ACo is a Constituent Entity in a “within scope” MNE Group. It is the only Constituent Entity located in jurisdiction A. Jurisdiction A has a 15% corporate income tax rate.

In Years 1, 2, and 3, ACo has these financial numbers:

(1) Year 1:

• GloBE Income: 300
• Substance-based Income Exclusion (SBIE): 100
• Tax loss (jurisdiction A corporate income tax): 100 (can be carried forward indefinitely)

(2) Year 2:

• GloBE Income: 200
• SBIE: 100
• Taxable income (before deduction of carry-forward tax loss): 60
• Taxable income (after deduction of carry-forward tax loss): 0

(3) Year 3:

• GloBE Income: 250
• SBIE: 120
• Taxable income (before deduction of carry-forward tax loss): 40
• Taxable income (after deduction of carry-forward tax loss): 0

Based on this limited information, what is the Top-up Tax for jurisdiction A in each of Years 1, 2, and 3?

Answer:

(1) Year 1:

• GloBE Income: 300
• SBIE: 100
• Current tax expense: 0
• Deferred tax asset (DTA) in respect of tax loss: 15% x 100 = 15
• Adjusted Covered Taxes (ACT) (prima facie): (15)
• ETR (prima facie): (15) / 300 = (5)%
• Top-up Tax Percentage (TTP) (prima facie) : 15% – (5)% = 20%

As TTP (prima facie) exceeds the Minimum Rate, the administrative procedure under Art. 5.2.1 applies (see AG, section 2.7):

• ACT: 0
• Excess Negative Tax Expense Carry-forward (ENTEC): 15
• ETR: 0 / 300 = 0%
• TTP: 15% – 0% = 15%
• Top-up Tax: 15% x (300 – 100) = 30

(2) Year 2:

• GloBE Income: 200
• SBIE: 100
• Current tax expense: 0
• DTA partial reversal: 60 x 15% = 9
• ACT (prima facie): 9
• ACT (after applying ENTEC): 0
• Remaining ENTEC: 15 – 9 = 6
• ETR: 0 / 200 = 0%
• TTP: 15%
• Top-up Tax: 15% x (200 – 100) = 15

(3) Year 3:

• GloBE Income: 250
• SBIE: 120
• Current tax expense: 0
• DTA reversal: 40 x 15% = 6
• ACT (prima facie): 6
• ACT (after applying ENTEC): 0
• Remaining ENTEC: 0
• ETR: 0 / 250 = 0%
• TTP: 15%
• Top-up Tax: 15% x (250 – 120) = 19.5

Do you agree?

An MNE Group which is “within scope” of the GloBE rules, has this simplified structure:

• UPE (located in jurisdiction U) owns 100% of the shares in ACo (located in jurisdiction A)
• ACo owns 100% of the shares in each of 2 sister subsidiaries: BCo (located in jurisdiction B) and CCo (located in jurisdiction C)

CCo is the only Constituent Entity located in jurisdiction C.

BCo manufactures goods and sells them to CCo, which distributes the goods to third party customers in jurisdiction C.

In Year 1, CCo has these (prima facie) financial numbers (before considering any TP adjustments – see below):

• FANIL: 1,000
• Purchases from BCo: 400
• Adjusted Covered Taxes: 120

In Year 2, the jurisdiction C tax authorities claim that the purchases from BCo exceed the arm’s length price. They therefore make a primary transfer pricing adjustment for Year 1: CCo’s deductions for purchases from BCo are reduced by 100. The jurisdiction C corporate income tax rate is 15%.

The jurisdiction C tax authorities also make a secondary transfer pricing adjustment for Year 1: the “extra” cash of 100 which has been paid by CCo to BCo is deemed to be a dividend paid by CCo to ACo, followed by a deemed capital contribution by ACo to BCo. Dividend withholding tax of 20% is imposed on the deemed dividend. The withholding tax is imposed on ACo, but CCo has a collection obligation – therefore, the jurisdiction C tax authorities collect the withholding tax from CCo.

CCo accepts that both of these adjustments are appropriate.

In Year 2, CCo has these (prima facie) financial numbers (before considering any TP adjustments):

• FANIL: 1,200
• Purchases from BCo: 450
• Adjusted Covered Taxes: 200

CCo expects that there will be no transfer pricing adjustment in Year 2 in regard to its purchases from BCo, because the intercompany price was changed in Year 2 in accordance with the Year 1 adjustment.

Based on this limited information, what will be the amount of Jurisdictional Top-up Tax (if any) for jurisdiction C in each of Year 1 and Year 2?

Please assume that (1) there are no adjustments in computing CCo’s GloBE Income, except those which follow from the facts stated above; and (2) CCo has no Substance-based Income Exclusion in either Year 1 or Year 2.

Answer:

Year 1
The primary TP adjustment will be reflected in CCo’s GloBE Income in Year 2, not in Year 1: see para. 99 of Comm on Art. 3.2.3, and also see Art. 4.6.1. The additional jurisdiction C income tax (i.e., 100 x 15% = 15) will be reflected in CCo’s Adjusted Covered Taxes in Year 2, not Year 1: Art. 4.6.1.

GloBE Income: 1,000 + 120 (assuming Adjusted Covered Taxes = Net Taxes Expense) = 1,120

Adjusted Covered Taxes: 120

ETR: 120 / 1,120 = 10.7143%

Top-up Tax Percentage: 4.2857%

Top-up Tax: 4.2857% x 1,120 = 47.9998

Year 2
GloBE Income: 1,200 + 200 (assuming prima facie Adjusted Covered Taxes = Net Taxes Expense) + 100 (Art. 3.2.3 adjustment, caused by primary TP adjustment for Year 1) = 1,500

Adjusted Covered Taxes: 200 + 15 (jurisdiction C tax increase, caused by primary TP adjustment for Year 1) + 20 (Art. 4.3.2(e): see below) = 235

ETR: 235 / 1,500 = 15.6667%

Top-up Tax: nil

The jurisdiction C dividend withholding tax of 20, caused by the secondary TP adjustment, probably qualifies as a Covered Tax on a deemed distribution: see AG, section 2.6. If so, and assuming the tax is reflected in ACo’s financial accounts, Art. 4.3.2(e) will allocate the Covered Tax to CCo. The question arises as to whether this tax should be added to CCo’s Adjusted Covered Taxes in Year 1 or Year 2. As it is an increase in Covered Taxes, I think that Art. 4.6.1 probably requires it to be added to CCo’s Adjusted Covered Taxes in Year 2.

Do you agree?

XCo is a company located in jurisdiction X. It is a Constituent Entity in an MNE Group, which is “within scope” of the GloBE rules.

XCo has established a “defined benefit” Pension Fund in jurisdiction X to provide retirement benefits for most of its employees.

XCo’s most senior employees, however, are not covered by the Pension Fund. Instead, their individual employment contracts require XCo to pay “defined benefit” pensions directly to them after they leave XCo’s employment (provided they satisfy a “minimum employment period” condition).

In Year 1:

• XCo has an accounting profit of 200 (before tax and before pension expenses)
• XCo accrues 30 of pension expenses: (1) 20, in regard to contributions to the Pension Fund; and (2) 10, in regard to the pension benefits to be provided to the senior employees
• XCo makes no “pension related” payments
• The jurisdiction X corporate income tax law (20% tax rate) allows deductions for: (1) contributions paid to pension funds; and (2) pension benefits paid directly to pension beneficiaries – in both cases, the deduction is allowed in the fiscal year in which the payment is made

In Year 2:

• XCo has an accounting profit of 300 (before tax and before pension expenses)
• XCo does not accrue either of the 2 pension expenses – instead, XCo pays (1) a contribution of 12 to the Pension Fund; and (2) pension benefits of 8 directly to (former) senior employees

In Year 3:

• XCo has an accounting profit of 400 (before tax and before pension expenses and pension income)
• The Pension Fund earns income of 80, and XCo’s pension liabilities for Year 3 are 20; thus, the Pension Fund has a net pension surplus of 60
• The net pension surplus: (1) is retained in the Pension Fund, (2) is included as income in XCo’s profit and loss statement, and (3) is not taxable under the jurisdiction X corporate income tax law
• XCo accrues 20 of pension expenses regarding pension benefits to be provided to senior employees
• XCo pays pension benefits of 10 directly to (former) senior employees

Based on this limited information, what is XCo’s (1) Financial Accounting Net Income or Loss, and (2) GloBE Income or Loss, for each of Years 1, 2, and 3?

Answer:

Year 1

1. Current tax expense: 200 x 20% = 40
2. Deferred tax income: 30 x 20% = (6)
3. Income tax expense: 40 – 6 = 34
4. FANIL: 200 – 34 – 30 = 136
5. Accrued Pension Expense (AEP) (Art. 10.1.1 definition; AG, section 2.5 formula):
   (-20 + 0) x (-1) = +20
6. GloBE Income or Loss: 136 + 34 (Tax Expense) + 20 (Accrued Pension Expense) = 190

Year 2

1. Current tax expense: (300 – 20) x 20% = 56
2. Deferred tax expense: 20 x 20% = 4
3. Income tax expense: 56 + 4 = 60
4. FANIL: 300 – 60 = 240
5. AEP: (0 + 12) x (-1) = -12
6. GloBE Income or Loss: 240 + 60 (Tax Expense) – 12 (AEP) = 288

Year 3

1. Current tax expense: (400 – 10) x 20% = 78
2. (i) Deferred tax expense: 8 x 20% = 1.6 (i.e., due to the net pension surplus, XCo does not need to make the further 8 of contributions to the Pension Fund, based on the pension expense accrued in Year 1; the opening balance of 1.6 is therefore reversed: see example 2 in AG); (ii) Deferred tax income: (10 x 20%) = (2); (iii) Net deferred tax income: (0.4)
3. Income tax expense: 78 – 0.4 = 77.6
4. FANIL: 400 + 60 – 77.6 – 20 = 362.4
5. AEP: (60 + 0) x (-1) = -60
6. GloBE Income or Loss: 362.4 + 77.6 (Tax Expense) – 60 (AEP) = 380

Do you agree?

A Holdco, A Sub 1 and A Sub 2 are companies located in jurisdiction A. A Holdco is a direct 100% subsidiary of the UPE of an MNE Group, which is “within scope” of the GloBE rules. A Holdco directly owns 100% of the shares in each of A Sub 1 and A Sub 2 (i.e., A Sub 1 and A Sub 2 are sister subsidiaries). A Holdco, A Sub 1 and A Sub 2 are the only Constituent Entities located in jurisdiction A. None of the companies is an Investment Entity.

Jurisdiction A has implemented a QDMTT, which is effectively identical to the GloBE rules.

The MNE Group’s tax director estimates that, absent planning, the group will incur a significant QDMTT liability in the next fiscal year. In particular, the director estimates that the following numbers will apply for the next fiscal year:

• A Holdco:
  • GloBE Income: Nil
  • Adjusted Covered Taxes: Nil
• A Sub 1:
  • GloBE Income: 500
  • Adjusted Covered Taxes: 50
• A Sub 2:
  • GloBE Income: 400
  • Adjusted Covered Taxes: 48

The tax director proposes this plan: (1) A Sub 2 would subscribe for redeemable preference shares (RPS) in A Sub 1; (2) A Sub 1 would use the cash from the RPS to buy-back some of its common shares from A Holdco; (3) A Holdco would use the cash from (2) to subscribe for new common shares in A Sub 2; (4) the terms of the RPS would be drafted such that the RPS would be treated as a liability for A Sub 1 under the Acceptable Financial Accounting Standard applicable in jurisdiction A; and (5) those terms of the RPS would also require ACo 2 to treat the RPS as equity under the same Acceptable Financial Accounting Standard.

The RPS would carry a coupon dividend of 100 in the next fiscal year (the dividend would be due and payable on the last business day of that fiscal year).

The tax director explains that there will be no impact on corporate income tax, because the RPS will be treated as equity for jurisdiction A corporate income tax purposes by both A Sub 1 and A Sub 2: thus, A Sub 1 would not obtain a deduction for the coupon dividend, and A Sub 2 would qualify for a 100% exemption under the jurisdiction A corporate income tax law.

The tax director asks you whether this plan will cause a reduction in the group’s QDMTT liability in the next fiscal year.

Answer:

A Sub 1

If the coupon payment is an expense in calculating A Sub 1’s Financial Accounting Net Income or Loss, no adjustment (in regard to the coupon payment) will be made in computing A Sub 1’s GloBE Income. In particular, Art. 3.2.7 will not apply, as both A Sub 1 and A Sub 2 are located in jurisdiction A.

Thus, no adverse GloBE impact.

A Holdco

The profit (if any) which A Holdco derives on the buy-back of common shares will qualify as “Excluded Equity Gain or Loss” (defined in Art. 10.1.1), and thus will be excluded from A Holdco’s GloBE Income.

Thus, no adverse GloBE impact.

A Sub 2

Preliminary issue: ignoring the Administrative Guidance (AG), would the coupon receipt qualify as “Excluded Dividends”? The definition in Art. 10.1.1 excludes dividends or other distributions in respect of a “Short-term Portfolio Shareholding” (defined in Art. 10.1.1).

The RPS is probably not a “Portfolio Shareholding”: that term is defined in Art. 10.1.1 to mean “Ownership Interests in an Entity that are held by the MNE Group” – this indicates that the RPS should be considered together with the common shares in A Sub 1 held by A Holdco. Those 2 shareholdings together would carry 100% rights in regard to A Sub 1.

Thus, ignoring the AG, the coupon receipt would probably qualify as “Excluded Dividends”, and would thus be excluded from A Sub 1’s GloBE Income.

Impact of AG: Section 2.3 of the AG adds new Commentary to the definition of “Ownership Interest” in Art.10.1.1: “To the extent [two] Constituent Entities have classified [an] instrument differently under the relevant accounting standard(s), the classification adopted by the issuer should be applied by the issuer and the holder for GloBE purposes”.

Thus, the RPS will be treated as debt for GloBE purposes – the RPS will not be an “Ownership Interest”, and the coupon receipt will not be “Excluded Dividends”.

This is an adverse GloBE impact – i.e., the tax director’s plan will not cause any reduction in the QDMTT position in jurisdiction A.

Do you agree?

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules.

The UPE has a 60% Ownership Interest in ACo, with the balance of 40% owned by minority shareholders.

ACo has the following financial income for a fiscal year (determined in accordance with the Acceptable Financial Accounting Standard used by the UPE in preparing its Consolidated Financial Statements) (numbers in parentheses are debits):

1. Profit (i.e., net income) (in P&L): 30,000
2. Income included in Profit under equity accounting method: 5,000
3. Other comprehensive income (relating to changes in liabilities under ACo’s pension plan): 4,500 (after deducting tax of (1,500))
4. Immaterial deviations from the Acceptable Financial Accounting Standard: (800)
5. Income tax expense: (10,000) (includes (1,000) referable to income included in Profit under equity accounting method)
6. Withholding tax deducted from outbound royalties: (1,500) – this tax is economically borne by ACo under a “gross-up” condition in the licence agreement

Based on this information, what is ACo’s GloBE Income or Loss for the fiscal year?

Answer:

Note: Commentary references are to the Commentary to chapter 3 of the GloBE rules.

The fact that the UPE has only a 60% Ownership Interest in ACo does not impact the computation of ACo’s GloBE Income: see Comm, para. 8.

Computation of ACo’s GloBE Income

1. Start with Profit: 30,000
2. Income included in Profit under equity accounting method – negative adjustment of (5,000): see Art. 3.2.1(c) and definition of “Excluded Equity Gain or Loss” in Art. 10.1.1; also, see Comm, para. 51.
3. OCI (including tax) remains excluded – no adjustment: see Comm, para. 9. [Note that the description, “changes to liabilities under ACo’s pension plan”, does not indicate that there is any “Accrued Pension Expense” (see Art. 3.2.1(i) and definition of “Accrued Pension Expense” in Art. 10.1.1).]
4. Immaterial deviations from Acceptable Financial Accounting Standard – no adjustment: see Comm, para. 12.
5. Income tax expense (including 1,000 referable to income included in Profit under equity accounting method) – positive adjustment of 10,000: see Art. 3.2.1(a) and definition of “Net Taxes Expense” in Art. 10.1.1; also, see Comm, paras. 26 & 27.
6. Withholding tax deducted from outbound royalties (economically borne by ACo under “gross-up” condition, but legally imposed on payee) – no adjustment: Comm, para. 29.

Thus, ACo’s GloBE Income: 30,000 – 5,000 + 10,000 = 35,000

Do you agree?

ACo is a company located in jurisdiction A. ACo runs the public hospital system in jurisdiction A. It is incorporated as a company by Act of parliament, it is required to provide comprehensive hospital services and not pursue profits, and it is exempt from jurisdiction A corporate income tax.

ACo has several subsidiaries (with ACo’s shareholding percentage indicated):

1. Sub Co 1 (100%), which is located in jurisdiction B, but with a PE in jurisdiction F. Sub Co 1 carries out administrative activities which are ancillary to ACo’s hospital activities in jurisdiction A. Sub Co 1 also invests funds for the benefit of ACo. Both of these activities are performed in the Main Entity and the PE.
2. Sub Co 2 (97%), which is located in jurisdiction C. The other 3% shareholding is owned by senior management in Sub Co 2. Sub Co 2 has been funded by equity from ACo and has borrowed from third parties. It has used the funding to acquire a broad range of debt and equity investments.
3. Sub Co 3 (100%), which is located in jurisdiction D. Sub Co 3 has also been funded by equity from ACo and has borrowed from third parties. It has used the funding to acquire shares, from which Sub Co 3 derives only Excluded Dividends and Excluded Equity Gains or Losses.
4. Sub Co 4 (100%), which is located in jurisdiction E. Sub Co 4 operates several private hospitals in jurisdiction E, using IP and services provided by ACo.

ACo prepares consolidated financial statements in accordance with the applicable financial accounting standard in jurisdiction A, and as required by jurisdiction A law. For the latest fiscal year, those consolidated financial statements report revenue of EUR 3 billion.

Also for that latest fiscal year, the “separate entity” revenue for the 5 companies in the group is:

• ACo: EUR 2.5b
• Sub Co 1: EUR 250m (comprising: (i) Main Entity: EUR 180m; and (ii) PE: EUR 70m)
• Sub Co 2: EUR 150m
• Sub Co 3: EUR 100m
• Sub Co 4: EUR 200m

All of the 6 jurisdictions (A to F) have implemented the GloBE rules (IIR and UTPR) and a QDMTT (which is effectively identical to the GloBE rules).

Based on this information, ACo’s tax director has told you that it is not possible for any of those 5 companies to have an IIR, UTPR or QDMTT tax liability for that fiscal year. Do you agree?

Answer:

Introductory point:

If any of the 5 companies is not a “Constituent Entity”, then these taxes (in its location jurisdiction) will not apply to it: IIR (Art. 2.1), UTPR (Art. 2.4.1), and QDMTT (because there would be no Top-up Tax in that jurisdiction: Arts. 5.1 & 5.2).

ACo:

ACo is a “Non-profit Organisation” (Art. 10.1.1 definition), and thus it is an “Excluded Entity” (Art. 1.5.1(c)).

ACo is therefore not a “Constituent Entity” (Art. 1.3.3).

Sub Co 1:

Is Sub Co 1 an “Excluded Entity” under Art. 1.5.2(a)?

The fact that Sub Co 1 performs 2 activities (i.e., administrative activities which are ancillary to ACo’s hospital activities, and investing funds for the benefit of ACo) does not disqualify it from “Excluded Entity” status (para. 54.1 in new Commentary to Art. 1.5.2, added by AG).

Also, in assessing its compliance with Art. 1.5.2, the activities of the whole of the Entity (i.e., Main Entity and PE) are considered together – and, if the definition is satisfied, the whole of the Entity is an “Excluded Entity”: para. 43.1 in new Commentary to Art. 1.5.2, added by AG.

Thus, Sub Co 1 (Main Entity and PE) is an “Excluded Entity” (Art. 1.5.2(a)), and it is thus not a “Constituent Entity” (Art. 1.3.3).

Sub Co 2:

The fact that Sub Co 2 has borrowed from third parties does not disqualify it from “Excluded Entity” status under Art. 1.5.2(a) (para. 53 in new Commentary to Art. 1.5.2, added by AG) – subject to one qualification: the new Commentary provides an example of a “wholly owned subsidiary” (cf. Sub Co 2, which is 97% owned by ACo). Does that make a difference?

IMHO: That should not make a difference, having regard to the fact that para. (a) in Art. 1.5.2 requires only “at least 95%” ownership. Also, note that, even with the 3% “leakage”, Sub Co 2 does “almost exclusively” hold assets or invest funds for the benefit of ACo.

Thus, IMHO: Sub Co 2 should be an “Excluded Entity” (Art. 1.5.2(a)), and thus it is not a “Constituent Entity”.

Sub Co 3:

Apart from the third party borrowing, Sub Co 3 would clearly satisfy Art. 1.5.2(b).

There is nothing in Art. 1.5.2(b), the Commentary, or the AG to indicate that the third party borrowing would make a difference.

Thus, Sub Co 3 is an “Excluded Entity” (Art. 1.5.2(b)), and thus it is not a “Constituent Entity”.

Sub Co 4:

Based on the text in the GloBE rules, Sub Co 4 does not satisfy either para. (a) or (b) of Art. 1.5.2.

However, the AG has introduced a “bright-line test” which can deem “ancillary activities” status under Art. 1.5.2(a)(ii).

Application of test: Is Sub Co 4’s revenue (EUR 200m) less than (1) EUR 750m, or (2) 25% of “revenue of MNE Group” (i.e., 25% x EUR 3b = EUR 750m) (whichever is lower)? Yes!

Therefore, Sub Co 4 is deemed to satisfy Art. 1.5.2(a)(ii). Thus, Sub Co 4 is an “Excluded Entity” (Art. 1.5.2(a)), and it is thus not a “Constituent Entity”.

Final answer:

ACo’s tax director is correct.

Do you agree?

SCo, a company located in jurisdiction S, is a sovereign wealth fund which is 100% owned by the government of jurisdiction S. SCo’s principal purpose is to invest the government’s funds through the making and holding of investments.

The applicable financial accounting standard which applies in jurisdiction S does not provide an exclusion, from consolidation, for “investment entities”. However, jurisdiction S law exempts SCo from the requirement to prepare consolidated financial statements – and thus, SCo does not do so.

Jurisdiction S has implemented the GloBE rules. Jurisdiction S does not have a CFC regime. SCo is a taxpayer under the jurisdiction S corporate income tax law.

One of SCo’s many investments is a 60% direct shareholding in XCo, a company located in jurisdiction X. The other 40% of the shares are owned by unrelated investors who are located in jurisdiction Y. XCo carries on an R&D business in jurisdiction X, which enables it to qualify for an exemption from the 25% jurisdiction X corporate income tax. However, jurisdiction X has implemented the GloBE rules and a QDMTT (which is effectively identical to the GloBE rules). XCo has no subsidiaries.

For the purposes of the GloBE rules and the QDMTT, XCo has: (1) GloBE Income of 100; (2) Adjusted Covered Taxes of nil; and (3) a Substance-based Income Exclusion of 40.

Based on this information, what tax liability will arise, in respect of XCo, under the GloBE rules (in jurisdictions S or X) or QDMTT (in jurisdiction X)?

In answering this question, please assume that the revenue threshold in Art. 1.1.1 is satisfied.

Answer:

SCo meets the definition of “Governmental Entity” in Art. 10.1.1.

SCo is therefore an “Excluded Entity” (Art. 1.5.1(a)). Thus, SCo is excluded from being a “Constituent Entity” (Art. 1.3.3). Accordingly, SCo will not be liable for IIR tax in jurisdiction S (Art. 2.1.1), even if there were a Top-up Tax for jurisdiction X (which is there is not – see below).

The applicable accounting standard in jurisdiction S does not provide SCo with an exclusion from consolidation. However, the jurisdiction S law exempts SCo from the requirement to prepare consolidated financial statements. Therefore, prima facie, SCo would have a “Controlling Interest” in its subsidiaries, under para. (b) of the definition in Art. 10.1.1.

However, that conclusion is reversed by the Administrative Guidance (para. 36.4 in new Commentary on the definition of “Ultimate Parent Entity” in Art. 1.4.1): a sovereign wealth fund that meets the definition of a Governmental Entity (1) will not be considered to be a UPE, and (2) will not be considered to be part of an MNE Group.

I would also note that the government in jurisdiction S is not an “Entity” (para. 17.1 in new Commentary on definition of “Entity” in Art. 10.1.1), and therefore the GloBE rules do not apply to it.

As SCo is not the UPE of an MNE Group, XCo is not included in a Group (Art. 1.2.2). Therefore, XCo is not a “Constituent Entity” (Art. 1.3.1).

Accordingly, for jurisdiction X, there is (1) no ETR (Art. 5.1.1); (2) no Net GloBE Income (Art. 5.1.2); (3) no Additional Current Top-up Tax (Arts. 4.5.1 & 5.4.1); and (4) therefore, no Jurisdictional Top-up Tax (Art. 5.2).

Therefore, XCo will not be liable for UTPR tax in jurisdiction X (see also Art. 2.4.1), and XCo will also not be liable for QDMTT in jurisdiction X.

Do you agree?

ACo 1, a private company located in jurisdiction A, is an “investment entity”, as defined in IFRS 10. The shares in ACo 1 are owned by several (unrelated) individual investors.

Jurisdiction A law does not require private companies to prepare consolidated financial statements, and ACo 1 does not do so.

As part of its investment business, ACo 1 directly owns common shares (with the percentage ownership shown) in the following companies:

• ACo 2 (100%)
• ACo 3 (80%)
• ACo 4 (70%)
• BCo 1 (60%)
• BCo 2 (70%)
• CCo (100%)

ACo 2-4 are located in jurisdiction A, BCo 1-2 are located in jurisdiction B, and CCo is located in jurisdiction C. All of these companies are operating companies, except CCo (which is a pure holding company).

CCo owns 100% of the shares in DCo, an operating company located in jurisdiction D.

IFRS is the applicable financial accounting standard in all 4 jurisdictions.

Jurisdiction C does not require pure holding companies to prepare consolidated financial statements, and CCo does not do so.

Based on this information:

Q1: Are there one or more MNE Groups, for the purposes of the GloBE rules?
Q2: If yes, which companies are members of that, or each, MNE Group?

Answer:

1. Is ACo 1 a “UPE”?

As ACo 1 is an “investment entity” as defined in IFRS 10, it is required not to consolidate its subsidiaries, but instead it is required to measure an investment in a subsidiary at fair value through profit or loss: para. 31, IFRS 10. The facts do not indicate that the exception in para. 32 of IFRS 10 would be triggered.

ACo 1 therefore does not own a “Controlling Interest” (defined in Art. 10.1.1) in any of ACo 2-4, BCo 1-2, CCo, or DCo (“the 7 subsidiaries”). In particular, the “deemed consolidation test” in para. (b) of the “Controlling Interest” definition does not apply: even if the jurisdiction A law did require private companies to prepare consolidated financial statements, IFRS (which is the applicable financial accounting standard in jurisdiction A) requires ACo 1 not to consolidate the 7 subsidiaries.

ACo 1 therefore is not an “Ultimate Parent Entity” (defined in Art. 1.4.1) in respect of the 7 subsidiaries.

Thus, ACo 1 and the 7 subsidiaries do not satisfy the Art. 1.2.2 definition of “Group”, and therefore they do not constitute an “MNE Group” (defined in Art. 1.2.1).

2. Is CCo a “UPE”?

CCo is a “pure holding company”. The facts do not state that CCo is an “investment entity” as defined in IFRS 10, and therefore presumably it is not.

Jurisdiction C law does not require CCo to prepare consolidated financial statements. However, if the jurisdiction C law did require CCo to do that, IFRS 10 would require CCo to consolidate DCo.

Therefore, CCo owns the “Controlling Interest” in DCo, under para. (b) of the definition in Art. 10.1.1. Also, CCo is deemed to have prepared consolidated financial statements which include DCo (see para. (d) of the definition of “Consolidated Financial Statements” in Art. 10.1.1).

Thus, CCo is a “UPE” (Art. 1.4.1), CCo & DCo are a “Group” (Art. 1.2.2), and (because DCo is not located in jurisdiction C) CCo & DCo are an “MNE Group”.

3. Administrative Guidance (AG)

The above issues are discussed in AG, section 1.2.4 (Examples).

4. Final answers

Q1: 1 MNE Group
Q2: CCo & DCo

Do you agree?

An MNE Group’s UPE, which is located in jurisdiction U, is subject to the jurisdiction U CFC rules. Those CFC rules qualify as a Blended CFC Tax Regime, as defined in the Administrative Guidance (AG). Under the CFC rules, the foreign effective tax rate must be 13.125% in order to generate sufficient foreign tax credits (ignoring any foreign tax credit limitation) to prevent the imposition of a tax charge.

In a Fiscal Year, UPE has a tax charge of 50 under the CFC rules.

UPE directly owns 100% of the shares in 4 CFCs. For the Fiscal Year, the CFCs have this financial information:

1. XCo 1 (located in jurisdiction X)
   • Net income (P&L): 220
   • GloBE Income: 200
   • Attributable Income: 80
   • Constituent Entity for GloBE purposes
2. XCo 2 (located in jurisdiction X)
   • Net income (P&L): 100
   • GloBE Income: Nil
   • Attributable Income: 70
   • Non-Constituent Entity for GloBE purposes
3. YCo (located in jurisdiction Y)
   • Net income (P&L): 150
   • GloBE Income: 150
   • Attributable Income: 100
   • Constituent Entity for GloBE purposes
4. ZCo (located in jurisdiction Z)
   • Net income (P&L): 200
   • GloBE Income: 150
   • Attributable Income: 50
   • Constituent Entity for GloBE purposes

The MNE Group has these GloBE Jurisdictional ETRs (as defined in the AG) for the Fiscal Year:

• X: 8%
• Y: 11%
• Z: 14%

Based on this information, what will be the allocation of CFC tax under Art. 4.3.2(c)? Please ignore any possible cap under Art. 4.3.3.

Answer:

The question requires the application of AG, section 2.10.3.

First step: calculate Blended CFC Allocation Key for each CFC (including XCo 2, which is a non-Constituent Entity), using this formula (AG, para. 58.3):

       Attributable Income of Entity x (Applicable Rate – GloBE Jurisdictional ETR).

Based on the question, the Applicable Rate is 13.125% (see AG, para. 58.5).

Thus, Blended CFC Allocation Keys:

1. XCo 1: 80 x (13.125% – 8%) = 4.10
2. XCo 2: 70 x (13.125% – 8%) = 3.59
3. YCo: 100 x (13.125% – 11%) = 2.13
4. ZCo: 50 x (13.125% – 14%) = 0 (see AG, para. 58.6)

Sum of All Blended CFC Allocation Keys: 4.10 + 3.59 + 2.13 + 0 = 9.82

Second step: calculate Blended CFC Tax allocated to each Entity (including XCo 2), using this formula (AG, para. 58.3):

       Blended CFC Allocation Key / Sum of All Blended CFC Allocation Keys x Allocable Blended CFC Tax.

Based on the question, the Allocable Blended CFC Tax is 50 (see AG, para. 58.3).

Thus, Blended CFC Tax allocated to:

1. XCo 1: 4.10 / 9.82 x 50 = 20.88
2. XCo 2: 3.59 / 9.82 x 50 = 18.28
3. YCo: 2.13 / 9.82 x 50 = 10.85
4. ZCo: 0 / 9.82 x 50 = 0

Total: 20.88 + 18.28 + 10.85 + 0 = 50.01 (due to rounding)

Thus, allocation of CFC taxes under Art. 4.3.2(c):

• XCo 1: 20.88
• YCo : 10.85

The 18.28 of Blended CFC tax allocated to XCo 2 is not allocated under Art. 4.3.2(c), because XCo 2 is not a Constituent Entity.

Do you agree?

Jurisdiction X has implemented the GloBE rules.

Jurisdiction X has a corporate income tax with a 25% tax rate. Jurisdiction X also has a minimum tax with a 20% tax rate. The computation of the minimum tax is identical to the computation of Top-up Tax under the GloBE rules, with 3 exceptions: (1) the tax rate (already noted); (2) the Top-up Tax formula for the minimum tax does not subtract a QDMTT; and (3) there is no jurisdictional blending of income and taxes – i.e., each company’s minimum tax liability (if any) is calculated separately. If there is a minimum tax liability for a company, that is a current tax liability for the company, even if it exceeds the amount of Top-up Tax which would otherwise apply under the GloBE rules – i.e., no part of the minimum tax is carried forward or back to other years.

XCo, a company located in jurisdiction X, is a Constituent Entity within an MNE Group which is “within scope” of the GloBE rules. XCo is the only Constituent Entity located in jurisdiction X. XCo carries on a major manufacturing business in jurisdiction X, and therefore it qualifies for a 100% exemption from jurisdiction X corporate income tax. However, XCo is subject to the jurisdiction X minimum tax.

For a Fiscal Year, XCo (1) has GloBE Income of 3,000; (2) has Substance-based Income Exclusion of 1,800; and (3) does not qualify for a safe harbour or de minimis exclusion (either under the GloBE rules or under the minimum tax).

Based on this information:

Q1: Does the jurisdiction X minimum tax qualify as a QDMTT?
Q2: Assuming the answer to Q1 is “yes”, what amount of QDMTT will be imposed on XCo?
Q3: Assuming the answer to Q1 is “no”, what amount of Top-up Tax (under the GloBE rules) will arise for jurisdiction X?

Answer:

1. Does jurisdiction X minimum tax qualify as a QDMTT?

Exception (1) (tax rate is 20%) does not cause disqualification: AG, para. 118.38.

Exception (2) (Top-up Tax formula does not subtract QDMTT) does not cause disqualification: AG, para. 118.34.

Exception (3) (no jurisdictional blending of income and taxes) is more difficult to analyse. Para. 118.33 says: “For QDMTT purposes, … a jurisdiction could have stricter limitations on blending of income and taxes across the ordinary Constituent Entities in the jurisdiction provided that the limitations on blending produce outcomes that are functionally equivalent to the GloBE Rules.” Outcomes will be functionally equivalent to the GloBE rules if the variations “systemically produce a greater incremental tax liability or do not systematically produce lower tax liability than would be expected under the GloBE Rules and Commentary.”: AG, para. 10. No jurisdictional blending (i.e., separate calculation for each Constituent Entity located in a jurisdiction) will generally lead to either the same or a greater tax liability than under the GloBE rules – however, I’m not sure that it can be stated that such an outcome will occur in all situations.

Note that, for the exception (3), it is irrelevant that XCo is the only Constituent Entity located in jurisdiction X. The issue is whether the minimum tax qualifies as a QDMTT – not its application to XCo.

With some hesitation, I would conclude that the minimum tax should qualify as a QDMTT.

2. If a QDMTT: what amount of QDMTT will be imposed on XCo?

GI: 3,000
ACT: nil
ETR: 0%
TUT%: 20% (i.e., minimum tax rate is 20%)
Excess Profits: 3,000 – 1,800 = 1,200
QDMTT: 20% x 1,200 = 240

[GloBE Top-up Tax: (15% x 1,200) – 240 = 180 – 240 Thus, nil]

3. If not a QDMTT: what amount of GloBE Top-up Tax will arise for jurisdiction X?

GI: 3,000
ACT: 240
ETR: 8%
TUT%: 7%
Excess Profits: 3,000 – 1,800 = 1,200
TUT: 7% x 1,200 = 84

[Total tax: 240 (minimum tax) + 84 (GloBE Top-up Tax) = 324]

Note how the disqualification of the minimum tax as a QDMTT causes an increase of 84 in total tax.

Do you agree?

ACo, a company located in jurisdiction A, is the UPE of an MNE Group which is “within scope” of the GloBE rules.

ACo owns 90% of the shares in BCo, a company located in jurisdiction B. The other 10% of the shares in BCo are owned by third parties. BCo is the only member of the MNE Group located in jurisdiction B.

BCo owns 100% of the shares in CCo, a company located in jurisdiction C.

Jurisdictions A and B have implemented the GloBE rules (both IIR and UTPR), and they have also each implemented a QDMTT.

For a Fiscal Year:

• ACo is subject to 4 jurisdiction A taxes: (1) Corporate income tax: 100; (2) CFC tax (in respect of BCo’s CFC taxable income of 1,400, which includes 400 of Passive Income): 150 (before credit for BCo’s taxes), 30 (after credit for BCo’s taxes); (3) IIR tax (in respect of the jurisdiction B Top-up Tax): to be determined (“TBD”); and (4) QDMTT: TBD.
• For purposes of both the GloBE rules and the QDMTT, ACo’s GloBE Income is 2,000, and its Substance-based Income Exclusion (“SBIE”) is 1,200.

For the same Fiscal Year:

• BCo is subject to 3 jurisdiction B taxes: (1) Corporate income tax: 50; (2) CFC tax (in respect of CCo’s CFC taxable income, which does not include any Passive Income): 120 (before credit for CCo’s taxes), 80 (after credit for CCo’s taxes); and (3) QDMTT: TBD.
• For purposes of both the GloBE rules and the QDMTT, BCo’s GloBE Income is 1,400 (including 400 of Passive Income), and its SBIE is 800.

Based on this information:
Q1: What is ACo’s IIR tax liability in respect of the jurisdiction B Top-up Tax?
Q2: What is ACo’s QDMTT liability?
Q3: What is BCo’s QDMTT liability?

Answer:

(1) Art. 4.3.3 calculation for BCo

Art. 4.3.3, para. (a): ACo’s CFC tax with respect to BCo’s Passive Income = 30 x 400 / 1,400 = 8.57 (i.e., I have applied a proportionate approach – see my comment below).

Art. 4.3.3, para. (b):
ACo’s residual CFC tax = 30 – 8.57 = 21.43 (see my comment below)
BCo’s Covered Taxes = 21.43 + 50 = 71.43
BCo’s ETR = 71.43 / 1,400 = 5.1%
BCo’s Top-up Tax Percentage = 9.9%
Para. (b) amount = 9.9% x 400 = 39.6

Thus, Art. 4.3.3 amount = 8.57

[Note that Example 4.3.3-1 (in the Inclusive Framework’s Examples document) considers a situation where 100% of the CFC taxable income comprises Passive Income. In that situation, all of the CFC tax is “with respect to such Passive Income”, as referred to in Art. 4.3.3(b). In contrast, in the current question, the CFC taxable income is 1,400, of which the Passive Income is only 400. The Top-up Tax Percentage in para. (b) is calculated “without regard to the Covered Taxes incurred with respect to such Passive Income by [ACo]” – i.e., without regard to 8.57. Thus, the Adjusted Covered Taxes for the ETR calculation takes into account the CFC tax on the non-Passive Income (i.e., the residual CFC tax) of 21.43.]

(2) ACo’s QDMTT

GI = 2,000
SBIE = 1,200
ACT = 100 (ACo’s CFC tax is not taken into account – see Administrative Guidance (AG), para. 118.28)
ETR = 100 / 2,000 = 5%
TUT% = 10%
EP = 2,000 – 1,200 = 800
QDMTT = 10% x 800 = 80

(3) BCo’s QDMTT

GI = 1,400
SBIE = 800
ACT = 50 (see AG, paras. 118.28 & 118.30; and see my comment below.)
ETR = 50 / 1,400 = 3.57%
TUT% = 11.43%
EP = 1,400 – 800 = 600
QDMTT = 11.43% x 600 = 68.58

[Note that BCo’s CFC tax in respect of CCo is 100% allocated to CCo, by Art. 4.3.2(c). As CCo has no Passive Income (stated in the question), then the cap in Art. 4.3.3 does not apply. As the CFC tax is allocated to CCo, it is not included in BCo’s ACT.]

(4) Jurisdiction B GloBE Top-up Tax

GI = 1,400
SBIE = 800
ACT = 50 + 30 = 80
ETR = 80 / 1,400 = 5.71%
TUT% = 9.29%
EP = 1,400 – 800 = 600
TUT = (9.29% x 600) – 68.58 = 55.74 – 68.58 = 0

(5) ACo’s IIR tax (with respect to jurisdiction B Top-up Tax)

Nil.

Thus, my answers:
Q1: 0
Q2: 80
Q3: 68.58
Do you agree?

XCo, a company located in jurisdiction X, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules. It is the only Constituent Entity located in X.

YCo, a company located in jurisdiction Y, is a Constituent Entity in the same MNE Group. It is the only Constituent Entity located in Y. XCo and YCo are sister subsidiaries.

The UPE is located in jurisdiction U. The UPE has a direct Ownership Interest in both XCo and YCo of 100%.

The GloBE rules have been implemented in jurisdictions X and Y (in both cases: IIR and UTPR), but they have not been implemented in jurisdiction U.

In a Fiscal Year:

1. UPE incurs CFC tax (under the jurisdiction U tax law) in respect of the profits of XCo. For the purposes of the GloBE rules, jurisdiction U’s CFC tax law is a “CFC Tax Regime”, but it is not a “Blended CFC Tax Regime”.
2. YCo has a Top-up Tax amount, which is allocated (in part) to XCo under Art. 2.6.
3. XCo incurs a tax liability under jurisdiction X’s minimum tax. That minimum tax has the same rules as the GloBE rules, except that it does not include a Substance-based Income Exclusion.

Based on this information:

• Q1: Is jurisdiction X’s minimum tax a QDMTT?
• Q2: Assuming the answer to Q1 is “yes”, will UPE’s CFC tax and/or the jurisdiction X UTPR tax (in respect of YCo’s Top-up Tax) be taken into account in computing XCo’s QDMTT liability?

Answer:

Q1
Jurisdiction X’s minimum tax will qualify as a QDMTT. The fact that it does not include a Substance-based Income Exclusion does not disqualify it from QDMTT status: see paras. 118.36-37 in the Administrative Guidance on the GloBE rules (AG).

Q2
Neither the UPE’s CFC tax nor the jurisdiction X UTPR tax (in respect of YCo’s Top-up Tax) will be taken into account in computing XCo’s QDMTT tax liability.

Regarding the CFC tax, see para. 118.30 of the AG.

Regarding the UTPR tax, see para. 118.31 of the AG and the exclusion of UTPR tax from the definition of “Covered Taxes” in Art. 4.2.2(c).

Do you agree?

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules. ACo is the only Constituent Entity located in jurisdiction A.

ACo carries on a manufacturing business in jurisdiction A, and is provided with a tax incentive under the jurisdiction A tax law.

ACo is trying to determine how the tax incentive should be designed in the future, having regard to the GloBE rules.

For that purpose, ACo assumes: (1) its GloBE Income will be 1,000; (2) its Substance-based Income Exclusion (SBIE) amount will be 800; and (3) it will not satisfy a safe harbour or the de minimis exclusion.

Q1: If jurisdiction A provides an income tax exemption for the SBIE amount (800), and levies a 15% income tax on the remainder of ACo’s GloBE Income (200), will there be no Top-up Tax?

Q2: If the answer to Q1 is that there would be a Top-up Tax, what rate of tax should jurisdiction A levy on the remainder of ACo’s GloBE Income (200) to ensure that the Top-up Tax is zero?

For the purposes of these questions, please assume that (apart from the exemption of the SBIE amount) there are no permanent or timing differences between the computation of GloBE Income and the computation of taxable profits under the jurisdiction A tax law.

Answer:

Q1
Adjusted Covered Taxes: 15% x 200 = 30
GloBE Income: 1,000 (i.e., not reduced by the SBIE amount)
Thus, ETR = 30 / 1,000 = 3% (Art. 5.1)

Top-up Tax Percentage = 12%
Excess Profit = 1,000 – 800 = 200

Thus, Jurisdictional Top-up Tax = 12% x 200 = 24 (Art. 5.2)

Q2
To ensure that the Top-up Tax is zero, jurisdiction A would need to levy a tax of 150 on the remainder of ACo’s GloBE Income (200).
With Adjusted Covered Taxes of 150, ACo’s ETR would be: 150 / 1,000 = 15%.

The tax of 150 on 200 of income is a 75% tax rate!

Comments
With a 15% jurisdiction A tax rate on the 200, the total tax paid would be: 30 (juris. A tax) + 24 (Top-up Tax) = 54.

Alternatively, with a 75% jurisdiction A tax rate on the 200, the total tax paid would be: 150 (juris. A tax) + 0 (Top-up Tax) = 150.

Ironically, of the 2 alternatives, the MNE Group would pay less tax by allowing the Top-up Tax to apply.

An important point to note is that the SBIE amount does not reduce GloBE Income. Therefore, a low ETR can still occur, even though most of the GloBE Income is SBIE and the remainder is subject to a 15% tax rate.

Do you agree?

XCo, a company located in jurisdiction X, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules. XCo, a small manufacturing company, is the only Constituent Entity located in jurisdiction X.

YCo, a company located in jurisdiction Y, is also a Constituent Entity in the MNE Group. YCo is the only Constituent Entity located in jurisdiction Y. XCo and YCo are “sister subsidiaries”.

The UPE is located in jurisdiction U.

For 2024, the GloBE rules are in effect in jurisdictions X and Y (for both jurisdictions, both the IIR and UTPR are in effect, but not a QDMTT); however, the GloBE rules are not in effect in jurisdiction U or in any of the other 8 jurisdictions in which the MNE Group has Constituent Entities.

For 2024, XCo has the following financial information (determined in accordance with the Acceptable Accounting Standard used by the UPE in preparing its consolidated Financial Statements) (all in EUR millions):

1. Profit before Income Tax: 1.4
2. Revenue: 9
3. Income tax expense (100% Covered Taxes, no “uncertain tax positions”): 0.2
4. Negative adjustments (i.e., reductions) (under Art. 3.2 and following) in computing GloBE Income (note: there are no positive adjustments): (0.5)
5. Adjusted Covered Taxes: 0.1
6. Substance-based Income Exclusion: 0.6

And for 2024, YCo has the following financial information (determined in accordance with the Acceptable Accounting Standard used by the UPE in preparing its consolidated Financial Statements) (all in EUR millions):

1. Profit before Income Tax: 1.2
2. Revenue: 15
3. Income tax expense (100% Covered Taxes, no “uncertain tax positions”): 0.1
4. Net positive adjustments (i.e., add-back) (under Art. 3.2 and following) in computing GloBE Income: 2.0
5. Adjusted Covered Taxes: 0.3
6. Substance-based Income Exclusion: 0.4

Based on this information, will either or both of XCo and YCo have a tax liability under the GloBE rules for 2024?

Answer:

1. Juris. X Top-up Tax

XCo fails the transitional CbCR safe harbour: (i) de minimis test is failed, because Profit before Income Tax is not less than EUR 1m; (ii) simplified ETR test is failed, because simplified ETR is: 0.2 / 1.4 = 14.3%; and (iii) routine profits test is failed, because Profit before Income Tax exceeds SBIE amount.

However, XCo satisfies the de minimis exclusion in Art. 5.5: Average GloBE Revenue = EUR 9m, and Average GloBE Income = EUR 0.9 (see the Commentary’s discussion on how to determine the “average” numbers in the first year when GloBE rules apply).

If the election is made (I will assume that it is), Art. 5.5 requires that the Top-up Tax for 2024 is zero.

2. Juris. Y Top-up Tax

YCo fails the transitional CbCR safe harbour: (i) de minimis test is failed, because Total Revenue is not less than EUR 10m, and Profit before Income Tax is not less than EUR 1m; (ii) simplified ETR is failed, because simplified ETR is: 0.1 / 1.2 = 8.3%; and (iii) routine profits test is failed because Profit before Income Tax exceeds SBIE amount.

YCo also fails the de minimis exclusion in Art. 5.5: Average GloBE Revenue is not less than EUR 10m, and Average GloBE Income is not less than EUR 1m.

Calculation of Top-up Tax…

GloBE Income: 1.2 + 2.0 = 3.2
ETR: 0.3 / 3.2 = 9.375%
Top-up Tax Percentage: 5.625%
Excess Profits: 3.2 – 0.4 = 2.8
Top-up Tax: 5.625% x 2.8 = EUR 0.1575m

3. UTPR

Art. 9.3 will not apply to exclude the application of the UTPR in 2024, as the MNE Group is not “in its initial phase of its international activity”: there are Constituent Entities in more than 6 jurisdictions.

The UTPR of EUR 0.1575m will be allocated between jurisdictions X and Y, according to the allocation formula in Art. 2.6. Note that UTPR for 2024 will be allocated (in part) to jurisdiction X, even though that jurisdiction qualifies for the de minimis exclusion in 2024.

Do you agree?

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules. ACo is the only Constituent Entity located in jurisdiction A. Jurisdiction A has a corporate income tax rate of 20%.

The UPE is a large manufacturing company which is located, and has significant manufacturing operations, in jurisdiction U. The UPE has 3 subsidiaries (including ACo) located outside jurisdiction U. The 3 subsidiaries are low-risk buy / sell distributors of the UPE’s goods: they own no valuable IP, they own no inventory (they buy goods from the UPE on a “flash title” basis), and they operate from leased premises.

For the 2024 fiscal year, jurisdiction A is the only jurisdiction (in which the MNE Group operates) for which the GloBE rules are in effect (IIR, UTPR, and QDMTT).

UPE enjoys a tax incentive in jurisdiction U, causing its ETR (calculated under the GloBE rules) to be 10% in 2024. The UPE’s GloBE Income in 2024 is EUR 200 million. The UPE’s Substance-based Income Exclusion is EUR 80 million.

For 2024, ACo has the following financial information (determined in accordance with the Acceptable Accounting Standard used by the UPE in preparing its consolidated Financial Statements) (all in EUR millions):

1. Profit before Income Tax: 0.5
2. Revenue: 15
3. Income tax expense (100% Covered Taxes, no “uncertain tax positions”): 0.06
4. Net positive adjustments (i.e., add-back) (under Art. 3.2 and following) in computing GloBE Income: 0.6
5. Adjusted Covered Taxes: 0.08
6. Substance-based Income Exclusion: 0.4

Based on this information, will ACo have a tax liability under jurisdiction A’s GloBE rules (IIR, UTPR and/or QDMTT) for 2024?

Answer:

1. Juris. A: de minimis exclusion (Art. 5.5)

Not applicable, as ACo’s GloBE Revenue is not less than EUR 10m and its GloBE Income is not less than EUR 1m (see the Commentary’s discussion on how to determine the “average” numbers in the first year when GloBE rules apply).

2. Juris. A: transitional CbCR safe harbour

Not applicable, as none of the 3 tests is satisfied: (1) de minimis test failed, because Total Revenue is not less than EUR 10m; (2) simplified ETR test failed, because computation is: 0.06 / 0.5 = 12%, which is less than Transition Rate of 15%; and (3) routine profits test failed, because Profit (Loss) before Income Tax is not equal to or less than SBIE amount.

3. Juris. A Top-up Tax

ACo’s ETR: 0.08 / 1.1 = 7.2727%.

Thus, Top-up Tax Percentage = 7.7273%.

Excess Profit: 1.1 – 0.4 = 0.7

Thus, Top-up Tax = (7.7273% x 0.7) – QDMTT = 0.054 – QDMTT

Thus, jurisdiction A QDMTT = EUR 0.054m.

4. Juris. U Top-up Tax

UPE’s ETR = 10%.

Thus, Top-up Tax Percentage = 5%.

Excess Profit: 200 – 80 = 120.

Thus, Top-up Tax = 5% x 120 = EUR 6m.

Jurisdiction A is the only jurisdiction (in which the MNE Group operates) for which the GloBE rules are in effect in 2024. Thus, 100% of the Top-up Tax, prima facie, should be allocated to jurisdiction A as UTPR. Note that the allocation percentage would be 100% only if ACo has at least one employee in jurisdiction A, and at least one “Tangible Asset” in jurisdiction A (e.g., office furniture): see the formula in Art. 2.6.1.

However, Art. 9.3 (exclusion from the UTPR of MNE Groups in the initial phase of their international activity) should apply here – which would mean that no Top-up Tax would be allocated to jurisdiction A under the UTPR.

5. Final answer

The only Top-up Tax which will be imposed for 2024 will be EUR 0.054m of jurisdiction A QDMTT.

Do you agree?

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules. ACo is the MNE Group’s first and only Constituent Entity located in jurisdiction A. ACo became a member of the MNE Group on 1 January 2025, when 100% of its shares were purchased by the UPE from third parties.

For the MNE Group, the GloBE rules commence operation in 2024.

ACo has the following financial income for 2025 (determined in accordance with the Acceptable Accounting Standard used by the UPE in preparing its Consolidated Financial Statements) (all in EUR millions):

1. Profit before Income Tax: 1.5
2. Revenue: 9.5
3. Income tax expense (100% Covered Taxes, no “uncertain tax positions”): 0.25
4. Net positive adjustments (i.e., add-back) (under Art. 3.2 and following) in computing GloBE Income: 1.8
5. Adjusted Covered Taxes: 0.3
6. Substance-based Income Exclusion: 1.0

Based on this information, does jurisdiction A have a Top-up Tax in 2025?

Answer:

A preliminary point to note is that the de minimis exclusion in Art. 5.5 does not apply, because ACo’s GloBE Income (EUR 3.3m) exceeds the limit of EUR 1m.

However, the key issue is whether the Transitional CbCR Safe Harbour (“TSH”) (described in IF Guidance issued in December 2022) will apply:

1. 2025 is within the “Transition Period”.
2. Although the MNE Group did not apply the TSH with respect to jurisdiction A in 2024, the “once out, always out” rule does not apply because the MNE Group had no Constituent Entities located in jurisdiction A in 2024.
3. De minimis test: (i) Total Revenue: EUR 9.5m; (ii) Profit before Income Tax: EUR 1.5m; (iii) Thus, the de minimis test is failed, because the Profit before Income Tax exceeds the limit of EUR 1m.
4. Simplified ETR test: (i) Simplified Covered Taxes: EUR 0.25m; (ii) Profit before Income Tax: EUR 1.5m; (iii) “Transition Rate” for 2025: 16%; (iv) Simplified ETR = 0.25 / 1.5 = 16.7%; (v) Thus, the simplified ETR test is passed.
5. Routine profits test: (i) Profit before Income Tax: EUR 1.5m; (ii) SBIE amount: EUR 1.0m; (iii) Thus, the routine profits test is failed, because the Profit before Income Tax is not equal to or less than the SBIE amount.

Therefore, as the simplified ETR test is passed, the TSH with respect to jurisdiction A is available to the MNE Group in 2025, provided the election in Art. 8.2.1 is made and the GloBE Information Return includes the correct information. If this is the case, there will be no Top-up Tax for jurisdiction A in 2025.

Do you agree?

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules.

ACo is the owner of valuable IP, which it licenses to group companies throughout the world, in return for arm’s length royalties. ACo’s carrying value of the IP in its 2022 financial statements is 100.

Jurisdiction A does not impose a corporate income tax.

BCo, a newly formed company in jurisdiction B, is also a Constituent Entity in the same MNE Group. BCo currently does not have any business operations, and it has no employees. Jurisdiction B has a corporate income tax, with a 25% tax rate. BCo is the only Constituent Entity located in jurisdiction B.

At the start of 2023, ACo sells its IP to BCo for 1,000 (the IP’s fair market value). BCo finances the acquisition by issuing new shares to the UPE in the MNE Group (located in jurisdiction U). By virtue of the sale, BCo becomes the licensor of the IP to the group company licensees.

In its 2023 and later financial statements, BCo amortises the IP at a rate of 10% per annum (i.e., 100 each year). BCo derives 110 of royalty income each year (please assume that no foreign withholding tax is paid on those royalties). For jurisdiction B corporate income tax purposes, BCo deducts tax depreciation on the IP at a rate of 10% per annum (i.e., 100 each year).

The GloBE rules first apply to the MNE Group in 2024.

Based on this information, will the MNE Group have a Top-up Tax for jurisdiction B in 2024? Please assume that BCo continues to have no employees in 2024.

Answer:

The key issue in this case is whether, in computing its GloBE Income in 2024, BCo will use a basis in the IP of 1,000 (the fair market value price which it pays to ACo) or 100 (ACo’s carrying value) – in other words, whether the intra-group sale of the IP in 2023 (i.e., before the start of the GloBE rules) achieves a “step-up” in the basis of IP for GloBE purposes.

The answer is: BCo will use 100 – i.e., no step-up will be achieved.

2024 is a “Transition Year” for the MNE Group: see Art. 10.1.1 definition.

Art. 9.1.3: “In the case of a transfer of assets between Constituent Entities after 30 November 2021 and before the commencement of a Transition Year, the basis in the acquired assets … shall be based on the disposing Entity’s carrying value of the transferred assets upon disposition …”.

In 2024:

1. BCo’s Adjusted Covered Taxes: (110 – 100) x 25% = 2.5
2. BCo’s GloBE Income: 110 – (100 x 10%) = 100
3. Jurisdiction B ETR: 2.5 / 100 = 2.5%
4. Jurisdiction B Top-up Tax: 12.5% x 100 = 12.5 (ignoring QDMTT)

Thus, my answer is: Jurisdiction B Top-up Tax = 12.5

Do you agree?

ACo, a company located in jurisdiction A, is the UPE of an MNE Group which is “within scope” of the GloBE rules. Jurisdiction A has a corporate income tax rate of 20%. ACo has no tax losses.

ACo directly owns 100% of the shares in XCo, a company located in jurisdiction X. Jurisdiction X has a corporate income tax rate of 25%. XCo has no tax losses.

XCo directly owns 100% of the shares in YCo, a company located in jurisdiction Y. Jurisdiction Y does not levy a corporate income tax.

In the current year, YCo derives 200 of profits, comprising (1) 100 of interest income (no related expenses), and (2) 150 of service fees (less 50 of related expenses). YCo does not incur any foreign withholding taxes.

Jurisdiction X has CFC rules. Under those rules, an amount equal to YCo’s 100 of interest income is imputed to XCo.

Jurisdiction A also has CFC rules. Under those rules, an amount equal to the whole of YCo’s profits (i.e., 200) is imputed to ACo. However, ACo will obtain a credit for the CFC tax paid by XCo on the same amount.

Based on this limited information, what will be YCo’s Adjusted Covered Taxes in the current year?

Answer:

1. XCo’s CFC tax

XCo’s CFC tax: 25% x 100 = 25

Prima facie, that amount of 25 will be allocated to YCo under Art. 4.3.2(c), subject to Art. 4.3.3 (see below).

2. ACo’s CFC tax

ACo’s CFC tax: [20% x 200] – credit for XCo’s CFC tax

I will assume that jurisdiction A’s tax law limits the credit to ACo’s CFC tax on the same income (i.e., 100 of interest income).

Based on that assumption, the credit will be: 20% x 100 = 20

Thus, ACo’s CFC tax: 40 – 20 = 20

Prima facie, that amount of 20 will be allocated to YCo under Art. 4.3.2(c), subject to Art. 4.3.3 (see below).

3. Art. 4.3.3

YCo’s 100 of interest income is included in “Passive Income” (Art. 10.1.1 definition), but its 100 of profit from service fees is not.

XCo’s CFC tax of 25 is wholly in respect of “Passive Income”.

A question arises as to how much (if any) of ACo’s CFC tax of 20 is in respect of “Passive Income”. After giving the credit for XCo’s CFC tax in respect of YCo’s 100 of interest income, is the remainder of ACo’s CFC tax (20) wholly in respect of the 100 of net service fees – or, alternatively, is it 50% in respect of the 100 of net service fees and 50% in respect of the 100 of interest income? The Commentary and the Examples do not answer that question.

I will assume that the answer is that ACo’s CFC tax is wholly in respect of 100 of net service fees – i.e., none of ACo’s CFC tax of 20 is in respect of “Passive Income”.

Based on that assumption:

Jurisdiction Y’s Top-up Tax Percentage is 15%.

Art. 4.3.3, para. (b) amount: 15% x 100 = 15.

Art. 4.3.3, para. (a) amount: 25 (XCo) + 0 (ACo) = 25.

Thus, Art. 4.3.3 “cap” is 15.

4. Final amounts allocated to YCo under Art. 4.3.2(c)

XCo’s CFC tax (capped under Art. 4.3.3) = 15

ACo’s CFC tax (not capped under Art. 4.3.3) = 20

Total CFC tax amounts allocated to YCo (i.e., YCo’s Adjusted Covered Taxes): 15 + 20 = 35.

Do you agree?

ACo, a company located in jurisdiction A, is the UPE of an MNE Group which is “within scope” of the GloBE rules.

BCo is a company located in jurisdiction B (which has not implemented a QDMTT). BCo qualifies as an “Investment Fund” (Art. 10.1.1 definition). BCo has one class of issued shares.

ACo owns a 60% Ownership Interest in BCo. The other 40% Ownership Interests are owned by third party investors.

ACo includes BCo’s financial results in its consolidated financial statements on a line-by-line basis.

In the current year, BCo reports 200 of pretax profits in its financial statements. Included in those pretax profits are: (1) dividends on long-term (greater than 12 months) portfolio shareholdings: 65; (2) gains on sale of such shareholdings: 35; (3) interest on corporate and government bonds: 60; and (4) gains on sale of such bonds: 40. Please ignore expenses.

BCo is tax-exempt in jurisdiction B. Also, please assume that BCo does not incur any foreign withholding tax, and it does not have any “Eligible Employees” (Art. 10.1.1 definition) or “Eligible Tangible Assets” (Art. 5.3.4 definition). In addition, please assume that no election is made under Art. 7.5 or Art. 7.6.

ACo is subject to CFC tax in jurisdiction A with respect to its investment in BCo. For the purposes of the CFC rules, BCo’s interest income and gains on sale of bonds, are taxable. The CFC tax rate is 25%.

Based on this information, what is BCo’s Top-up Tax (if any) for the current year?

Answer:

BCo’s GloBE Income = 200 – 65 (“Excluded Dividends”: Art. 10.1.1 definition) = 135.

The 35 of gains on sale of long-term portfolio shareholdings are not “Excluded Equity Gain or Loss” (Art. 10.1.1 definition) because of the exception for Portfolio Shareholdings.

For the purposes of Art. 7.4, the MNE Group’s Allocable Share of BCo’s GloBE Income is: 60% x 135 = 81.

BCo is tax-exempt in jurisdiction B and does not incur any foreign withholding tax. Therefore, subject to Art. 4.3, BCo’s Adjusted Covered Taxes would be nil.

However, ACo incurs a CFC tax rate of 25% in regard to BCo’s interest income (60) and gains on sale of bonds (40). Thus, ACo’s CFC tax is: 25% x 100 x 60% = 15 – i.e., reflecting ACo’s 60% Ownership Interest in BCo.

Prima facie, that 15 is allocated to BCo under Art. 4.3.2(c). However, both the interest income and the gains on sale of bonds, fall within the definition of “Passive Income” in Art. 10.1.1. Therefore, the “cap” in Art. 4.3.3 will need to be applied. The amount in para. (a) is 15. The amount in para. (b) is calculated as: 15% x 100 = 15. Accordingly, based on the numbers, the cap does not restrict the tax allocated to BCo. (Note that the 35 of gains on sale of long-term portfolio shareholdings is excluded from the definition of “Passive Income” by the closing words in the definition: “but only to the extent …”).

Therefore, BCo’s Adjusted Covered Taxes will be 15.

In calculating BCo’s ETR, Art. 7.4.2 requires us to use the MNE Group’s Allocable Share of BCo’s GloBE Income – i.e., 81.

Accordingly, BCo’s ETR is: 15 / 81 = 18.5185%. Thus, BCo has no Top-up Tax Percentage: Art. 7.4.5.

Which means that BCo has no Top-up Tax.

Do you agree?

Question 1

UPE 1 is the UPE of MNE Group 1, and UPE 2 is the UPE of MNE Group 2. Both MNE Group 1 and MNE Group 2 are “within scope” of the GloBE rules.

UPE 1 and UPE 2 each owns 50% of the issued shares in XCo, a company located in jurisdiction X. XCo has only one class of issued shares.

UPE 1 and UPE 2 each report XCo’s financial results in their respective consolidated financial statements under the equity method.

XCo is the UPE of MNE Group 3, which is also “within scope” of the GloBE rules.

ACo, located in jurisdiction A, is a 100% subsidiary of XCo. ACo has a Top-up Tax of 100 in the current year.

What will be the impact, under the GloBE rules, on UPE 1, UPE 2, and XCo, in regard to ACo’s Top-up Tax? Please assume that all relevant jurisdictions (except jurisdiction A) have implemented the GloBE rules, and that ACo is the only Constituent Entity located in jurisdiction A.

Question 2

UPE 3 is the UPE of MNE Group 3; UPE 4 is the UPE of MNE Group 4; and UPE 5 is the UPE of MNE Group 5. All 3 groups are “within scope” of the GloBE rules.

The 3 UPEs are all shareholders in YCo, a company located in jurisdiction Y. YCo has only one class of issued shares. The percentages held are: UPE 3: 40%; UPE 4: 30%; and UPE 5: 30%.

UPE 3, UPE 4, and UPE 5 each report YCo’s financial results in their respective consolidated financial statements under the equity method.

YCo has no subsidiaries or PEs.

If YCo were to compute its position under the GloBE rules, it would have a Top-up Tax of 200.

What will be the impact, under the GloBE rules, on UPE 3, UPE 4, and UPE 5, in regard to that Top-up Tax of 200? Please assume that all relevant jurisdictions (except jurisdiction Y) have implemented the GloBE rules.

Answer:

Question 1

There will be no impact, under the GloBE rules, on either UPE 1 or UPE 2, for 2 reasons: (1) ACo is not a Constituent Entity of either MNE Group 1 or MNE Group 2, because it is not included in either Group’s consolidated financial statements on a line-by-line basis (see the definition of “Constituent Entity” in Art. 1.3, and the definition of “Group” in Art. 1.2); and (2) XCo is excluded from the definition of “Joint Venture” in Art. 10.1.1 by para. (a), and therefore ACo is not a “JV Subsidiary” (Art. 10.1.1 definition).

An IIR tax liability of 100 will be imposed on XCo in jurisdiction X.

Question 2

There will be no impact, under the GloBE rules, on any of UPE 3, UPE 4 or UPE 5, for 2 reasons: (1) YCo is not a Constituent Entity of any of the MNE Groups, as it is not included in any Group’s consolidated financial statements on a line-by-line basis (see the definition of “Constituent Entity” in Art. 1.3, and the definition of “Group” in Art. 1.2); and (2) YCo is not a “Joint Venture” (Art. 10.1.1 definition) as none of the 3 UPEs has an Ownership Interest of at least 50%.

Thus, no IIR or UTPR tax liability.

Do you agree?

XCo 1 is a company located in jurisdiction X. It has 3 shareholders: UPE 1, UPE 2, and UPE 3 (each of which is a UPE of an MNE Group “in scope” of the GloBE rules).

XCo 1 has only 1 class of issued shares, which are owned in these percentages: UPE 1 (50%), UPE 2 (25%), and UPE 3 (25%).

All 3 of the UPEs include XCo 1’s financial results in their consolidated financial statements under the equity method.

XCo 1 owns 80% of the shares in YCo, a company located in jurisdiction Y. The other 20% is owned by third parties.

UPE 1 owns 100% of the shares in XCo 2, a Constituent Entity located in jurisdiction X. UPE 1 does not own any other subsidiaries in X, and UPE 2 & 3 own no subsidiaries in X.

In the current Fiscal Year:

(1) XCo 1 has GloBE Income of 100, and Adjusted Covered Taxes of 10.
(2) XCo 2 has GloBE Income of 100, and Adjusted Covered Taxes of 25.
(3) YCo has GloBE Income of 100, and Adjusted Covered Taxes of 5.

Based on this information, what will be the impact, under the GloBE rules, on UPE 1, UPE 2, and UPE 3? Please ignore any Additional Current Top-up Tax, Substance-based Income Exclusion, and/or Qualified Domestic Minimum Top-up Tax.

Answer:

XCo 1 and YCo are not Constituent Entities in the respective MNE Group of UPE 1, UPE 2 or UPE 3, because none of those UPEs consolidate XCo 1 and YCo on a line-by-line basis: see Arts. 1.2 & 1.3. Thus, except for the “JV” liability discussed below, there is no impact, under the GloBE rules, for any of the 3 UPEs.

XCo 1 is a “Joint Venture” (defined in Art. 10.1.1) in regard to UPE 1, which reports XCo 1’s financial results in its consolidated financial statements under the equity method, and which holds at least 50% of XCo 1’s “Ownership Interests” (defined in Art. 10.1.1). I have assumed that XCo 1 is not a UPE of an “in scope” MNE Group, and is not otherwise excluded from being a “Joint Venture”: see paras. (a) & (b) of the Art. 10.1.1 definition of “Joint Venture”.

XCo 1 is not a “Joint Venture” in regard to either UPE 2 or UPE 3, because neither holds at least 50% of XCo 1’s Ownership Interests.

YCo is a “JV Subsidiary” (defined in Art. 10.1.1). XCo 1 and YCo together form a “JV Group” (Art. 10.1.1 definition).

In accordance with Art. 6.4.1(a), the Top-up Tax of XCo 1 and YCo will be computed as if they were Constituent Entities of a separate MNE Group and as if XCo 1 was the UPE of that Group. Importantly, this means that, in computing the jurisdictional Top-up Tax for jurisdiction X, XCo 1’s numbers are not blended with XCo 2’s numbers.

Thus: (i) XCo 1’s Top-up Tax is: 5% x 100 = 5; and (ii) YCo’s Top-up Tax is: 10% x 100 = 10.

UPE 1’s “Allocable Share of the Top-up Tax” (defined in Art. 2.2.1) is: (i) in regard to XCo 1: 50% x 5 = 2.5; and (ii) in regard to YCo: 50% x 80% x 10 = 4.

Those 2 amounts (2.5 and 4) will be included in UPE 1’s IIR tax: Art. 6.4.1(b).

XCo 2’s numbers will not cause a Top-up Tax liability for UPE 1’s MNE Group.

As noted above, there will be no impact, under the GloBE rules, on either UPE 2 or UPE 3.

Do you agree?

XCo is a Constituent Entity located in jurisdiction X, which imposes a corporate income tax with a 20% rate.

100% of the shares in XCo are owned by X Holdco, which is also located in jurisdiction X.

XCo is a limited liability company (LLC) formed under jurisdiction X corporate law.

XCo changes its legal form to a corporation, also under jurisdiction X corporate law.

LLCs and corporations are both taxable entities for the purposes of the jurisdiction X corporate income tax, and they are both subject to the 20% rate.

Under the jurisdiction X corporate law, the change in legal form: (1) automatically causes all of the assets and liabilities of XCo (LLC) to be the assets and liabilities of XCo (corporation), for no consideration; (2) the issued shares of XCo (LLC) are automatically treated as the issued shares of XCo (corporation); and (3) XCo (LLC) and XCo (corporation) are deemed to be the same legal entity.

The change in legal form does not trigger the recognition of a gain or loss, or any adjustment to the carrying value of assets and liabilities, in XCo’s financial statements.

Under the jurisdiction X tax law, the excess of (1) the fair value of XCo’s assets and liabilities, over (2) the tax basis of the assets and the amount of the liabilities, at the time of the change in legal form, is treated as a taxable gain for XCo. That gain is subject to a special tax rate of 10%. Also, under the jurisdiction X tax law, after the change in legal form, the tax basis of the assets and the amount of the liabilities, are treated as equal to that fair value.

What will be impact, under the GloBE rules, of XCo’s change in legal form?

Answer:

1. GloBE Reorganisation:

A threshold issue is whether the change in legal form is a “GloBE Reorganisation”, as defined in Art. 10.1.1. If it is not a “GloBE Reorganisation”, then Arts. 6.3.2 & 6.3.3 can be ignored.

The opening words and para. (a) in the definition should be satisfied: the change in legal form is a “transformation”, and no consideration is provided.

In applying para. (b) to a transformation, the “disposing Constituent Entity” presumably means XCo (LLC). Para. (b) seems to assume that the disposing Constituent Entity has a “gain or loss”. However, it’s not clear what the “gain or loss” in para. (b) is referring to, in the context of a transformation (where no consideration is provided). As noted in the question, XCo does not record a gain or loss in its financial statements. Moreover, if XCo does have a “gain”, the whole of that gain is subject to tax, albeit at a reduced tax rate (10%). For these reasons, para. (b) is probably not satisfied.

Para. (c) is also probably not satisfied. Although XCo derives a taxable gain on the transformation, that taxable gain is not a “Non-qualifying Gain or Loss”, as defined in Art. 10.1.1 – because XCo’s financial accounting gain or loss arising on the transformation is nil.

Thus, IMHO: the change in legal form is not a “GloBE Reorganisation”.

2. XCo: continuity of identity for GloBE rules

The jurisdiction X corporate law deems XCo (LLC) and XCo (corporation) as the same legal entity.

The GloBE rules, as implemented in the various jurisdictions where XCo’s MNE Group has Constituent Entities, should accept that jurisdiction X corporate law treatment.

3. Adjusted Covered Taxes:

XCo’s Adjusted Covered Taxes will increase (ceteris paribus) in the Fiscal Year it changes legal form (due to the taxable gain); and will reduce (ceteris paribus) in subsequent Fiscal Years, due to tax depreciation on a higher tax basis.

4. GloBE Income:

The impact on GloBE Income will depend on whether an election is made under Art. 6.3.4:

1. If election is not made, then the transformation will have no impact on XCo’s GloBE Income. Thus, XCo’s ETR will be higher (ceteris paribus) in the Fiscal Year it changes legal form, and will be lower (ceteris paribus) in subsequent Fiscal Years.
2. If election is made: (a) a gain is recognised in the Fiscal Year it changes legal form (equal to the difference between fair value and carrying value immediately before the change in legal form); and (b) higher amounts of depreciation will be recognised in subsequent Fiscal Years, due to using fair value as the new base for depreciation. In regard to (a), the MNE Group can choose to spread the gain over 5 Fiscal Years.

Do you agree?

ACo 1 is located in jurisdiction A, and is a Constituent Entity in MNE Group # 1. ACo 1 owns several businesses.

ACo 2 is also located in jurisdiction A, and is a Constituent Entity in MNE Group # 2.

ACo 1 sells the assets and liabilities in one of its businesses to ACo 2, for consideration in 2 parts: (1) shares issued by ACo 2 (70% of the value of the total consideration); and (2) cash (30% of the value of the total consideration). The issue of shares by ACo 2 does not cause it to leave MNE Group # 2 or to join MNE Group # 1.

In ACo 1’s financial statements, it reports a profit on the sale, and it records the ACo 2 shares according to their value.

In ACo 2’s financial statements, it records the assets and liabilities according to the value of the consideration it provided to ACo 1.

However, under the jurisdiction A tax law: (i) ACo 1 does not recognize any gain or loss on the sale; (ii) ACo 1’s basis in the ACo 2 shares is equal to its basis in the transferred assets (minus the amount of transferred liabilities); and (iii) ACo 2 inherits ACo 1’s basis in the transferred assets.

How will this transaction be treated under the GloBE rules, for each of ACo 1 and ACo 2?

Answer:

The key question is whether the transaction constitutes a “GloBE Reorganisation”, as defined in Art. 10.1.1.

There are 2 issues:

(1) First issue

Is the transaction “a transformation or transfer of assets and liabilities such as in a merger, demerger, liquidation, or similar transaction” (the opening words in the “GloBE Reorganisation” definition)?

It is not a “transformation”, which (according to the Commentary) refers to a change in the form of an Entity.

It is a “transfer of assets and liabilities” – but what about “such as in a merger, demerger, liquidation, or similar transaction”?

As ACo 2 does not change its MNE Group from #2 to #1 (i.e., control does not change), I think the transaction is not a “merger”. And it’s obviously not a “liquidation”.

The transaction is possibly a “demerger” of the transferred assets or liabilities, or a “similar transaction” to such a demerger. Nevertheless, there is a risk that the opening words are not satisfied.

(2) Second issue

Is “the consideration for the transfer …, in whole or in significant part, equity interests issued by [ACo 2]” (para. (a) in definition of “GloBE Reorganisation”)?

Does 70% of the value of the total consideration satisfy the “significant part” condition? The Commentary provides no guidance on the meaning of “significant part”.

My personal view is that 70% should satisfy that condition.

(3) Conclusion on “GloBE Reorganisation”

The definition will be satisfied, if the transaction is a “demerger, … or similar transaction”.

If the transaction is a “GloBE Reorganisation”: (i) ACo 1 will exclude the gain from its GloBE Income or Loss; and (ii) ACo 2 will use ACo 1’s carrying value of the transferred assets and liabilities in computing its future GloBE Income or Loss (Art. 6.3.2).

If the transaction is not a “GloBE Reorganisation”: (i) ACo 1 will include the gain (generally as reported in its financial statements) in its GloBE Income or Loss; and (ii) ACo 2 will use the value determined under the relevant accounting standard, as the carrying value of the transferred assets and liabilities in computing its future GloBE Income or Loss (Art. 6.3.1).

In both situations: ACo 1 will use the value in its financial statements, as the carrying value of the shares in ACo 2 in computing its future GloBE Income or Loss.

Do you agree?

XCo (located in jurisdiction X) is a Constituent Entity in an MNE Group, which is “within scope” of the GloBE rules. The MNE Group uses the calendar year as its fiscal year.

XCo owns 100% of the shares in YCo, which is located in jurisdiction Y.

On 30 June in year 1, XCo sells 100% of the shares in YCo to ZCo, which is an unrelated company located in jurisdiction Z. ZCo is a member of a group which is not an MNE Group “in scope” of the GloBE rules.

The consideration for the sale is in 2 parts: (1) the issue of new shares by ZCo to XCo (this represents 90% of the value of the total consideration), and (2) cash (this represents 10% of the value of the total consideration). The issue of shares does not cause ZCo to become a member of XCo’s MNE Group – i.e., the MNE Group does not control ZCo.

In XCo’s financial statements, it reports a gain of 100 on the sale of the shares in YCo. The gain is computed as: value of consideration (300) minus carrying value of shares in YCo (200) = 100. XCo’s carrying value of the shares is equal to its tax basis in the shares, for X tax law purposes.

Under the jurisdiction X tax law, XCo recognizes a gain of 10, which represents the gain referable to the cash component of the consideration. XCo is liable for jurisdiction X Covered Tax of 2.5 on that gain. The remainder of the gain is exempt.

Under the jurisdiction Y tax law, the sale of the 100% shares in YCo is treated as a sale, and re-acquisition, of YCo’s assets and liabilities. The deemed sale price and the deemed re-acquisition price of the assets are both equal to the value of the consideration paid to XCo (i.e., 300), plus the value of the liabilities deemed to be transferred and re-acquired (200) – i.e., total consideration of 500. At the date of the transaction, YCo has assets with a carrying value (and tax basis) of 250. The jurisdiction Y corporate income tax rate of 20% applies to any gain deemed to be derived by YCo.

The jurisdiction Y tax law does not impose any tax on XCo in regard to the sale.

Based on these facts, what are the consequences, under the GloBE rules, for XCo’s MNE Group? Please assume that XCo’s MNE Group does not make an election under Art. 6.3.4 in regard to YCo.

Answer:

1. XCo:

XCo’s gain of 100 is excluded from its GloBE Income: Art. 3.2.1(c) (Excluded Equity Gain or Loss), regardless of the cash element of the consideration.

XCo’s jurisdiction X tax of 2.5 is excluded from its Adjusted Covered Taxes: Art. 4.1.3(a) (current tax) & Art. 4.4.1(a) (deferred tax).

2. YCo:

A threshold issue is whether Art. 6.2.2 applies to the transfer of shares in YCo. In particular, who is “the seller” referred to the provision – XCo or YCo? Strangely, para. 64 in the Commentary suggests that “the seller” (i.e., the entity on which the jurisdiction Y Covered Tax is imposed) is YCo; but para. 68 in the Commentary suggests that “the seller” is XCo.

If “the seller” is XCo:

1. Art. 6.2.2 will not apply, as jurisdiction Y does not impose a Covered Tax on XCo.
2. There will be no further impact on XCo’s GloBE rules position.
3. For jurisdiction Y tax purposes, YCo incurs a tax liability of 50 on its deemed gain of 250. That 50 will likely qualify as Adjusted Covered Taxes. As there should be no impact in YCo’s financial statements (which are used for the group consolidation), there should be no impact on YCo’s GloBE Income. Thus, YCo’s ETR in year 1 will be increased.

If “the seller” is YCo:

1. Art. 6.2.2 will potentially apply, as the jurisdiction Y Covered Tax is imposed on YCo.
2. But there is another issue with Art. 6.2.2: is it correct that the Covered Tax of 50 which is imposed on YCo is “based on the difference between the tax basis and the consideration paid in exchange for the Controlling Interest or the fair value of the assets and liabilities”? The consideration paid in exchange for the Controlling Interest is 300, reflecting the value of the assets minus the liabilities. In contrast, the Covered Tax imposed on YCo uses total consideration equal to (i) the value of consideration paid to XCo (300), plus (ii) the value of liabilities deemed to be transferred and re-acquired (200). Possibly, the total consideration of 500 can be accepted as corresponding to “the fair value of the assets and liabilities”.
3. Assuming Art. 6.2.2 applies: for purposes of the GloBE rules, the share transfer will be treated as a disposal and acquisition of YCo’s assets and liabilities.
4. YCo’s GloBE Income: (i) deemed gain of 250 included in GloBE Income (Art. 6.3.1); (ii) carrying value of assets and liabilities based on 500: para. 72 of Commentary.
5. YCo’s Adjusted Covered Taxes: 50 included.

Regardless of whether Art. 6.2.2 applies: The allocation of YCo’s GloBE Income and Covered Taxes for year 1 to XCo’s MNE Group must be determined, as the share transfer will cause YCo to leave the MNE Group during the year. I will leave that issue for another day!

XCo is the UPE of an MNE Group which is “within scope” of the GloBE rules. XCo and all (except one) of the subsidiaries within the group, are located in jurisdiction X. Jurisdiction X has not implemented the GloBE rules.

Z Sub is one of XCo’s subsidiaries, and is located in jurisdiction Z. Z Sub owns IP, which it licenses to third parties in return for royalties. Z Sub has no employees (it receives services from a sister subsidiary located in jurisdiction X), and it owns no assets other than the IP. Z Sub is not an Investment Entity. Jurisdiction Z has implemented the GloBE rules, but it has not implemented a QDMTT.

In year 1, Z Sub derives 100 of royalties, and incurs an IP amortisation expense of 18 and intra-group service fees of 2, resulting in a pre-tax profit of 80. Z Sub qualifies for a tax incentive in jurisdiction Z, which is a corporate income tax rate of 5%. Z Sub is not subject to any royalty withholding tax in other jurisdictions.

Ignoring any permanent or timing differences between financial accounting net income, GloBE Income, and taxable profits in jurisdiction Z, Z Sub has GloBE Income of 80 in year 1, and Adjusted Covered Taxes of 4 in year 1.

On 30 September in year 2, XCo sells 100% of the shares in Z Sub to YCo, which is the UPE of another MNE Group which is “within scope” of the GloBE rules. YCo is located in jurisdiction Y. Although jurisdiction Y has not implemented the GloBE rules, several jurisdictions where the YCo group has subsidiaries have done so. Z Sub is the YCo group’s only subsidiary in jurisdiction Z.

YCo records Z Sub’s IP at fair value in its consolidated financial statements for year 2. That fair value is significantly higher than the carrying value of the IP in Z Sub’s financial statements.

Assume that, in year 2, Z Sub’s financial statements report the same financial information as in year 1 – i.e., royalty income of 100, amortisation expense of 18 and intra-group service fees (paid to YCo subsidiaries after 30 September) of 2, pre-tax profits of 80, no royalty withholding tax, jurisdiction Z corporate income tax rate of 5%. Please ignore any permanent or timing differences between financial accounting net income, GloBE Income, and taxable profits in jurisdiction Z. Also assume that both XCo and YCo use the calendar year as the fiscal year.

Based on this information, will Z Sub have a tax liability under the GloBE rules in year 1 and/or year 2?

Answer:

1. Year 1

Z Sub is the only member of the XCo MNE Group which is located in jurisdiction Z.

Jurisdiction Z’s ETR (Art. 5.1.1): 4 / 80 = 5%.
Substance-based Income Exclusion (Art. 5.3): zero (Z Sub has no Eligible Employees and no Eligible Tangible Assets).
Z Jurisdictional Top-up Tax (assuming no Additional Current Top-up Tax) (Art. 5.2): 80 x 10% = 8.

X has not implemented the GloBE rules, but Z has done so.

Can Z’s UTPR apply to the Z Jurisdictional Top-up Tax?

Except for one issue, the answer is “yes”. But that issue might prevent the UTPR applying. Art. 2.6.1 allocates the UTPR Top-up Tax Amount to UTPR Jurisdictions, according to a formula which uses “Number of Employees” and “Total value of Tangible Assets”. However, Z has zero for both of these items. Specifically, the formula in Art. 2.6.1, in this case, would be: 50% x 0/0 + 50% x 0/0 – which presumably is equal to zero!

Therefore, Z Sub should not have a UTPR tax liability in year 1.

2. Year 2

2.1 Preliminary point

Z Sub will be a member of both the XCo Group and the YCo Group in Year 2: Art. 6.2.1(a).

2.2 XCo Group

XCo Group’s status as an MNE Group is dependent on the membership of Z Sub, which is the only group member which is not located in jurisdiction X: Art. 1.2.1. As Z Sub will be included in XCo’s consolidated financial statements for Year 2, the XCo Group should retain its status as an MNE Group in Year 2, despite Z Sub’s departure part-way through the year.

It should be unnecessary to compute the Jurisdictional Top-up Tax for Z for Year 2 – because, just as in year 1, the allocation of the UTPR Top-up Tax Amount to Z in year 2 should be zero.

Thus, in regard to the XCo Group, Z Sub should not have a UTPR tax liability in year 2.

2.3 YCo Group

In computing the ETR and Top-up Tax for jurisdiction Z in year 2, YCo Group will take into account only the Financial Accounting Net Income or Loss and Adjusted Covered Taxes of Z Sub that are taken into account in YCo’s consolidated financial statements for year 2: Art. 6.2.1(b).

Accordingly, Z Sub’s GloBE Income should be 20 (i.e., 80 x 3/12) and its Adjusted Covered Taxes should be 1 (i.e., 4 x 3/12). In computing Z Sub’s GloBE Income, Z Sub will retain the historical carrying value of the IP – i.e., there will be no step-up to fair value: Art. 6.2.1(c).

Jurisdiction Z’s ETR should be 1 / 20 = 5%.
Substance-based Income Exclusion (Art. 5.3): zero (Z Sub has no Eligible Employees and no Eligible Tangible Assets; and the YCo Group has no other Constituent Entities in Z).
Z Jurisdictional Top-up Tax (assuming no Additional Current Top-up Tax) (Art. 5.2): 20 x 10% = 2.

That Top-up Tax will be allocated, as a UTPR Top-up Tax Amount, to the various UTPR Jurisdictions in which the YCo Group has members – but not jurisdiction Z. For the same reason as discussed above, the formula in Art. 2.6.1 should allocate zero UTPR Top-up Tax Amount to Z.

Thus, in regard to the YCo Group, Z Sub should not have a UTPR tax liability in year 2.

3. Final answer

Z Sub should not have a UTPR tax liability in either year 1 or year 2.

A Group

ACo is the UPE of an MNE Group (“A Group”), which includes XCo (100% subsidiary of ACo).

ACo is located in jurisdiction A, and XCo is located in jurisdiction X. Jurisdiction X has implemented the GloBE rules, but jurisdiction A has not.

XCo is the parent of a 100% subsidiary, YCo, which is located in jurisdiction Y. YCo is the only member of the A Group which is located in Y. Jurisdiction Y has not implemented the GloBE rules.

A Group uses the calendar year as its fiscal year.

B Group

BCo is the UPE of another MNE Group (“B Group”), which includes YCo 2 (100% subsidiary of BCo).

BCo is located in jurisdiction B, which has implemented the GloBE rules.

YCo 2 is located in jurisdiction Y – it is the only member of the B Group which is located in Y.

B Group uses the calendar year as its fiscal year.

Sale of XCo

On 30 September in Year 1, ACo sells 100% of the shares in XCo to BCo.

In the 12 months ending 31 December in Year 1, YCo’s financial accounting net income is 100 and its Adjusted Covered Taxes are 5. Please assume that there are no differences between the computation of YCo’s financial accounting net income and GloBE Income.

In the 12 months ending 31 December in Year 1, YCo 2’s financial accounting net income is 100 and its Adjusted Covered Taxes are 30. Again, please assume that there are no differences between the computation of YCo 2’s financial accounting net income and GloBE Income.

Question

For Year 1, will there be one or more tax liabilities under the GloBE rules in regard to jurisdiction Y? If yes, which entity or entities will be subject to the liability or liabilities?

Answer:

Preliminary point

XCo and YCo will be members of both the A Group and the B Group in Year 1: Art. 6.2.1(a).

A Group

In computing the ETR and Top-up Tax for jurisdiction Y in Year 1, A Group will take into account only the Financial Accounting Net Income or Loss and Adjusted Covered Taxes of YCo that are taken into account in ACo’s consolidated financial statements for Year 1: Art. 6.2.1(b).

Accordingly, YCo’s GloBE Income should be 75 (i.e., 100 x 9/12) and its Adjusted Covered Taxes should be 3.75 (i.e., 5 x 9/12).

Jurisdiction Y’s ETR should be 3.75 / 75 = 5%.

If we ignore the Substance-based Income Exclusion and Additional Current Top-up Tax, the jurisdictional Top-up Tax for jurisdiction Y should be: 10% x 75 = 7.5.

Jurisdiction A has not implemented the GloBE rules. Thus, the IIR will not be imposed on ACo.

Assuming XCo is not an Investment Entity, it will qualify as an Intermediate Parent Entity in regard to YCo: Art. 10.1.1 definition. In accordance with Art. 6.2.1(h) and Art. 2.1.2, an IIR of 7.5 will be imposed on XCo.

B Group

In computing the ETR and Top-up Tax for jurisdiction Y in Year 1, B Group will take into account only the Financial Accounting Net Income or Loss and Adjusted Covered Taxes of YCo that are taken into account in BCo’s consolidated financial statements for Year 1: Art. 6.2.1(b).

Accordingly, YCo’s GloBE Income should be 25 (i.e., 100 x 3/12) and its Adjusted Covered Taxes should be 1.25 (i.e., 5 x 3/12).

Jurisdiction Y’s Net GloBE Income, aggregate Adjusted Covered Taxes, ETR and Top-up Tax will need to take into account both YCo and YCo 2.

Net GloBE Income: 25 + 100 = 125

Adjusted Covered Taxes: 1.25 + 30 = 31.25

ETR: 31.25 / 125 = 25%

Thus, if we ignore Additional Current Top-up Tax, jurisdiction Y will have no Top-up Tax in Year 1.

Final answer

A Group: IIR of 7.5 imposed on XCo.

B Group: no IIR.

2 points to note: (i) For B Group, YCo 2’s high ETR shelters YCo’s low-taxed profits; and (2) B Group should do its tax due diligence carefully: XCo (which it purchases) has an IIR liability in regard to A Group.

Do you agree?

X Group sells 100% of the shares in ZCo (a Constituent Entity located in jurisdiction Z) to Y Group. ZCo is not an Investment Entity.

Both groups are MNE Groups “within scope” of the GloBE rules, and both use the calendar year as the fiscal year.

The sale is effective on 31 May of Year 2.

In its consolidated financial statements for Year 2, X Group reports these 2 items in regard to ZCo: (1) 200 of payroll costs incurred in the 5 months to 31 May; and (2) 50 of depreciation incurred in the 5 months to 31 May. The depreciation relates to a tangible asset (“asset A”) which has a carrying value (net of accumulated depreciation) at the start of Year 2 of 240.

In its consolidated financial statements for Year 2, Y Group reports these items in regard to ZCo: (1) 300 of payroll costs incurred in the 7 months to 31 December; and (2) carrying value of asset A (net of accumulated depreciation for Y Group’s 7 months of ownership of ZCo) of 350 – this reflects the fair value of asset A, net of Y Group’s 7 months’ depreciation.

Please assume that: (i) ZCo is the only Constituent Entity in jurisdiction Z for both groups; (ii) the jurisdiction Z corporate income tax law does not treat the transfer of shares in ZCo as a transfer of ZCo’s assets and liabilities; (iii) the payroll costs satisfy the conditions for the payroll carve-out in Art. 5.3.3; and (iv) asset A is an Eligible Tangible Asset and it satisfies the conditions for the tangible asset carve-out in Art. 5.3.4.

For each of X Group and Y Group, what will be the amount of Substance-based Income Exclusion for Year 2 for jurisdiction Z?

Answer:

1. X Group:
1.1 Payroll carve-out (Art. 5.3.3 & Art. 6.2.1(d)):
5% x 200 = 10

1.2 Tangible asset carve-out (Art. 5.3.4 & Art. 6.2.1(e)):
Carrying value at start of Year 2 (net of accumulated depreciation): 240
Carrying value at end of Year 2 (for X Group) (net of accumulated depreciation): 240 – 50 =190 (see Example 6.2.1-1 in IF’s Examples document)
Thus, carrying value for Year 2 = (240 + 190) / 2 = 215 (Art. 5.3.5)
Adjusted carrying value under Art. 6.2.1(e): 215 x 5/12 = 89.5833
Tangible asset carve-out: 5% x 89.5833 = 4.4792

1.3 Substance-based Income Exclusion for jurisdiction Z:
10 + 4.4792 = 14.4792

2. Y Group:
2.1 Payroll carve-out (Art. 5.3.3 & Art. 6.2.1(d)):
5% x 300 = 15

2.2 Tangible asset carve-out (Art. 5.3.4 & Art. 6.2.1(e)):
Carrying value at start of Year 2 (for Y Group) (net of accumulated depreciation): 0
Carrying value at end of Year 2 (net of accumulated depreciation): 350 (step-up to fair value – see Commentary on Art. 6.2.1(e) and Example 6.2.1-1 in IF’s Examples document)
Thus, carrying value for Year 2 = (0 + 350) / 2 = 175 (Art. 5.3.5)
Adjusted carrying value under Art. 6.2.1(e): 175 x 7/12 = 102.0833
Tangible asset carve-out: 5% x 102.0833 = 5.1042

2.3 Substance-based Income Exclusion for jurisdiction Z:
15 + 5.1042 = 20.1042

Do you agree?

ACo Group (with ACo as its parent company) and BCo Group (with BCo as its parent company) are not under common control. Neither Group has ever been “within scope” of the GloBE rules.

The 2 Groups report these consolidated revenues in Years 1 to 4 (all in EUR millions):

• Year 1:
  • ACo Group: 450 (including revenue of 150 from sales to BCo Group)
  • BCo Group: 350
• Year 2:
  • ACo Group: 300
  • BCo Group: 400
• Year 3:
  • ACo Group: 300
  • BCo Group: 420
• Year 4:
  • ACo Group: 360
  • BCo Group: 500

At the start of Year 5, ACo acquires all of the shares in BCo, for cash consideration.

In Year 5, the ACo Group reports consolidated revenue of EUR 900 million.

At the start of Year 6, ACo distributes all of the shares in BCo, to ACo’s shareholders.

In Year 6:

• ACo Group reports consolidated revenue of EUR 200 million
• BCo Group reports consolidated revenue of EUR 760 million

Based on these facts, is the ACo Group and/or the BCo Group “within scope” of the GloBE rules in Years 1 to 6?

Answer :

(1) Years 1 to 4:

Neither ACo Group nor BCo Group is “within scope” of the GloBE rules because neither group satisfies the consolidated revenue threshold test in those years: Art. 1.1.1.

(2) Year 5:

ACo’s acquisition of all of the shares in BCo qualifies as a “merger”, as defined in Art. 6.1.2(b), despite the fact that the acquisition was for cash consideration: see Commentary.

Thus, Art. 6.1.1(b) will apply to amend the consolidated revenue threshold test in Art. 1.1, for Years 1 to 4. Under that amended test, the separate consolidated revenues of the ACo Group and the BCo Group for Years 1 to 4 are aggregated (“the sum”). Importantly, the ACo Group revenue of 150 from sales to the BCo Group in Year 1 is not ignored. Thus, the aggregate revenues are: Year 1: 800; Year 2: 700; Year 3: 720; and Year 4: 860.

Accordingly, the ACo Group will satisfy the “at least 2 years out of the previous 4 years” amended consolidated revenue threshold test (in Years 1 and 4), and therefore the ACo Group will be “within scope” of the GloBE rules in Year 5.

(3) Year 6:

ACo’s distribution of all of the shares in BCo, to ACo’s shareholders, qualifies as a “demerger”, as defined in Art. 6.1.3.

A pre-condition to apply Art. 6.1.1(c) is that there is a single MNE Group which is “within scope” of the GloBE rules. According to the Commentary, the single MNE Group must be “within the scope of the GloBE Rules in the Fiscal Year that the demerger takes place”. That means Year 6. Under the amended consolidated revenue threshold test (see above), the ACo Group would satisfy the “at least 2 years out of the previous 4 years” standard, in Years 4 & 5.

Subpara. (i) of Art. 6.1.1(c) will apply a consolidated revenue threshold test to each of the 2 demerged Groups (ACo Group and BCo Group), by considering only the consolidated revenue of that demerged Group in Year 6. BCo Group will satisfy this test (i.e., 760). However, the ACo Group will not satisfy the test (i.e., 200).

Thus, in Year 6, the BCo Group will be “within scope” of the GloBE rules, but the ACo Group will not.

You will notice that Art. 6.1.1(c) treats the ACo Group in Year 6 differently (a) before the demerger (when the ACo Group is required to be “within scope”, as a pre-condition for Art. 6.1.1(c) to apply); and (b) after the demerger (when the demerged ACo Group has been found to be not “within scope”).

(4) Final answer:

Years 1 to 4: neither Group is “within scope”
Year 5: ACo Group is “within scope”
Year 6: BCo Group is “within scope”

Do you agree?

ACo is the only Constituent Entity (within an in-scope MNE Group) which is located in jurisdiction A. The Fiscal Year for the MNE Group is the calendar year. The MNE Group has Constituent Entities which are located in 10 jurisdictions.

Jurisdiction A imposes a corporate income tax with a 10% rate.

In 2023:

• ACo incurs a tax loss (for jurisdiction A corporate income tax purposes) of 100, which it can carry forward indefinitely
• If the GloBE rules were applicable to ACo in 2023, ACo would have incurred a GloBE Loss of 70 in 2023. The difference between the tax loss (100) and the notional GloBE Loss (70) is due to a “double deduction” for certain expenditure, which is allowed under the jurisdiction A corporate income tax law
• The GloBE rules are not effective, in 2023, in any jurisdiction where the MNE Group operates

In 2024:

• ACo derives taxable income (for jurisdiction A corporate income tax purposes) of 100, before deducting (in full) the carry-forward tax loss
• If the GloBE rules were applicable to ACo in 2024, ACo would have derived GloBE Income of 100 in 2024
• The GloBE rules are effective in jurisdiction B, from the start of 2024. The MNE Group includes BCo, a Constituent Entity which is located in jurisdiction B (BCo does not own, directly or indirectly, any shares in ACo)
• The GloBE rules are not effective, in 2024, in any other jurisdiction where the MNE Group operates

In 2025:

• ACo derives taxable income (for jurisdiction A corporate income tax purposes) of 100
• If the GloBE rules were applicable to ACo in 2025, ACo would have derived GloBE Income of 100 in 2025
• The GloBE rules are effective in jurisdiction U (where the UPE is located), from the start of 2025
• The GloBE rules are not effective, in 2025, in any jurisdiction where the MNE Group operates, other than jurisdictions B and U

Based on these facts, and ignoring the Substance-based Income Exclusion and Qualified Domestic Minimum Top-up Tax, does ACo have Top-up Tax in 2023, 2024 or 2025?

Answer:

(1) Introduction:

The GloBE rules are first effective, in any jurisdiction where the MNE Group operates, in 2024 – i.e., in jurisdiction B.

Therefore, 2024 is the “Transition Year” (defined in Art. 10.1.1) for the MNE Group, in regard to all jurisdictions (including jurisdiction A) where the MNE Group operates in 2024.

Thus, ACo’s deferred tax balances at the beginning of 2024 must be determined: Art. 9.1.1.

(2) 2023:

No Top-up Tax in 2023.

(3) 2024:

The first step is to determine the opening balance in the deferred tax asset for the 2023 tax loss. Prima facie, the deferred tax asset = 100 x 15% = 15 (with 15% recast: Art. 9.1.1). However, under Art. 9.1.2, 30 of the tax loss (i.e., the amount which is referable to the “double deduction” for certain expenditure), is excluded. Thus, the opening deferred tax asset is: 70 x 15% = 10.5

Next, the Adjusted Covered Taxes, ETR and Top-up Tax are calculated:

• Adjusted Covered Taxes: 0 (current tax expense) + 10.5 (Total Deferred Tax Adjustment Amount – i.e., reversal of deferred tax asset) = 10.5
• GloBE Income: 100
• ETR: 10.5 / 100 = 10.5%
• Top-up Tax: 4.5% x 100 = 4.5 – which would be imposed in jurisdiction B as UTPR.

(4) 2025:

• Adjusted Covered Taxes: 10 (current tax expense) + 0 (Total Deferred Tax Adjustment Amount) = 10
• GloBE Income: 100
• ETR: 10 / 100 = 10%
• Top-up Tax: 5% x 100 = 5 – which would be imposed in jurisdiction U as IIR (nil would be imposed in jurisdiction B as UTPR: Art. 2.5.2).

Do you agree?

XCo is a Constituent Entity in an MNE Group, which is “within scope” of the GloBE rules.

XCo is located in jurisdiction X, which levies a corporate income tax. XCo is the only Constituent Entity located in jurisdiction X.

In Year 1:

1. XCo purchases (at the start of Year 1) a fixed asset for 150, which it depreciates for financial accounting purposes at 10% per annum, and which it depreciates for X corporate income tax purposes at 20% per annum
2. XCo has GloBE Income of 100, after expensing 15 of depreciation for the fixed asset
3. XCo has taxable income (for the purposes of X corporate income tax) of 50, after deducting 30 of depreciation for the fixed asset
4. XCo has no other temporary differences between its financial accounting pretax profit and taxable income
5. The X corporate income tax rate is 25%

In Year 2:

1. XCo has GloBE Income of 220, after expensing 15 of depreciation for the fixed asset
2. XCo has taxable income of 80, after deducting 30 of depreciation for the fixed asset
3. XCo has no other temporary differences between its financial accounting pretax profit and taxable income
4. Jurisdiction X increases its corporate income tax rate to 30% (effective in Year 2)

Based on these facts, what amounts of Top-up Tax (if any) does XCo have in each of Years 1 and 2?

Please assume that jurisdiction X has no Substance-based Income Exclusion and no Qualified Domestic Minimum Top-up Tax.

Answer:

Year 1:

1. Current tax expense: 50 x 25% = 12.5
2. Total Deferred Tax Adjustment Amount: 15 x 15% = 2.25 (i.e., recast at 15%, no adjustments or exclusions are relevant) (Art. 4.4.1)
3. Adjusted Covered Taxes: 12.5 + 2.25 = 14.75 (Art. 4.1.1)
4. ETR: 14.75 / 100 = 14.75% (Art. 5.1.1)
5. Top-up Tax: 0.25% x 100 = 0.25 (Art. 5.2.3)

Year 2:

1. Current tax expense: 80 x 30% = 24
2. Total Deferred Tax Adjustment Amount: 15 x 15% = 2.25 (again, recast at 15%, no adjustments or exclusions are relevant) (Art. 4.4.1)
3. Adjusted Covered Taxes: 24 + 2.25 = 26.25 (Art. 4.1.1)
4. ETR: 26.25 / 220 = 11.9318% (Art. 5.1.1)
5. Top-up Tax: 3.0682% x 220 = 6.75 (Art. 5.2.3)

Final answer:

Top-up tax: 0.25 (Year 1) and 6.75 (Year 2), despite fact that jurisdiction X’s corporate income tax rate is 25% in Year 1 and 30% in Year 2 – the power of permanent differences!

XCo is the only Constituent Entity (within an “in-scope” MNE Group), which is located in jurisdiction X.

Jurisdiction X’s corporate income tax has a 10% rate and allows the carry back of tax losses.

In Year 1, XCo derives:

• GloBE Income: 100
• Taxable profits: 100

In Year 2, XCo incurs:

• GloBE Loss: 80
• Tax loss: 100

XCo carries back all of the Year 2 tax loss to apply against the Year 1 taxable profits.

What amounts of Top-up Tax (if any) will arise for XCo in Year 1 and Year 2?

Answer:

(1) Year 1 (before tax loss carried back):

GloBE Income: 100
Taxable profits: 100

Current tax expense: 10
Total Deferred Tax Adjustment Amount: nil
Adjusted Covered Taxes: 10

ETR: 10 / 100 = 10%

Top-up Tax: 5

(2) Year 2 (before tax loss carried back):

GloBE Loss: 80
Tax loss: 100

Current tax: nil
Total Deferred Tax Adjustment Amount: (80 x 15%) + (20 x 10%) = (14) (i.e., deferred tax asset for tax loss at 10% rate, increased to 15% rate to the extent of GloBE Loss of 80: Art. 4.4.2(c), Art. 4.4.3)
Adjusted Covered Taxes: (14)

As no GloBE Income, there is no ETR (Art. 5.1.1), and thus no Top-up Tax Percentage (Art. 5.2.1)

Expected Adjusted Covered Taxes (defined in Art. 4.1.5): 80 x 15% = (12)
Thus, Additional Current Top-up Tax: (12) – (14) = 2 (Art. 4.1.5)

Thus, Top-up Tax: 2

(3) Year 1 (after tax loss carried back):

GloBE Income: 100
Taxable profits: nil

Current tax expense: nil (or Reduction to Covered Taxes under Art. 4.1.3(c))
Total Deferred Tax Adjustment Amount: 14
(Amended) Adjusted Covered Taxes: 14

As this is an increase of 4 in Adjusted Covered Taxes, Art. 4.6.1 directs that this be treated as an adjustment to Covered Taxes in Year 2.

Accordingly, Top-up Tax of 5 in Year 1 remains.

(4) Year 2 (after tax loss carried back):

In Year 2, 4 is added to Adjusted Covered Taxes, which become (10) (i.e., (14) + 4 = (10))

This will cause the Additional Current Top-up Tax in Year 2 to reduce to nil, because the (amended) Adjusted Covered Taxes are not less than the Expected Adjusted Covered Taxes.

Thus, (amended) Top-up Tax: nil

(5) Final answer:

Year 1: Top-up Tax = 5
Year 2: Top-up Tax = nil

Do you agree?

BCo is the only Constituent Entity (within an “in-scope” MNE Group) which is located in jurisdiction B.

The jurisdiction B corporate income tax has a 15% rate and allows the indefinite carryforward of tax losses.

In Year 1, BCo incurs:

• GloBE Loss of 100,
• Pre-tax accounting loss of 100 in its financial statements, and
• Tax loss of 150

For financial accounting purposes, BCo does not recognise a deferred tax asset.

The difference of 50 between the pre-tax accounting loss and the tax loss is due to a permanent difference: 200% deductions for certain expenses.

In Year 2, BCo derives:

• GloBE Income of 150,
• Pre-tax accounting profit of 150 in its financial statements, and
• Taxable profits of 150 (before deduction of the carried forward tax loss)

Jurisdiction B has no Substance-based Income Exclusion and no Qualified Domestic Minimum Top-up Tax in either Year 1 or Year 2.

What amounts of Top-up Tax (if any) will arise for jurisdiction B in Year 1 and Year 2?

Answer:

Year 1

Current tax expense: nil
Total Deferred Tax Adjustment Amount, after applying Art. 4.4.2(c): (150) x 15% = (22.5)
Adjusted Covered Taxes: (22.5)

No ETR, as no GloBE Income (Art. 5.1)

Expected Adjusted Covered Taxes (defined in Art. 4.1.5): (100) x 15% = (15)
Additional Current Top-up Tax: (15) – (22.5) = 7.5 (Art. 4.1.5)

Thus, Jurisdictional Top-up Tax (Art. 5.2.3): 0 + 7.5 – 0 = 7.5

Year 2

Current tax expense: nil
Total Deferred Tax Adjustment Amount: 22.5
Adjusted Covered Taxes: 22.5

ETR: 22.5 / 150 = 15%
Top-up Tax: nil

Final answer

7.5 (Year 1) + 0 (Year 2)

ACo is the only Constituent Entity (within an “in-scope” MNE Group) which is located in jurisdiction A.

The jurisdiction A corporate income tax has a 5% standard rate and allows the indefinite carryforward of tax losses.

In Year 1, ACo incurs:

• GloBE Loss of 100,
• Pre-tax accounting loss of 100 in its financial statements, and
• Tax loss of 100

For financial accounting purposes, ACo does not recognise a deferred tax asset.

In Year 2, ACo derives:

• GloBE Income of 100,
• Pre-tax accounting profit of 100 in its financial statements, and
• Taxable profits of 100 (before deduction of the carried forward tax loss)

Jurisdiction A has no Substance-based Income Exclusion and no Qualified Domestic Minimum Top-up Tax, in either Year 1 or Year 2.

What amounts of Top-up Tax (if any) will arise for jurisdiction A in Year 1 and Year 2?

Answer:

If the MNE Group does not make a Group Loss Election under Art. 4.5:

Year 1:

Due to the GloBE Loss, jurisdiction A has no ETR (Art. 5.1) and no Top-up Tax computed under Art. 5.2.

ACo’s Adjusted Covered Taxes:

1. Current tax: nil
2. Total Deferred Tax Adjustment Amount (after 15% recast and applying Art. 4.4.2(c)): (15)
3. Total Adjusted Covered Taxes: (15)

Expected Adjusted Covered Taxes Amount (defined in Art. 4.1.5) is (15).

Thus, Art. 4.1.5 does not apply to determine an amount of Addtional Current Top-up Tax.

Therefore, no Top-up Tax in Year 1.

Year 2:

ACo’s Adjusted Covered Taxes:

1. Current tax: nil
2. Total Deferred Tax Adjustment Amount: 15
3. Total Adjusted Covered Taxes: 15

GloBE Income: 100

ETR: 15 / 100 = 15%

Thus, no Top-up Tax in Year 2.

If the MNE Group makes a Group Loss Election under Art. 4.5:

Year 1:

Due to the GloBE Loss, jurisdiction A has no ETR (Art. 5.1) and no Top-up Tax computed under Art. 5.2.

ACo’s Adjusted Covered Taxes:

1. Current tax: nil
2. Total Deferred Tax Adjustment Amount: nil (Art. 4.4 rules do not apply)
3. Total Adjusted Covered Taxes: nil

Expected Adjusted Covered Taxes Amount (defined in Art. 4.1.5) is (15).

Thus, Art. 4.1.5 does not apply to determine an amount of Additional Current Top-up Tax.

Therefore, no Top-up Tax in Year 1.

Also, under Art. 4.5.1, jurisdiction A has a GloBE Loss Deferred Tax Asset = 15.

Year 2:

All 15 of the GloBE Loss Deferred Tax Asset is used in Year 2 (Art. 4.5.3).

That causes ACo to have an addition of 15 to Covered Taxes in Year 2 (Art. 4.1.2(b)).

ACo’s Adjusted Covered Taxes:

1. Current tax: nil
2. Total Deferred Tax Adjustment Amount: nil
3. Addition to Covered Taxes (Art. 4.1.2(b)): 15
4. Total Adjusted Covered Taxes: 15

GloBE Income: 100

ETR: 15 / 100 = 15%

Thus, no Top-up Tax in Year 2.

ACo, a company located in jurisdiction A, is a Constituent Entity in a “within scope” MNE Group.

ACo is a special purpose company which has been formed to undertake a large construction project in jurisdiction A.

The project is expected to produce total pretax accounting profits and taxable income of 10,000 over its 10 years duration (i.e., Years 1 to 10).

For financial accounting purposes, ACo recognizes profit on a “percentage of completion” (POC) basis. Under the POC basis, ACo expects to recognize 1,000 of pretax profit in each of Years 1 to 10.

For jurisdiction A corporate income tax purposes, profit on long-term projects is recognized on a “completed contract” (CC) basis. Under the CC basis, ACo expects to recognize no taxable income in each of Years 1 to 9, but it will recognize 10,000 of taxable income in Year 10.

The jurisdiction A corporate income tax rate is 15%.

In each year, ACo’s GloBE Income is equal to its financial accounting pretax profit.

Q1: What amounts of Top-up Tax (if any) will be triggered in each of Years 1 to 10?

Q2: Would your answer to Q1 be different if the MNE Group made an election under Article 4.4.7 for each of Years 1 to 4?

Answer:

Q1:

Year 1: (a) GloBE Income (GI): 1,000; (b) Current tax (CT): nil; (c) Deferred tax (Total Deferred Tax Adjustment Amount under Art. 4.4.1) (DT): 150; (d) Recaptured deferred tax (Art. 4.4.4) (RDT): (150); (e) Adjusted Covered Tax (ACT): nil; (f) ETR: 0% (g) Top-up Tax (Additional Current Top-up Tax in Year 6): 150.

Year 2: (a) GI: 1,000; (b) CT: nil; (c) DT: 150; (d) RDT: (150); (e) ACT: nil; (f) ETR: 0%; (g) Top-up Tax (Additional Current Top-up Tax in Year 7): 150.

Year 3: (a) GI: 1,000; (b) CT: nil; (c) DT: 150; (d) RDT: (150); (e) ACT: nil; (f) ETR: 0%; (g) Top-up Tax (Additional Current Top-up Tax in Year 8): 150.

Year 4: (a) GI: 1,000; (b) CT: nil; (c) DT: 150; (d) RDT: (150); (e) ACT: nil; (f) ETR: 0%; (g) Top-up Tax (Additional Current Top-up Tax in Year 9): 150.

For each of Years 5 to 9: (a) GI: 1,000; (b) CT: nil; (c) DT: 150; (d) RDT: nil; (e) ACT: 150; (f) ETR: 15%; (g) Top-up Tax: nil.

Year 10: (a) GI: 1,000; (b) CT: 1,500; (c) DT: (1,350); (d) RDT: nil; (e) ACT: 150; (f) ETR: 15%; (g) Top-up Tax: nil.

Thus, total tax paid = (1) Jurisdiction A tax: 1,500 + (2) Top-up Tax: 600 = 2,100

Effective tax rate: 2,100 / 10,000 = 21%

Q2:

Assuming an Art. 4.4.7 election is validly made in respect of each of Years 1 to 4 …

For each of Years 1 to 4: (a) GI: 1,000; (b) CT: nil; (c) DT: nil (see Note 1 below); (d) RDT: nil; (e) ACT: nil; (f) ETR: 0%; (g) Top-up Tax: 150.

For each of Years 5 to 9: (a) GI: 1,000; (b) CT: nil; (c) DT: 150; (d) RDT: nil; (e) ACT: 150; (f) ETR: 15%; (g) Top-up Tax: nil.

Year 10: (a) GI: 1,000; (b) CT: 1,500; (c) DT: (750) (see Note 2 below); (d) RDT: nil; (e) ACT: 750; ETR: 75%; (g) Top-up Tax: nil.

Note 1: By virtue of the Art. 4.4.7 elections (assuming they are valid), the increase in deferred tax liability is excluded from the Total Deferred Tax Adjustment Amount. In regard to validity, note that Art. 4.4.7 refers to “paid”, not “reversed”!

Note 2: In Year 10, there should be 2 movements in the Total Deferred Tax Adjustment Amount: (i) reduction of 1,350 as the deferred tax liability in the financial accounts reverses; and (ii) increase of 600 under Art. 4.4.2(a) (see Note 3 below). These 2 movements result in a net reduction of 750.

Note 3: Art. 4.4.2(a) refers to “paid”, not “reversed”.

Thus, total tax paid = (1) Jurisdiction A tax: 1,500 + (2) Top-up Tax: 600 = 2,100

Effective tax rate: 2,100 / 10,000 = 21%

Do you agree? In particular, do you agree (in Year 2) with the net reduction of 750 in the Total Deferred Tax Adjustment Amount?

XCo is a Constituent Entity in an MNE Group, which is “within scope” of the GloBE rules.

XCo is located in jurisdiction X, which levies a corporate income tax.

In Year 1:

• XCo purchases (at the start of Year 1) a fixed asset for 100, which it depreciates for financial accounting purposes at 50% per annum, and which it claims as a 100% deduction for income tax purposes in Year 1
• XCo has GloBE Income of 500, after expensing 50 of depreciation for the fixed asset
• XCo has taxable income (for the purposes of X corporate income tax) of 470, after deducting 100 for the fixed asset
• XCo has no other temporary differences between its financial accounting pretax profit and taxable income
• The X corporate income tax has a nominal rate of 25%

In Year 2:

• XCo has GloBE Income of 620, after expensing 50 of depreciation for the fixed asset
• XCo has taxable income of 580
• XCo has no other temporary differences between its financial accounting pretax profit and taxable income
• Jurisdiction X increases its corporate income tax nominal rate to 30% (effective in Year 2)

Based on these facts, what are XCo’s Adjusted Covered Taxes and ETR in Years 1 and 2?

Answer:

Year 1:

• Current tax expense: 470 x 25% = 117.5
• Deferred tax expense (financial accounting): 50 x 25% = 12.5
• Total Deferred Tax Adjustment Amount (Art. 4.4.1): 50 x 15% = 7.5 (i.e., recast at 15%, no adjustments and no exclusions are relevant)
• Adjusted Covered Taxes: 117.5 + 7.5 = 125
• ETR: 125 / 500 = 25%

Year 2:

• Current tax expense: 580 x 30% = 174
• Total Deferred Tax Adjustment Amount (Art. 4.4.1): (7.5) (i.e., change in X tax rate is ignored: Art. 4.4.1(d))
• Adjusted Covered Taxes: 174 + (7.5) = 166.5
• ETR: 166.5 / 620 = 26.85%

Do you agree?

The UPE of an MNE Group is a sovereign wealth fund which is 100% owned by the government of jurisdiction U. The UPE’s principal purpose is to invest the government’s assets through the making and holding of share investments. The UPE does not carry on a trade or business.

The MNE Group is within scope of the GloBE rules.

The UPE owns 70% of the shares in UCo, a company located in jurisdiction U. The other 30% is owned by third parties. UCo carries on a manufacturing business.

The UPE also owns 90% of the shares in ACo 1, a company located in jurisdiction A. The other 10% is owned by third parties.

ACo 1’s only assets are shares in other companies. The shares are held by ACo 1 as long-term investments. None of those other companies is an Investment Entity (defined in Art. 10.1.1).

ACo 1 owns 100% of the shares in ACo 2, a company which is also located in jurisdiction A. ACo 2 carries on a manufacturing business.

ACo 1 also owns 90% of the shares in BCo 1, a company located in jurisdiction B. The other 10% is owned by third parties. BCo 1’s only assets are shares in other companies. The shares are held by BCo 1 as long-term investments. None of those other companies is an Investment Entity (defined in Art. 10.1.1).

BCo 1 owns 100% of the shares in BCo 2, a company which is also located in jurisdiction B. BCo 2 carries on a goods trading business.

All shares in all companies are common shares, with equal right to profit distributions and capital.

All of the above-mentioned jurisdictions have implemented the GloBE rules.

In the current Fiscal Year, there are amounts of Jurisdictional Top-up Tax in both jurisdiction A and jurisdiction U.

Which company or companies (if any) within the MNE Group will be subject to IIR tax or UTPR tax?

Answer:

UPE should satisfy the definition of “Governmental Entity” (Art. 10.1.1), and it should therefore be an “Excluded Entity” (Art. 1.5.1). UPE should therefore be exempt from the GloBE rules (Art. 1.1.3).

ACo 1 should satisfy the definition of “Excluded Entity” in Art. 1.5.2(b): substantially all of its income should be Excluded Dividends or Excluded Equity Gain or Loss. ACo 1 should therefore be exempt from the GloBE rules (Art. 1.1.3).

BCo 1 does not satisfy the definition of “Excluded Entity” in Art. 1.5.2(b), despite the fact that its only assets are shares in other companies, and those shares are held as long-term investments. BCo 1 does not satisfy the “at least 85%” test: UPE’s proportionate interest in BCo 1 is 81%. Note that the “at least 85%” test measures the UPE’s interest, not ACo 1’s interest, in BCo 1. BCo 1 is therefore not exempt from the GloBE rules.

ACo 2, BCo 2 and UCo are also not exempt from the GloBE rules.

In regard to the total Top-up Tax from jurisdictions A and U: (1) no IIR tax will apply; (2) UTPR tax will be allocated to jurisdictions A, B, and U (the allocation will be in accordance with the formula in Art. 2.6.1).

The UTPR tax (i) which is allocated to A will be imposed on ACo 2 (as ACo 1 is exempt from the GloBE rules); (ii) which is allocated to B will be imposed on BCo 1 and/or BCo 2, in accordance with the jurisdiction B law; and (iii) which is allocated to U will be imposed on UCo (as UPE is exempt from the GloBE rules).

Do you agree?

A Real Estate Investment Trust (REIT), located in jurisdiction X, is the UPE of an MNE Group which is “within scope” of the GloBE rules. The REIT is in the form of a unit trust.

The REIT is widely-held by unconnected investors (unitholders). One of those investors is a pension fund, which is also located in jurisdiction X. Most of the REIT’s assets are in the form of shares in land-rich companies (i.e., companies whose assets predominantly consist of immovable property) – these companies are located in X and other jurisdictions.

Under the X income tax law:

• The REIT is exempt from taxation on all of its taxable profits, provided it distributes to its unitholders, within 12 months of its year-end, 100% of its taxable profits.
• The unitholders are generally subject to tax on distributions from the REIT, regardless of whether they are resident in X or not.
• However, the pension fund is tax-exempt on all income – this includes the distributions from the REIT.

The GloBE rules have been implemented in jurisdiction X.

If one or more of the Constituent Entities within the REIT’s MNE Group have a Top-up Tax, will the REIT be subject to an IIR tax?

Answer:

If the REIT qualifies as an “Excluded Entity”, then it will be exempt from IIR tax: Art. 1.1.3.

The REIT might qualify as an “Excluded Entity” under either para. (e) or para. (f) of Art. 1.5.1.

I will consider para. (f) first.

Para. (f) applies to a Real Estate Investment Vehicle that is a UPE.

The definition of “Real Estate Investment Vehicle” in Art. 10.1.1 contains 3 conditions, all of which must be satisfied: (1) “the taxation of [the Entity] achieves a single level of taxation either in its hands or in the hands of its interest holders (with at most one year of deferral)”; (2) “[the Entity] holds predominantly immovable property”; and (3) “[the Entity] is itself widely held”.

Based on the facts, condition (3) is satisfied.

Condition (1): The fact that a tax-exempt pension fund is a unitholder in the REIT would appear to cause condition (1) to be failed, even if the REIT distributes all of its taxable profits within 12 months of its year-end. However, the Commentary states that that would not be the case, if the pension fund satisfies the definition of “Pension Fund” in Art. 10.1.1.

Condition (2): The Commentary states that the holding of securities the value of which is linked to immovable property, qualifies as the holding of immovable property for the purposes of condition (2). Thus, condition (2) should be satisfied in this situation.

Therefore, the REIT should satisfy the definition of “Real Estate Investment Vehicle” (if it distributes 100% of its taxable profits within 12 months of its year-end), and accordingly (in that situation) it should be an “Excluded Entity” under para. (f) of Art. 1.5.1, and thus be exempt from IIR tax.

Alternatively, if the REIT does not satisfy the definition of “Real Estate Investment Vehicle”, it might qualify as an “Excluded Entity” under para. (e) of Art. 1.5.1. Para. (e) refers to an Investment Fund that is a UPE. The term, “Investment Fund”, is defined in Art. 10.1.1. An investment fund which is focused on the real estate sector can satisfy that definition. However, based on the facts in the question, it is not possible to conclude whether the particular REIT in the question satisfies the definition.

Do you agree?

ACo, a company located in jurisdiction A, is the parent company of an MNE Group. The Group includes subsidiaries in several other jurisdictions.

Jurisdiction A has implemented the GloBE rules. A’s implementing legislation uses the Euro.

ACo prepares Euro-denominated consolidated financial statements for the Group, in accordance with an Acceptable Financial Accounting Standard (defined in Art. 10.1.1).

ACo’s consolidated financial statements reported these amounts of revenue in the previous 4 Fiscal Years and the current Fiscal Year (defined in Art. 10.1.1):

• Fiscal Year 1: EUR 700 million
• Fiscal Year 2: EUR 600 million
• Fiscal Year 3: EUR 740 million
• Fiscal Year 4: EUR 760 million
• Fiscal Year 5 (current year): EUR 720 million

All of these Fiscal Years were 12 months in duration, except Fiscal Year 2 which was 9 months (due to a change in year-end).

For many years, 60% of the shares in ACo have been owned by the B Family Trust, which is a trust created in jurisdiction X. The trustee and beneficiaries of the trust are members of the B family, who all reside in X. The remaining 40% of the shares in ACo are owned by third parties.

Jurisdiction X has not implemented the GloBE rules. Although the trust law of X requires simple accounting records to be kept by all trusts created in X, consolidated financial statements are not required. Consequently, the B Family Trust has not prepared consolidated financial statements.

Q1: For Fiscal Year 5, do the GloBE rules apply to the companies within the ACo Group?

Q2: If the answer to Q1 is “yes”, will the IIR apply to ACo?

Answer:

Q1:

The B Family Trust is an “Entity”, as defined in para. (b) of Art. 10.1.1.

The B Family Trust would be the UPE of the MNE Group: Art. 1.4.1(a). In particular, the B Family Trust would own a “Controlling Interest” in ACo, under para. (b) of the definition of “Controlling Interest” in Art. 10.1.1.

Accordingly, the revenue threshold test in Art. 1.1.1 must be applied to the B Family Trust’s “Consolidated Financial Statements”, which would be the deemed consolidated financial statements in para. (d) of the definition in Art. 10.1.1.

Before doing so, we need to adjust the revenue threshold for Fiscal Year 2, to take into account the 9 months accounting period: Art. 1.1.2. The adjusted threshold would be EUR 562.5 million (i.e., 750 million x 75%).

The revenue threshold would therefore be satisfied in Fiscal Years 2 and 4: Art. 1.1.1.

Accordingly, the GloBE rules would apply to the companies within the ACo Group (i.e., the B Family Trust MNE Group) in Fiscal Year 5, despite the fact that the revenue threshold is not satisfied in Fiscal Year 5 itself.

Q2:

Although the B Family Trust is the UPE of the MNE Group, the IIR will not apply to the B Family Trust because jurisdiction X has not implemented the GloBE rules.

ACo would be an Intermediate Parent Entity, and therefore it would be subject to the IIR in jurisdiction A: Art. 2.1.2. Art. 2.1.3(a) is not applicable, as the IIR does not apply to the UPE.

Do you agree?

ACo, located in jurisdiction A, is the UPE of an MNE Group.

ACo owns 100% of the shares in BCo (located in jurisdiction B) and 100% of the shares in CCo (located in jurisdiction C). None of ACo, BCo or CCo is an Investment Entity or a Flow-through Entity.

Jurisdictions B and C have implemented the GloBE rules, but jurisdiction A has not. None of the 3 jurisdictions has implemented a Qualified Domestic Minimum Top-up Tax.

For the current year:

• A is a Low-Tax Jurisdiction, with a Top-up Tax of 300. ACo has revenue of 700 and deductions of 450, giving taxable profits of 250. ACo has 200 full-time equivalent employees, and tangible assets with a net book value of 100.
• B is a Low-Tax Jurisdiction, with a Top-up Tax of 400. BCo has revenue of 500 and deductions of 300, giving taxable profits of 200. BCo has 150 full-time equivalent employees, and tangible assets with a net book value of 250.
• C is a Low-Tax Jurisdiction, with a Top-up Tax of 200. CCo has revenue of 400 and deductions of 550, giving a tax loss of 150. CCo has 150 full-time equivalent employees, and tangible assets with a net book value of 150.
• All 3 jurisdictions have the same corporate income tax rate (20%).
• Jurisdictions B and C impose UTPR tax by denying deductions (across-the-board).

Based on these facts, what amounts of IIR tax and UTPR tax will be imposed for the current year, and in which jurisdictions?

Answer:

There will be no IIR tax: jurisdiction A has not implemented the GloBE rules, and BCo has no Ownership Interest in CCo and vice versa.

The Total UTPR Top-up Tax Amount (i.e., the sum of the Top-up Tax calculated for each Low-Taxed Constituent Entity) = 300 (ACo) + 400 (BCo) + 200 (CCo) = 900: Art. 2.5.1.

Art. 2.6.1:

1. Jurisdiction A: nil – GloBE rules not implemented in A.
2. Jurisdiction B:
   UTPR Percentage = [50% x 150 / 300] + [50% x 250 / 400] = 25% + 31.25% = 56.25%
   UTPR Top-up Tax Amount allocated to B = 900 x 56.25% = 506.25
3. Jurisdiction C:
   UTPR Percentage = [50% x 150 / 300] + [50% x 150 / 400] = 25% + 18.75% = 43.75%
   UTPR Top-up Tax Amount allocated to C = 900 x 43.75% = 393.75

Art. 2.4.1:

1. Jurisdiction B: All of BCo’s deductions of 300 will be disallowed, which would cause BCo to have an additional cash tax expense of 60 in the current year – i.e., 300 x 20% = 60. That will leave a remaining UTPR Top-up Tax Amount of 446.25 – i.e., 506.25 – 60 = 446.25. The 446.25 will be carried forward for adjustment in Art. 2.4.1 in future years: Art. 2.4.2.
2. Jurisdiction C: All of CCo’s deductions of 550 will be disallowed, which would cause CCo to move from a tax loss of 150 to a taxable profit of 400. It would therefore have an additional cash tax expense of 80 in the current year – i.e., 400 x 20% = 80. That will leave a remaining UTPR Top-up Tax Amount of 313.75 – i.e., 393.75 – 80 = 313.75. The 313.75 will be carried forward for adjustment in Art. 2.4.1 in future years: Art. 2.4.2. [Note that, if the C tax law allows tax losses to be carried forward, the disallowance of CCo’s 150 tax loss in the current year might cause an additional cash tax expense of 30 in future years – this might reduce the UTPR Top-up Tax Amount carried forward by 30.]

Art. 2.6.3 & 2.6.4: Due to Art. 2.6.4, in the next year, B and C will not be deemed to have a UTPR Percentage of zero under Art. 2.6.3.

Do you agree?

ACo, located in A, is the UPE of an MNE Group.

ACo directly owns 100% of BCo (located in B), 70% of CCo (located in C), 100% of DCo (located in D), and 40% of ECo (located in E).

The other 30% of CCo is directly owned by third parties.

BCo directly owns 15% of ECo, and CCo directly owns 25% of ECo. The other 20% of ECo is directly owned by third parties.

All of the shares in all of the companies are common shares, with an equal right to profit distributions and capital.

A, B, C and D have implemented the GloBE rules, but E has not.

ECo is a Low-Taxed Constituent Entity. It has a Top-up Tax for the current Fiscal Year of 1,000.

Q1: What amount of IIR tax and UTPR tax will be imposed, and on which entity or entities?

Q2: Same question as Q1, with one change in the facts: A has not implemented the GloBE rules.

Answer:

Q1:

• ACo: an IIR tax of 725 (reflecting ACo’s 72.5% direct and indirect Ownership Interest in ECo) prima facie would be imposed on ACo. However, that amount would be reduced by 175 (reflecting ACo’s 17.5% indirect Ownership Interest in ECo through CCo, a POPE: Art. 2.3). Thus, final amount of IIR tax imposed on ACo would be 550.
• BCo (an IPE): the prima facie IIR tax of 150 would be reduced to nil by Art. 2.1.3(a).
• CCo (a POPE): an IIR tax of 250 (reflecting CCo’s 25% Ownership Interest in ECo) would be imposed on CCo.
• Thus, aggregate IIR tax = 550 (ACo) + 250 (CCo) = 800.
• UTPR: prima facie, UTPR tax of 1,000 would be allocated (in aggregate) to ACo, BCo, CCo and DCo: Art. 2.4. However, ECo’s Top-up Tax of 1,000 is reduced to zero, as all of ACo’s 72.5% Ownership Interests in ECo are held directly or indirectly by ACo and CCo, both of which are required to apply a Qualified IIR. Thus, no UTPR tax would be imposed.
• Thus, final answer: IIR tax of 550 imposed on ACo, 250 of IIR tax imposed on CCo, and no UTPR tax imposed – a total tax of 800.

Q2:

• BCo (an IPE): IIR tax of 150 (reflecting BCo’s 15% Ownership Interest in ECo) would be imposed on BCo.
• CCo (a POPE): IIR tax of 250 (reflecting CCo’s 25% Ownership Interest in ECo) would be imposed on CCo.
• Thus, aggregate IIR tax = 150 (BCo) + 250 (CCo) = 400.
• UTPR: prima facie, UTPR tax of 1,000 would be allocated (in aggregate) to BCo, CCo and DCo: Art. 2.4. However, ECo’s Top-up Tax of 1,000 would be reduced by 400 (the aggregate amount of Top-up Tax that is brought into charge under a Qualified IIR): Art. 2.5.3. Thus, the reduced UTPR tax of 600 would be allocated (in aggregate) to BCo, CCo and DCo (the amount allocated to each entity would be determined under Art. 2.6).
• Thus, final answer: IIR tax of 150 imposed on BCo, IIR tax of 250 imposed on CCo, and aggregate UTPR tax of 600 imposed on BCo, CCo and DCo – a total tax of 1,000

Note the difference in the total tax in Q1 (800) vs. Q2 (1,000).

Do you agree?

An MNE Group has 1 Constituent Entity (ACo) located in jurisdiction A. The UPE owns a direct or indirect 75% Ownership Interest in ACo, with the balance of 25% owned by third parties.

In year 1:

• The MNE Group is “within scope” of the GloBE rules.
• A UTPR Top-up Tax Amount of 1,000 is allocated to jurisdiction A.
• That UTPR Top-up Tax Amount relates to the Top-up Tax of XCo, a Low-Taxed Constituent Entity located in jurisdiction X. ACo has no transactions with, and no direct or indirect equity investment in, XCo.
• The corporate income tax rate in jurisdiction A is 20%.
• ACo has:
  • Revenue: 7,000
  • Deductions: 3,000
  • Taxable profits: 4,000

Under the jurisdiction A tax law, the UTPR Top-up Tax Amount is imposed by denial of deductions (across-the-board, not specific deductions).

In year 2:

• The MNE Group is not “within scope” of the GloBE rules.
• At the start of year 2, the MNE Group sells 100% of the shares in ACo to a third party.
• The corporate income tax rate in jurisdiction A is increased to 25%.
• ACo has:
  • Revenue: 6,000
  • Deductions: 3,000
  • Taxable profits: 3,000

What UTPR Top-up Tax (if any) will be imposed on ACo in years 1 and 2?

Answer:

Introductory point: UTPR will be imposed on ACo, regardless of: (1) the fact that ACo is 25% owned by third parties; and (2) the fact that ACo has no transactions with, and no direct or indirect equity investment in, XCo.

Year 1:

• ACo will be denied all of its existing deductions of 3,000: Art. 2.4.1.
• That will cause an additional cash tax expense of 3,000 x 20% = 600.
• And that will leave 400 of UTPR to be imposed.

Year 2:

• Art. 2.4.2 will require there to be a second adjustment under Art. 2.4.1, in regard to year 2.
• Therefore, ACo will be denied deductions of 1,600: Art. 2.4.1.
• That will cause an additional cash tax expense of 1,600 x 25% = 400.
• This second adjustment will be made in year 2, regardless of: (1) the fact that the MNE Group is not “within scope” of the GloBE rules; and (2) the fact that ACo is wholly owned by third parties: Commentary on Art. 2.4. (I hope the third party acquirers do their tax due diligence thoroughly!)

Do you agree?

An MNE Group consists of a UPE (located in U), XCo 1 (located in X), XCo 2 (also located in X), YCo (located in Y), ZCo (located in Z), and UCo (located in U).

The Ownership Interests are owned as follows:

• XCo 1: 100% owned by UPE
• XCo 2: 60% owned by XCo 1, 10% owned by UPE, and 30% owned by third parties
• YCo: 60% owned by XCo 2, 30% owned by UPE, and 10% owned by third parties
• ZCo: 100% owned by YCo
• UCo: 100% owned by YCo

All shares in all companies are common shares, which carry an equal right to profit distributions and capital.

None of the Constituent Entities is an Investment Entity or a Flow-through Entity.

All of the jurisdictions have implemented the GloBE rules.

For the current Fiscal Year:

• ZCo has Top-up Tax of 1,000, and GloBE Income of 25,000
• UCo has Top-up Tax of 3,000, and GloBE Income of 10,000

Based on these facts, what are the amounts of IIR tax imposed on UPE, XCo 1, XCo 2 and YCo for the current Fiscal Year?

Answer:

(1) XCo 1 is an Intermediate Parent Entity (IPE) (100% directly owned by UPE).

No Top-up Tax will be imposed on XCo 1, due to the fact that a Qualified IIR applies to UPE: Art. 2.1.3(a).

(2) YCo is a Partially-Owned Parent Entity (POPE) (28% directly or indirectly owned by third parties).

In regard to ZCo: YCo’s Allocable Share is 100%: Art. 2.2. Thus, Top-up Tax of 1,000 is imposed on YCo: Art. 2.1.4.

In regard to UCo: YCo’s Allocable Share is 100%: Art. 2.2. Thus, Top-up Tax of 3,000 is imposed on YCo: Art. 2.1.4. Note that the fact that UCo is located in U (same as UPE) has no impact on the application of Art. 2.1 to YCo: see Art. 2.1.6.

(3) XCo 2 is a POPE (30% directly owned by third parties).

Art. 2.1.5 does not apply to exclude XCo 2 from IIR tax, as XCo 2 does not wholly own YCo.

In regard to ZCo: XCo 2’s Allocable Share is 60%: Art. 2.2. Prima facie, Top-up Tax of 600 is imposed on XCo 2. However, Art. 2.3.1 reduces that Top-up Tax to nil.

In regard to UCo: XCo 2’s Allocable Share is 60%: Art. 2.2. Prima facie, Top-up Tax of 1,800 is imposed on XCo 2. However, Art. 2.3.1 reduces that Top-up Tax to nil.

(4) UPE: In regard to ZCo: UPE’s Allocable Share is 72% (i.e., 30% owned directly in YCo, plus 42% owned indirectly in YCo through XCo 1 and XCo 2): Art. 2.2. Prima facie, Top-up Tax of 720 is imposed on UPE. However, Art. 2.3.1 reduces that Top-up Tax to nil, due to the fact that all 72% is owned through YCo, which applies a Qualified IIR.

In regard to UCo: As UCo is located in U (same as UPE), Art. 2.1.6 provides an exclusion. Note: the Commentary allows jurisdictions to delete Art. 2.1.6 when they transpose the GloBE rules into domestic law.

(5) Summary: ZCo: Top-up Tax imposed on YCo: 1,000. UCo: Top-up Tax imposed on YCo: 3,000.

Do you agree?

An MNE Group consists of the UPE and 4 other Constituent Entities: ACo 1, ACo 2, BCo and CCo.

The UPE is located in jurisdiction X, which has not implemented the GloBE rules.

The UPE owns 100% of ACo 1, which is located in jurisdiction A.

The UPE owns a 90% Ownership Interest in ACo 2, which is also located in jurisdiction A. The other 10% Ownership Interests in ACo 2 are owned by third parties.

ACo 2 owns an 85% Ownership Interest in BCo, which is located in jurisdiction B. The other 15% Ownership Interests in BCo are owned by third parties.

BCo owns a 75% Ownership Interest in CCo, which is located in jurisdiction C. The other 25% Ownership Interests in CCo are owned by ACo 1.

None of the Constituent Entities is an Investment Entity.

Jurisdictions A, B and C have implemented the GloBE rules.

In the current Fiscal Year, CCo has an amount of Top-up Tax.

Which Constituent Entity or Entities will be subject to an IIR tax, under Art. 2.1, in regard to CCo’s Top-up Tax?

Answer:

Each of ACo 1 and ACo 2 is an Intermediate Parent Entity (IPE). Neither ACo 1 nor ACo 2 owns a Controlling Interest in the other – therefore, Art. 2.1.3(b) is not applicable.

BCo is a Partially-Owned Parent Entity (POPE). More than 20% of its Ownership Interests are held directly or indirectly by persons that are not Constituent Entities: (i) 15% Ownership Interests directly held by third parties, and (ii) 8.5% Ownership Interests indirectly held by third parties through ACo 2.

Therefore:

1. UPE: No IIR tax, because jurisdiction X has not implemented the GloBE rules – therefore, Art. 2.1.3(a) is not applicable.
2. ACo 1: IIR tax is imposed on ACo 1, equal to its Allocable Share of CCo’s Top-up Tax: Art. 2.1.2. Under Art. 2.2, its Allocable Share is 25%.
3. ACo 2: IIR tax is imposed on ACo 2, equal to its Allocable Share of CCo’s Top-up Tax: Art. 2.1.2. Under Art. 2.2, its Allocable Share is prima facie 63.75% (but see below).
4. BCo: IIR tax is imposed on BCo, equal to its Allocable Share of CCo’s Top-up Tax: Art. 2.1.4. Under Art. 2.2, its Allocable Share is 75%.
5. Double taxation between ACo 2 and BCo is relieved by Art. 2.3: ACo 2’s 63.75% Allocable Share is reduced to nil.
6. Thus, final IIR tax liabilities: ACo 1 (Allocable Share = 25%) and BCo (Allocable Share = 75%).

Do you agree?

An MNE Group has 4 Constituent Entities located in jurisdiction X: ACo, BCo, CCo and DCo.

The UPE’s Ownership Interest in each Constituent Entity is this:

• ACo: 100%
• BCo: 40%
• CCo: 30%
• DCo: 25%

The other Ownership Interests in BCo, CCo and DCo are owned by shareholders who are unrelated to the UPE.

The UPE holds a Controlling Interest in all 4 Entities. None of the Entities owns shares in the other Entities.

In the current Fiscal Year

• ACo has:
  • Adjusted Covered Taxes: 100
  • GloBE Income: 250
• BCo has:
  • Adjusted Covered Taxes: 25
  • GloBE Income: 100
• CCo has:
  • Adjusted Covered Taxes: 20
  • GloBE Loss: 200
• DCo has:
  • Adjusted Covered Taxes: 50
  • GloBE Income: 500
• For jurisdiction X, there is:
  • No Additional Current Top-up Tax
  • No Domestic Top-up Tax
  • No Substance-based Income Exclusion
  • No de minimis exclusion

What is the Top-up Tax, if any, for jurisdiction X for the current Fiscal Year?

Answer:

CCo and DCo are each Minority-Owned Constituent Entities. BCo is not, as the UPE’s Ownership Interest in BCo is 40%. See the definition of “Minority-Owned Constituent Entity” in Art. 10.1.1.

Thus, Art. 5.6.2 requires separate calculations of ETR and Top-up Tax for (1) ACo and BCo; (2) CCo; and (3) DCo.

ACo and BCo:

• Adjusted Covered Taxes: 100 + 25 = 125
• Net GloBE Income: 250 + 100 = 350
• Thus, ETR = 125 / 350 = 35.7%
• Top-up Tax Percentage = nil
• Therefore, Top-up Tax = nil

CCo:

• Adjusted Covered Taxes: 20
• Net GloBE Loss: 20
• Thus, Top-up Tax = nil

DCo:

• Adjusted Covered Taxes: 50
• Net GloBE Income: 500
• Thus, ETR = 10%
• Top-up Tax Percentage = 15% – 10% = 5%
• Therefore, Top-up Tax = 500 x 5% = 25

Do you agree?

An MNE Group has 3 Constituent Entities (ACo, BCo and CCo) located in jurisdiction X.

The MNE Group uses the calendar year as its Fiscal Year.

ACo has these financial numbers for Fiscal Years 1 to 3:

• Year 1:
  • GloBE Revenue: EUR 5 million
  • GloBE Income: EUR 0.8 million
• Year 2:
  • GloBE Revenue: EUR 7 million
  • GloBE Income: EUR 0.7 million
• Year 3:
  • GloBE Revenue: EUR 12 million
  • GloBE Loss: EUR 0.1 million

BCo has these financial numbers for Fiscal Years 1 to 3:

• Year 1 (BCo was dormant in Year 1):
  • GloBE Revenue: EUR 0
  • GloBE Income or Loss: EUR 0
• Year 2:
  • GloBE Revenue: EUR 4 million (including EUR 3 million from services provided to ACo)
  • GloBE Income: EUR 0.2 million
• Year 3:
  • GloBE Revenue: EUR 3 million (including EUR 2 million from services provided to ACo)
  • GloBE Income: EUR 0.3 million

CCo was formed on 1 April in Year 2, and commenced operations immediately.

CCo has these financial numbers for Fiscal Years 2 & 3:

• Year 2:
  • GloBE Revenue: EUR 0.75 million
  • GloBE Loss: EUR 0.3 million
• Year 3:
  • GloBE Revenue: EUR 1 million
  • GloBE Loss: EUR 0.4 million

Note: The “GloBE Revenue” for each Fiscal Year is the Entity’s revenue for that year, taking into account the adjustments in Chapter 3 of the GloBE model rules.

Is the MNE Group entitled to make a “de minimis exclusion” election for Year 3?

Answer:

Preliminary points:

1. In Year 1, BCo was dormant and CCo had not been formed. Nevertheless, due to the existence and operation of ACo in Year 1, Year 1 is included in the calculation of averages. In other words, the second sentence in Art. 5.5.2 does not apply.
2. CCo was formed on 1 April in Year 2 and commenced operations immediately. Thus, its Year 2 numbers need to be converted into equivalent 12 month numbers. Thus, CCo’s GloBE Revenue for Year 2 becomes: EUR 0.75 million x 4/3 = EUR 1 million; and its GloBE Loss becomes: EUR 0.3 million x 4/3 = EUR 0.4 million.
3. BCo’s GloBE Revenue for Years 2 & 3 includes significant amounts of revenue from services provided to ACo. No adjustment is made for such intra-group revenue.

GloBE Revenue (in EUR millions):
Year 1: 5 + 0 = 5
Year 2: 7 + 4 + 1 = 12
Year 3: 12 + 3 + 1 = 16

Average GloBE Revenue (in EUR millions) = (5 + 12 + 16) / 3 = 11

GloBE Income or Loss (in EUR millions):
Year 1: 0.8 + 0 = 0.8
Year 2: 0.7 + 0.2 + (0.4) = 0.5
Year 3: (0.1) + 0.3 + (0.4) = (0.2)

Average GloBE Income or Loss (in EUR millions) = (0.8 + 0.5 + (0.2)) / 3 = 0.4 (rounded)

As the Average GloBE Revenue is not less than EUR 10 million, Art. 5.5.1(a) is not satisfied. Thus, the Group is not entitled to make a “de minimis exclusion” election for Year 3.

An MNE Group has one Constituent Entity (ACo) located in jurisdiction A.

For Year 1, the Group reported for jurisdiction A:

• Adjusted Covered Taxes: EUR 5 million
• Net GloBE Income: EUR 100 million
• ETR: 5%
• Substance-based Income Exclusion: nil
• Additional Current Top-up Tax: nil
• Qualified Domestic Minimum Top-up Tax: nil
• Thus, Top-up Tax = (10% x EUR 100 million) + 0 + 0 = EUR 10 million

For the current Fiscal Year (Year 3), the Group plans to report for jurisdiction A:

• Adjusted Covered Taxes: EUR 20 million
• Net GloBE Income: EUR 100 million
• ETR: 20%
• Substance-based Income Exclusion: nil
• Additional Current Top-up Tax: nil
• Qualified Domestic Minimum Top-up Tax: nil
• Thus, Top-up Tax = (0% x EUR 100 million) + 0 + 0 = 0

However, the Group now identifies a major jurisdiction A corporate income tax error in regard to Year 1. That error has caused an underpayment of EUR 2 million of tax for Year 1. However, the correction of the error will not cause any change to the GloBE Income for Year 1.

Q1: What are the adjusted amounts of Top-up Tax for Years 1 and 3?

Q2: Assume the same facts as above, except that the error in Year 1 has caused an overpayment of EUR 2 million of jurisdiction A corporate income tax for Year 1. Again, the correction of the error will not cause any change to the GloBE Income for Year 1. What are the adjusted amounts of Top-up Tax for Years 1 and 3?

Answer:

Q1

The correction of the jurisdiction A tax underpayment will cause an increase in Covered Taxes of EUR 2 million.

Art. 4.6.1 requires an increase in Covered Taxes for a prior Fiscal Year to be treated as relating to the current Fiscal Year (Year 3). There would thus be no adjustment to the Top-up Tax (i.e., EUR 10 million) for Year 1.

In Year 3, the Adjusted Covered Taxes are increased to EUR 22 million – therefore, the ETR becomes 22%. As there was no Top-up Tax in Year 3 prior to the correction, the correction will not cause any adjustment to the Top-up Tax (i.e., nil) for Year 3.

Therefore, the increase in the jurisdiction A tax will not any adjustment to Top-up Tax, in either Year 1 or Year 3.

Q2:

The correction of the jurisdiction A tax overpayment will cause a decrease in Covered Taxes of EUR 2 million.

Art. 4.6.1 requires a decrease in Covered Taxes for a prior Fiscal Year (Year 1) to be reflected in a recalculation of the ETR and Top-up Tax for Year 1, unless an election is available and is made (in this case, the election is not available, as the decrease amount exceeds EUR 1 million).

For Year 1:

1. the Adjusted Covered Taxes will now be EUR 3 million,
2. the ETR will be 3%, and
3. the Top-up Tax will be: (12% x EUR 100 million) + 0 + 0 = EUR 12 million.

Which means that there will be incremental Top-up Tax of EUR 2 million.

In accordance with Art. 4.6.1 and Art. 5.4.1, the incremental Top-up Tax:

1. is treated as Additional Current Top-up Tax in Year 3,
2. the Year 3 Top-up Tax will be: (0% x EUR 100 million) + EUR 2 million + 0 = EUR 2 million, and
3. there will be no adjustments to the assessments for Year 1.

Do you agree?

An MNE Group has one Constituent Entity, XCo, located in jurisdiction X.

At the beginning of the 2025 Fiscal Year, XCo has these operating assets in its balance sheet:

• Plant & equipment #1: cost of 20,000 (including capitalised payroll expenses of 5,000); accumulated depreciation of 4,000
• Plant & equipment #2: cost of 14,000; accumulated depreciation of 2,000
• Land #1: cost of 10,000; impairment adjustment of 3,000
• Land #2: cost of 15,000

During the 2025 Fiscal Year:

• XCo sells plant & equipment #2 for a price of 15,500
• XCo purchases plant & equipment #3 for 5,000
• XCo starts holding Land #2 for sale

At the end of the 2025 Fiscal Year, XCo’s balance sheet shows:

• Plant & equipment #1: accumulated depreciation of 6,000
• Plant & equipment #3: accumulated depreciation of 250
• Land #1: a further impairment adjustment of 1,000 (i.e., total impairment adjustment is now 4,000)
• Land #2: held for sale

Note: With the exception of Land #2: at year-end, all of these assets are being used in the production of XCo’s goods.

What is the MNE Group’s tangible asset carve-out for jurisdiction X for the 2025 Fiscal Year?

Answer:

1. P&E #1:
1.1 Beginning of year carrying value: 20,000 – 4,000 = 16,000
1.2 End of year carrying value: 20,000 – 6,000 = 14,000
1.3 Average carrying value: 15,000
Note: The 5,000 of capitalised payroll expenses is not excluded.

2. P&E #2:
2.1 Beginning of year carrying value: 14,000 – 2,000 = 12,000
2.2 End of year carrying value: nil (sold)
2.3 Average carrying value: 6,000
Note: Sale price is irrelevant.

3. P&E #3:
3.1 Beginning of year carrying value: nil (purchased)
3.2 End of year carrying value: 5,000 – 250 = 4,750
3.3 Average carrying value: 2,375

4. Land #1:
4.1 Beginning of year carrying value: 10,000 – 3,000 = 7,000
4.2 End of year carrying value: 10,000 – 4,000 = 6,000
4.3 Average carrying value: 6,500

5. Land #2:
5.1 Beginning of year carrying value: 15,000
5.2 During year, XCo starts holding Land #2 for sale
5.3 End of year: held for sale (Note 1)
5.4 End of year carrying value: nil (Note 2)
5.5 Average carrying value: 7,500
Note 1: Assuming Land #2 satisfies the Commentary’s requirements to be considered “held for sale”.
Note 2: Art. 5.3.4 states that “the tangible asset carve-out computation shall not include the carrying value of property (including land or buildings) that is held for sale, lease or investment”. However, it does not indicate the treatment of such property which becomes “held for sale” during the year. I think the logical treatment is to include its carrying value at the beginning of the year (when it was not “held for sale”), and to include a carrying value of nil at year-end, and then compute the average carrying value in the same way as for a disposal during the year.

6. Conclusions:
6.1 Aggregate average carrying values of Eligible Tangible Assets = 15,000 + 6,000 + 2,375 + 6,500 + 7,500 = 37,375
6.2 2025 rate: 7.6%
6.3 Tangible asset carve-out for 2025 = 37,375 x 7.6% = 2,840.5

Do you agree?

An MNE Group has 2 Constituent Entities (ACo & BCo) located in jurisdiction X.

ACo is a service company which provides procurement and marketing services to BCo in X and other Constituent Entities in other jurisdictions.

BCo carries on a manufacturing business in X.

In regard to both companies, all the employees perform their activities in X.

For the 2028 Fiscal Year:

• ACo:
  • incurs employee salaries of 20,000, payroll tax of 2,000, and employer social security contributions of 5,000
  • of these amounts, 2,000 is capitalised to Eligible Tangible Assets (as defined in Art. 5.3.4)
• BCo:
  • incurs employee salaries of 30,000, employee medical insurance payments of 5,000, service fees paid to ACo of 10,000 (including 1,000 of VAT), and employee pension contributions of 3,000
  • of these amounts, 4,000 is capitalised to Eligible Tangible Assets (as defined in Art. 5.3.4), and 5,000 is capitalised to inventory

What is the Group’s payroll carve-out for X in 2028?

Answer:

ACo:
Eligible Payroll Costs (after deducting exceptions) = 20,000 + 2,000 + 5,000 – 2,000 = 25,000

BCo:
Eligible Payroll Costs (after deducting exceptions) = 30,000 + 5,000 + 3,000 – (4,000 x 38,000 / 47,000) = 34,766

Notes:
(1) 10,000 service fees do not qualify, on the basis that ACo is not a staffing or employment company (and, therefore, ACo’s employees are not BCo’s “Eligible Employees”: Art. 10.1.1 definition and Commentary on Art. 5.3.3).
(2) 5,000 capitalised to inventory is not excluded.
(3) 4,000 capitalised to Eligible Tangible Assets is excluded, to the extent that it represents employee salaries, employee medical insurance payments and employee pension contributions. In the absence of better information, I have assumed that it represents those categories plus 9,000 service fees (net of VAT), on a pro rata basis. I have therefore excluded a pro rata proportion of the 4,000.

Eligible Payroll Costs (after deducting exceptions) for X = 25,000 + 34,766 = 59,766

In 2028, the Art. 5.3.3 rate is 9.0%: Art. 9.2.1.

Thus, the payroll carve-out for X in 2028 is: 59,766 x 9% = 5,378.94

Do you agree?

An MNE Group has 4 Constituent Entities which are located in a jurisdiction. For the current Fiscal Year:

• ACo has GloBE Income of 9,400 and Adjusted Covered Taxes of 400
• BCo has a GloBE Loss of 2,000 and Adjusted Covered Taxes of 40
• CCo has GloBE Income of 2,200, Adjusted Covered Taxes of 200, and a Substance-based Income Exclusion of 3,000
• DCo has a GloBE Loss of 1,100, Adjusted Covered Taxes of 160, and a Substance-based Income Exclusion of 1,300
• The Group does not have any Additional Current Top-up Tax in regard to the jurisdiction
• The jurisdiction has not introduced a domestic minimum top-up tax

Q1: What is the Group’s ETR and Top-up Tax (if any) for the jurisdiction?
Q2: If the Group has Top-up Tax for the jurisdiction, what is the allocation of that Top-up Tax amongst the 4 Constituent Entities?

Answer:

Q1:

Calculate ETR:

• Sum of Adjusted Covered Taxes: 400 + 40 + 200 + 160 = 800 (Art. 5.1.1)
• Net GloBE Income: 9,400 – 2,000 + 2,200 – 1,100 = 8,500 (Art. 5.1.2)
• ETR = 800 / 8,500 = 9.4118% (rounded to fourth decimal place: Commentary on Art. 5.1.1)

Calculate Top-up Tax Percentage:

• Top-up Tax Percentage = 15% – 9.4118% = 5.5882%

Calculate Excess Profit:

• Substance-based Income Exclusion: 3,000 + 1,300 = 4,300
• Excess Profit = 8,500 – 4,300 = 4,200 (Art. 5.2.2)

Calculate Jurisdictional Top-up Tax:

• Jurisdictional Top-up Tax = (5.5882% x 4,200) – 0 – 0 = 234.7044 (Art. 5.2.3)

Q2:

Calculate Aggregate GloBE Income for all Constituent Entities which have GloBE Income:

• Aggregate GloBE Income: 9,400 + 2,200 = 11,600 (Art. 5.2.4)

Allocation of Top-up Tax (Art. 5.2.4):

• ACo: 9,400 / 11,600 x 234.7044 = 190.1915
• BCo: nil (GloBE Loss)
• CCo: 2,200 / 11,600 x 234.7044 = 44.5129

DCo: nil (GloBE Loss)

A general partnership is created under the law of jurisdiction B. The partnership is treated as fiscally transparent in B.

The partnership has 3 partners:

• Partner #1 (with a 30% share in the partnership) is a company which is resident in jurisdiction A. A treats the partnership as fiscally transparent.
• Partner #2 (with a 50% share in the partnership) is a company which is resident in jurisdiction C. C does not treat the partnership as fiscally transparent.
• Partner #3 (with a 20% share in the partnership) is a company which is resident in B. As already noted, B treats the partnership as fiscally transparent.

The partnership’s financial statements show that it has a Financial Accounting Net Income (FANIL) of 10,000, and an income tax expense in regard to Covered Taxes (CT) of 3,000. The partnership does not have a PE in another jurisdiction.

All 4 entities (partnership, partner #1, partner #2 and partner #3) are Constituent Entities within an MNE Group.

Q1: What amounts of FANIL and CT are allocated to each of the 4 Constituent Entities? Q2: Would your answer to Q1 change if B treated the partnership as a separate taxable person which was tax resident in B?

Answer:

Q1

1. Characterisation of p/ship: (i) to extent of Partner #1’s 30% share: Tax Transparent Entity (Art. 10.2.1(a)); (ii) to extent of Partner #2’s 50% share: Reverse Hybrid Entity (Art. 10.2.1(b)); (iii) to extent of Partner #3’s 20% share: Tax Transparent Entity (Art. 10.2.1(a)).
2. Partner #1’s 30% share: (i) 30% of FANIL (i.e., 3,000) allocated to Partner #1 (Art. 3.5.1(b)); (ii) 30% of CT (i.e., 900) allocated to Partner #1 (Art. 4.3.2(b)).
3. Partner #2’s 50% share: (i) 50% of FANIL (i.e., 5,000) allocated to p/ship (Art. 3.5.1(c)); (ii) 50% of CT (i.e., 1,500) retained by p/ship.
4. Partner #3’s 20% share: (i) 20% of FANIL (i.e., 2,000) allocated to Partner #3 (Art. 3.5.1(b)); (ii) 20% of CT (i.e., 600) allocated to Partner #3.

Thus: FANIL: (i) Partner #1 = 3,000; (ii) Partner #2 = nil; (iii) Partner #3 = 2,000; (iv) p/ship = 5,000.

And CT: (i) Partner #1 = 900; (ii) Partner #2 = nil; (iii) Partner #3 = 600; (iv) p/ship = 1,500.

Q2:

1. Characterisation of p/ship: (i) to extent of Partner #1’s 30% share: Hybrid Entity (Art. 10.2.5); (ii) to the extent of Partner #2’s 50% share: neither a Flow-through Entity nor a Hybrid Entity (Art. 10.2); (iii) to the extent of Partner #3’s 20% share: neither a Flow-through Entity nor a Hybrid Entity. Note: Q2 says that B treats the p/ship as a separate taxable person – thus, Partner #3’s B treatment of the p/ship is not as a fiscally transparent entity.
2. Partner #1’s 30% share: (i) no amount of FANIL is allocated to Partner #1; (ii) no amount of CT is allocated from p/ship to Partner #1 – however, CT can be allocated from Partner #1 to p/ship (see Art. 4.3.2(d) and Art. 4.3.3).
3. Partner #2’s 50% share and Partner #3’s 20% share: (i) no amount of FANIL is allocated to Partner #2 or #3; (ii) no amount of CT is allocated to Partner #2 or #3.

Thus: FANIL: (i) Partner #1, #2 & #3 = nil; (ii) p/ship = 10,000.

And CT: (i) Partner #1, #2 & #3 = nil (although CT can be allocated from Partner #1 to p/ship – see above); (ii) p/ship = 3,000.

Do you agree?

UPE, a company resident in R, is the ultimate parent of an MNE group. The corporate income tax rate in R is 25%.

UPE owns 100% of the shares in ACo, a company resident in A.

ACo owns 100% of the shares in BCo, a company resident in B.

During the current Fiscal Year:

• ACo pays to UPE a royalty of 200, from which is deducts A royalty withholding tax of 20
• ACo also pays to UPE a dividend of 600, from which it deducts A dividend withholding tax of 30
• UPE pays to BCo interest of 400, from which it deducts R interest withholding tax of 40
• BCo pays to ACo a dividend of 250, from which it deducts B dividend withholding tax of 25
• UPE includes in its income tax expense: R tax of 250 in respect of BCo’s income of 1,000 allocated to UPE under the R CFC rules. Of that 1,000, 600 is “Passive Income” (as defined in Art. 10.1.1). Before taking into account the R tax of 250, the Top-up Tax Percentage for jurisdiction B is 5%.

Based on these numbers, what are the amounts of Covered Taxes for UPE, ACo and BCo?

Answer:

1. ACo pays to UPE a royalty of 200, from which it deducts A royalty withholding tax of 20: not allocated under Art. 4.3.
   Thus, UPE’s tax of 20.
2. ACo pays to UPE a dividend of 600, from which it deducts A dividend withholding tax of 30: allocated under Art. 4.3.2(e) to ACo.
   Thus, ACo’s tax of 30.
3. UPE pays to BCo interest of 400, from which it deducts R interest withholding tax of 40: not allocated under Art. 4.3.
   Thus, BCo’s tax of 40.
4. BCo pays to ACo a dividend of 250, from which it deducts B dividend withholding tax of 25: allocated under Art. 4.3.2(e) to BCo.
   Thus, BCo’s tax of 25.
5. (a) UPE includes in its income tax expense R tax of 250 in respect of BCo’s income of 1,000 allocated to UPE under the R CFC rules: prima facie, 250 allocated to BCo under Art. 4.3.2(c).
   (b) However, of that 1,000, 600 is “Passive Income” (as defined in Art. 10.1.1). Before taking into account the R tax of 250, the Top-up Tax Percentage for B is 5%: Art. 4.3.3 applies a cap to the amount allocated to BCo under Art. 4.3.2(c) – cap = 600 x 5% = 30.
   Thus, BCo’s tax of 30; and UPE’s tax of 220.

Thus, Covered Taxes: (1) UPE = 20 + 220 = 240; (2) ACo = 30; and (3) BCo = 40 + 25 + 30 = 95.

ACo, a Constituent Entity resident in A, has these financial items for a Fiscal Year:

1. Current tax expense: 25,000
2. Country B royalty withholding tax (recorded as debit to royalty income): 100
3. Country C digital services tax (recorded as debit to sales revenue): 500
4. Current tax expense in regard to uncertain tax positions:
   1. Accrued during current year: 1,000
   2. Paid during current year (accrued in prior year): 1,500
   3. Reversed during current year (accrued in prior year): 800
5. Income tax credit (refundable in cash for 3 years): credited to current tax expense
6. Current tax expense in regard to “Excluded Dividends”: 1,200

Based on these numbers, what is ACo’s Adjusted Covered Taxes for the Fiscal Year?

Answer:

1. Start with current tax expense: 25,000 (Art. 4.1.1).
2. Country B royalty withholding tax (recorded as debit to royalty income): addition (Art. 4.1.2(a)).
   Thus, add 100.
3. Country C digital services tax (recorded as debit to sales revenue) – If the DST is levied on gross revenue, if it’s a final tax, and if it is not in substitution for corporate income tax on net income (e.g., corporate income tax does not apply to the relevant gross revenue, possibly because of source rules), then (according to the October 2020 blueprint report – we don’t have the Commentary yet!), the “in lieu of” test in Art. 4.2.1(c) is not satisfied. In that situation, the DST is not a Covered Tax. For the purpose of the calculation, I will assume (for the above reasons) that the Country C DST is not a Covered Tax.
   Thus, ignore.
4. Current tax expense in regard to uncertain tax positions.
   1. Accrued during current year (1,000): reduction (Art. 4.1.3(d).
   2. Paid during current year (accrued in prior year) (1,500): addition (Art. 4.1.2(c)).
   3. Reversed during current year (accrued in prior year) (800): ignore – because the “paid” condition in Art. 4.1.2(c) is not satisfied (but see my question below).
      Thus, add 500 (i.e., add 1,500 and deduct 1,000).
5. Income tax credit (refundable in cash for 3 years): credited to current tax expense (300): addition (Art. 4.1.2(d)).
   Thus, add 300.
6. Current tax expense in regard to “Excluded Dividends” (1,200): reduction (Art. 4.1.3(a)).
   Thus, deduct 1,200..

Thus, ACo’s Adjusted Covered Taxes = 25,000 + 100 + 500 + 300 – 1,200 = 24,700

Do you agree with ignoring the reversal in the current tax expense in regard to uncertain tax positions?

XCo, a Constituent Entity resident in X, is liable for several taxes imposed in X:

1. Income tax of 25% imposed on XCo’s taxable income. In computing taxable income, actual expenses are taken into account, but some expenses are denied deduction (e.g., entertainment expenses), and some other expenses qualify for a 200% deduction (e.g., R&D expenses). Also, XCo’s taxable income includes (under the X CFC rules) its share of certain profits derived by XCo’s foreign subsidiary.
2. Resource levy of 20% imposed on the value (determined according to a government schedule) of iron ore extracted in XCo’s mining operations.
3. Withholding tax of 10% imposed on gross amount of rent received from leasing of X real estate owned by XCo. No deductions are available in calculating the withholding tax, which is a final tax.
4. A Qualified Domestic Minimum Top-Up Tax.
5. Wealth tax of 5% imposed on XCo’s shareholders’ equity as shown in its most recent balance sheet.
6. Capital duty of 1% imposed on the issue of new shares.
7. Top-up Tax imposed on XCo by X’s “income inclusion rule”, which is not a Qualified IIR.

Which of these taxes qualify as Covered Taxes?

Answer:

1. 1. Income tax of 25% imposed on XCo’s taxable income.
      1. The denial of deduction for some expenses, and the fact that some other expenses qualify for a 200% deduction, should not prevent the income tax from being a tax “with respect to [XCo’s] income or profits” (Art. 4.2.1(a)). See October 2020 blueprint report (Commentary to GloBE rules has not yet been released!)
      2. The income tax on the CFC inclusion will be a tax “with respect to … its share of the income or profits of a Constituent Entity in which it owns an Ownership Interest” (Art. 4.2.1(a)), if the foreign subsidiary is a direct subsidiary. However, if the foreign subsidiary is indirectly owned by XCo, it’s doubtful whether the phrase, “owns an Ownership Interest”, is satisfied.Thus, Covered Tax, subject to the issue concerning the foreign subsidiary.
   2. Special tax of 30% imposed by Y on XCo’s share of Amount A allocated to Y under Pillar One: This should be a tax “with respect to [XCo’s] income or profits” (Art. 4.2.1(a)). Also, see October 2020 blueprint report.Thus, Covered Tax.
   3. Resource levy of 20% imposed on value (determined according to government schedule) of iron ore extracted in XCo’s mining operations: Not a tax “with respect to [XCo’s] income or profits” (Art. 4.2.1(a)); and not a tax “in lieu of a generally applicable corporate income tax” (Art. 4.2.1(c)), if it is imposed in addition to, and not in substitution for, income tax: see October 2020 blueprint report.Thus, not Covered Tax.
   4. Withholding tax of 10% imposed on gross amount of rent: If 25% income tax does not apply to the rent, the withholding tax should be a tax “in lieu of a generally applicable corporate income tax” (Art. 4.2.1(c)).Thus, Covered Tax.
   5. Qualified Domestic Minimum Top-Up Tax: Excluded by Art. 4.2.2(b).Thus, not Covered Tax.
   6. Wealth tax of 5% imposed on XCo’s shareholders’ equity: This would be a tax “levied by reference to retained earnings and corporate equity” (Art. 4.2.1(d)).Thus, Covered Tax.
   7. Capital duty of 1% imposed on issue of new shares: this does not fall into any category of Covered Tax.Thus, not Covered Tax.
   8. Top-up Tax imposed on XCo by X’s “income inclusion rule”, which is not a Qualified IIR: Not excluded by Art. 4.2.2(a), which is limited to a Qualified IIR. This will be a tax “with respect to … its share of the income or profits of a Constituent Entity in which it owns an Ownership Interest” (Art. 4.2.1(a)), if XCo directly owns shares in the Constituent Entity (i.e., direct subsidiary). However, if the Constituent Entity is indirectly owned by XCo, the same issue as mentioned above applies.Thus, Covered Tax, subject to the issue concerning the Constituent Entity.

ACo 1, a company resident in A, is a Constituent Entity within an MNE Group, for the purposes of the GloBE rules.

ACo 1 has the following financial information for the current fiscal year:

1. Profit or loss: negative EUR 20 million
2. Income tax expense: EUR 7 million
3. Profit on sale of 8% shareholding in XCo, an unrelated company: EUR 3 million
   1. The shares were sold to ACo 2 (another Constituent Entity resident in A)
   2. ACo 1 and ACo 2 are members of a tax consolidation group in A
   3. MNE Group’s UPE makes an election under Art. 3.2.8 to apply its consolidated accounting treatment to all Constituent Entities resident in A
4. Charter fee revenue: EUR 4 million
   1. The revenue is from the lease of a ship for 2 years, on a bare boat charter basis, to BCo (unrelated shipping company resident in B)
   2. BCo uses the ship to transport passengers in international traffic
   3. ACo 1 incurs EUR 1.5 million of costs directly or indirectly attributable to this revenue
   4. ACo 1 has no other shipping activities
   5. ACo 2 has EUR 6 million of charter fee revenue from leasing a ship (to be used to transport cargo in international traffic) on charter fully equipped, crewed and supplied; ACo 2 incurs EUR 2 million of costs directly or indirectly attributable to this revenue
5. ACo 1 has a sales agent in C
   1. The sales agent causes ACo 1 to have a “contract-concluding agency” PE in C, under the A/C double tax treaty (which is identical to the 2017 UN model treaty)
   2. ACo 1 does not prepare separate financial accounts for the PE in C
   3. However, if ACo 1 did prepare separate financial accounts for the PE in C on a standalone basis in accordance with the accounting standard used in the preparation of the UPE’s consolidated financial accounts, those separate financial accounts would show a profit of EUR 0.5 million. That profit of EUR 0.5 million is equal to the profit attributable to the PE, under Art. 7 of the A/C treaty
   4. EUR 0.2 million of ACo 1’s income tax expense relates to the C income tax for the PE

Based on those numbers, what is the GloBE Income or Loss of ACo 1 (Main Entity) and the C PE, respectively?

Answer:

The threshold issue is whether the “contract-concluding agency” PE in C (under the A/C treaty) qualifies as a “permanent establishment” under the Art. 10.1.1 definition.

Under para. (a) of that definition, 2 questions arise: (1) Does the phrase, “deemed place of business”, apply to a “contract-concluding agency” PE? Note that Art. 5 of the 2017 UN model merely deems there to be a PE – it does not deem there to be a place of business. (2) Is Art. 7 of the 2017 UN model similar to Art. 7 of the OECD model? Note that Art. 7 of the UN model includes both an attribution rule and a modified force of attraction rule.

If para. (a) does not apply, the only other paragraph which could apply is para. (d) – but para. (d) will not apply if A does not exempt the profits attributable to the agency PE.

I suspect that the IF intends that para. (a) should apply in this case – but, if so, the drafting of para. (a) is loose!

The following assumes that there is an Art. 10.1.1 PE …

1. We need to separate the Main Entity (ME) and the C PE.
2. C PE: (i) Financial Accounting Net Income or Loss (FANIL) = 0.5; (ii) Income tax expense = 0.2; (iii) thus, C PE’s GloBE Income = EUR 0.7m.
3. ME: profit or loss: negative 20.
4. ME: C PE’s FANIL: deduct 0.5.
5. ME: Income tax expense (after removing C PE’s income tax expense): add 6.8.
6. ME: profit on sale of 8% shareholding: deduct 3: Art. 3.2.8
7. ME: charter fee revenue.
   1. Not “International Shipping Income” (ISI), as lease is to an unrelated party: Art. 3.3.2
   2. Prima facie, the revenue satisfies “Qualified Ancillary International Shipping Income” (QAISI): Art. 3.3.3
   3. However, the 50% cap in Art. 3.3.4 applies: ACo 2’s ISI is 4 (after deducting costs) – the cap is therefore 2.
   4. ACo 1’s QAISI is (prima facie) 2.5 (after deducting costs), but is capped at 2.
      Thus, deduct 2.
8. Thus, ME’s GloBE Loss = (20) – 0.5 + 6.8 – 3 – 2 = EUR 18.7m

XCo, a company resident in X, is a Constituent Entity within an MNE Group, for the purposes of the GloBE rules.

XCo has the following financial information for the current fiscal year:

1. Profit or loss: negative EUR 5 million
2. Income tax expense (in regard to Covered Taxes): EUR 2 million
3. Excise duty credit: EUR 4 million
   1. The credit can be used to offset future excise duty liabilities for the next 3 years – to the extent it is not used during that period, it will lapse
   2. Reported as credit to indirect tax expense in profit or loss
4. Loss of EUR 8 million under impairment accounting (included in profit or loss)
   1. XCo has not disposed of relevant asset
   2. Filing Constituent Entity makes election under Art. 3.2.5 to determine loss under realisation principle
5. Dividends of EUR 2.5 million paid on redeemable preference shares issued to YCo (Constituent Entity resident in Y)
   1. MNE Group has jurisdictional ETR of 14.95% in Y in current fiscal year. However, that jurisdictional ETR would be 15.1% if the dividends of EUR 2.5 million on the redeemable preference shares were excluded.
   2. Dividends are non-deductible / tax-exempt (including no withholding tax) in the 2 jurisdictions
   3. Dividends treated as interest expense in computing XCo’s profit or loss
6. Prior period error of EUR 3 million (after tax benefit of EUR 0.8 million)
   1. Error was understatement of expenses in prior fiscal year
   2. Error correction is reported as a decrease in the opening equity at the start of the current fiscal year

Based on those numbers, what is XCo’s GloBE Income or Loss for the current fiscal year?

Answer:

Computation of ACo 1’s GloBE Income or Loss:

1. Start with loss (in P&L) (Art. 3.1): negative EUR 5 million
2. Income tax expense (Covered Taxes): add EUR 2 million (Art. 3.1.1(a))
   Thus, EUR 2m is added
3. Excise duty credit:
   1. Excise duty credit can be used only to offset future excise duty liabilities for next 3 years – IMHO: not “refundable”. [Note that it is possible to take the view that the excise duty credit is “refundable” (and is therefore a “Qualified Refundable Tax Credit”), based on a statement in the October 2020 blueprint report (Art. 10.1.1 definition). In this question, it should not have any effect on the answer: in both situations, the excise duty credit is not excluded from GloBE Income or Loss (Art. 3.2.4).]
   2. Therefore, the GloBE rules do not require it to be either included or excluded.

Thus, no adjustment.

1. Loss of EUR 8 million under impairment accounting (included in profit or loss): due to the election to determine loss under realisation principle, loss should be added (Art. 3.2.5).
   Thus, EUR 8 million is added.
2. Dividends of EUR 2.5 million paid on redeemable preference shares (RPS) issued to YCo:
   1. If YCo is a “High-Tax Counterparty”, then the RPS would likely be an “Intragroup Financing Arrangement” (Art. 10.1.1 definitions).
   2. YCo is a “High-Tax Counterparty”, as (according to the question) Y’s jurisdictional ETR would be 15.1%, if the dividends on the RPS were excluded. Note that, for this situation to occur, the dividends are presumably not “Excluded Dividends” (Art. 10.1.1 definition), because, if they were, they would already be excluded in computing Y’s jurisdictional ETR (Art. 3.2.1(b)). This would mean that the dividends fall within either of the 2 exceptions in the Art. 10.1.1 definition of “Excluded Dividends”.
   3. EUR 2.5 million should be added (Art. 3.2.7).

Thus, EUR 2.5 million added.

1. Prior period error of EUR 3 million (after tax benefit of EUR 0.8 million) – qualifies as “Prior Period Error and Changes in Accounting Principles” (Art. 3.2.1(h) & definition in Art. 10.1.1). Note that the exception in para. (a) of definition does not apply, because the “error correction” resulted in a decrease in Covered Taxes of less than EUR 1 million. As the amount reported as a decrease in opening equity is after the tax benefit, that “after tax” amount should, I think, be the amount which is adjusted.
   Thus, EUR 3 million is deducted.

Based on the above, XCo’s GloBE Income or Loss = (5m) + 2m + 8m + 2.5m – 3m = EUR 4.5m.

ACo 1, a company resident in A, is a Constituent Entity within an MNE Group, for the purposes of the GloBE model rules.

ACo 1 has the following financial information for the current fiscal year:

1. Profit (in P&L): EUR 30 million
2. Other comprehensive income: EUR 8 million, including EUR 5 million (after tax) of gain under fair value accounting in respect of property, plant and equipment (not subsequently reported through P&L). The tax expense on this fair value accounting gain is EUR 1.5 million
3. Income tax expense:
   1. In regard to Covered Taxes: EUR 9 million
   2. In regard to other taxes: EUR 0.8 million
4. Transfer of assets and liabilities in merger transaction with ACo 2 (another Constituent Entity also resident in A):
   1. Gain (included in P&L): EUR 3.5 million (tax-free under A tax law)
   2. Consideration received by ACo 1: issue of new shares in ACo 2 (consideration satisfies arm’s length principle)
   3. ACo 2 inherits ACo 1’s tax basis in assets (for A tax purposes)
5. Loss (included in P&L) on sale of 8% shareholding (ACo 1 held these shares for 4 years): EUR 0.7 million
6. Gain (included in P&L) on sale of 10% shareholding (ACo 1 acquired half of these shares 3 years ago, and it acquired the other half during this current fiscal year): EUR 2 million
7. Prior period error of EUR 5 million (after tax expense of EUR 2 million) – This error was an understatement of revenue in a prior fiscal year, and is reported as increase in opening equity at start of current fiscal year
8. Pensions:
   1. Pension liability expense in P&L: EUR 2.5 million
   2. Contributed to pension fund for current fiscal year: EUR 3 million
9. Royalties expense:
   1. Relates to licence of IP from BCo (Constituent Entity resident in B)
   2. Actual expense: EUR 3 million
   3. Transfer pricing adjustment by A tax authorities: EUR 1 million (i.e., EUR 2 million allowed as income tax deduction)

Based on those numbers, what is ACo 1’s GloBE Income or Loss for the current fiscal year?

Answer:

Computation of ACo 1’s GloBE Income or Loss:

1. Start with profit (in P&L) (Art. 3.1): EUR 30 million
2. Other comprehensive income: EUR 8 million: ignore.

However, EUR 6.5 million (before tax) qualifies as “Included Revaluation Method Gain or Loss” (Art. 3.2.1(d))

Thus, EUR 6.5 million added

3. Income tax expense:

• In regard to Covered Taxes: add EUR 9 million (Art. 3.1.1(a))
• In regard to other taxes: to the extent “other taxes” are those described in para. (c), (d) or (e) of definition of “Net Taxes Expense” in Art. 10.1.1, the amount will be added; but not otherwise. I will assume that no part of the “other taxes” falls with para. (c), (d) or (e).

Thus, EUR 9 million is added

4. Transfer of assets and liabilities in merger transaction, which qualifies as “GloBE Reorganisation”: EUR 3.5 million excluded from GloBE Income (Art. 3.2.1(e) & Art. 6.3.2)

Thus, EUR 3.5 million is deducted

5. Loss on sale of 8% shareholding: not treated as “Excluded Equity Gain or Loss”, because a portfolio shareholding (Art. 3.2.1(c) & definitions in Art. 10.1.1)

Thus, no adjustment

6. Gain on sale of 10% shareholding: treated as “Excluded Equity Gain or Loss”, because not a portfolio shareholding (Art. 3.2.1(c) & definitions in Art. 10.1.1)

Thus, EUR 2 million is deducted

7. Prior period error –  qualifies as “Prior Period Errors and Changes in Accounting Principles” (Art. 3.2.1(h) & definition in Art. 10.1.1); note that the exception in para. (a) of definition does not apply, because the “error correction” resulted in a material increase (not decrease) in Covered Taxes of EUR 2 million. As the amount reported as an increase in opening equity is after the tax expense, that “after tax” amount should, I think, be the amount which is adjusted.

Thus, EUR 5 million is added

8. Pensions: Contribution to pension fund exceeds pension liability expense by EUR 0.5 million. Thus, Accrued Pension Expense (Art. 3.2.1(i) & definition in Art. 10.1.1) is negative EUR 0.5 million. There is nothing to indicate that Accrued Pension Expense cannot be negative.

Thus, EUR 0.5 million is deducted

9. TP adjustment for royalties expense (Art. 3.2.3)

EUR 1 million is added

Based on the above, ACo 1’s GloBE Income or Loss = 30m + 6.5m + 9m – 3.5m – 2m + 5m – 0.5m + 1m = EUR 45.5 million

XCo, a company resident in X, is a Constituent Entity within an MNE Group, for the purposes of the GloBE model rules.

XCo has the following financial information for a fiscal year:

• Profit or loss: 20,000
• Other comprehensive income: 3,500
• Income tax expense:
  • In regard to Covered Taxes: 6,000 (including 200 in respect of “dividend income minus related expenses”)
  • In regard to other taxes: 1,500
• Current and deferred tax shown as a contra to particular revenue items:
  • In regard to Covered Taxes: 800
  • In regard to other taxes: 700
• Accrued dividend income (gross) in respect of:
  • 10% shareholding held for 6 months: 400
  • 5% shareholding held for 18 months: 650
  • 8% shareholding held for 9 months: 1,200
• Received dividend income (gross) (accrued in P&L in preceding fiscal year, received in current fiscal year):
  • 12% shareholding held for 30 months: 700
• Expenses relating to all dividend income: 350
• Gain (included in P&L) on disposal of 12% shareholding: 1,000
• Loss (included in P&L) on disposal of 10% shareholding: 600

Based on those numbers, what is XCo’s GloBE Income or Loss for the fiscal year?

Answer:

Computation of XCo’s GloBE Income or Loss:

• Start with profit (in P&L) (Art. 3.1): 20,000
• Other comprehensive income: ignore – not part of “Financial Accounting Net Income or Loss” (Art. 3.1 and definition of “Other Comprehensive Income” in Art. 10.1.1)

Adjustments (Art. 3.2.1):

• Income tax expense:
  • In regard to Covered Taxes: add 6,000 (including 200 in respect of “dividend income minus related expenses”: see “including …” in para. (a) of definition of “Net Taxes Expense” in Art. 10.1.1)
  • In regard to other taxes: to the extent “other taxes” are those described in para. (c), (d) or (e) of definition of “Net Taxes Expense” in Art. 10.1.1, the amount will be added; but not otherwise. I will assume that no part of the “other taxes” falls within para. (c), (d) or (e).
    Thus, 6,000 is added
• Current and deferred tax shown as contra to particular revenue items:
  • In regard to Covered Taxes: add 800 (first part of definition of “Net Taxes Expense” in Art. 10.1.1)
  • In regard to other taxes: same as above.
    Thus, 800 is added
• Accrued dividend income (gross) in respect of:
  • 10% shareholding held for 6 months: deduct 400 (not “Short-term Portfolio Shareholding”, as shareholding is 10% – thus, “Excluded Dividend”)
  • 5% shareholding held for 18 months: deduct 650 (not “Short-term Portfolio Shareholding”, as held for 18 months – thus, “Excluded Dividend”)
  • 8% shareholding held for 9 months: no adjustment (“Short-term Portfolio Shareholding”)
    Thus, 1,050 is deducted
• Received dividend income (gross) (accrued in P&L in preceding fiscal year, received in current fiscal year) in respect of 12% shareholding held for 30 months: definition of “Excluded Dividends” in Art. 10.1.1 says “received or accrued”. However, it does not make sense to deduct this dividend, which is not included in this year’s profit to begin with. Commentary needs to clarify! I will assume that the correct answer is that the dividend is not included in this year’s “Excluded Dividends”.
  Thus, no adjustment.
• Expenses relating to all dividend income: Art. 3.2 does not require an adjustment for all or part of these expenses.
  Thus, no adjustment.
• Gain (included in P&L) on disposal of 12% shareholding: 1,000. This satisfies Art. 10.1.1 definition of “Excluded Equity Gain or Loss”.
  Thus, 1,000 is deducted
• Loss (included in P&L) on disposal of 10% shareholding: 600. This satisfies Art. 10.1.1 definition of “Excluded Equity Gain or Loss”.
  Thus, 600 is added