GloBE Rules Series

ITQ G-

003

January 21, 2022

Question

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

a. 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

b. 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)

a. XCo has not disposed of relevant asset

b. 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)

a. 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.

b. Dividends are non-deductible / tax-exempt (including no withholding tax) in the 2 jurisdictions

c. 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)

a. Error was understatement of expenses in prior fiscal year

b. 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:

a. 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).]

b. Therefore, the GloBE rules do not require it to be either included or excluded.

Thus, no adjustment.

4. 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.

5. Dividends of EUR 2.5 million paid on redeemable preference shares (RPS) issued to YCo:

a. If YCo is a "High-Tax Counterparty", then the RPS would likely be an "Intragroup Financing Arrangement" (Art. 10.1.1 definitions).

b. 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".

c. EUR 2.5 million should be added (Art. 3.2.7).

Thus, EUR 2.5 million added.

6. 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.

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