GloBE Rules Series

ITQ G-

004

January 28, 2022

Question

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

a. The shares were sold to ACo 2 (another Constituent Entity resident in A)

b. ACo 1 and ACo 2 are members of a tax consolidation group in A

c. 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

a. 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)

b. BCo uses the ship to transport passengers in international traffic

c. ACo 1 incurs EUR 1.5 million of costs directly or indirectly attributable to this revenue

d. ACo 1 has no other shipping activities

e. 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

a. 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)

b. ACo 1 does not prepare separate financial accounts for the PE in C

c. 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

d. 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.

a. Not "International Shipping Income" (ISI), as lease is to an unrelated party: Art. 3.3.2

b. Prima facie, the revenue satisfies "Qualified Ancillary International Shipping Income" (QAISI): Art. 3.3.3

c. However, the 50% cap in Art. 3.3.4 applies: ACo 2's ISI is 4 (after deducting costs) – the cap is therefore 2.

d. 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

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