GloBE Rules Series

ITQ G-

007

February 25, 2022

Question

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

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.
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.
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.
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.
(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.

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