GloBE Rules Series

ITQ G-

008

March 4, 2022

Question

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:

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)).
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)).
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.
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:

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.
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).
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?

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