GloBE Rules Series

ITQ G-

010

March 25, 2022

Question

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?

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