GloBE Rules Series

ITQ G-

012

April 8, 2022

Question

An MNE Group has one Constituent Entity (ACo) located in jurisdiction A.

For Year 1, the Group reported for jurisdiction A:

Adjusted Covered Taxes: EUR 5 million
Net GloBE Income: EUR 100 million
ETR: 5% • Substance-based Income Exclusion: nil
Additional Current Top-up Tax: nil
Qualified Domestic Minimum Top-up Tax: nil
Thus, Top-up Tax = (10% x EUR 100 million) + 0 + 0 = EUR 10 million

For the current Fiscal Year (Year 3), the Group plans to report for jurisdiction A:

Adjusted Covered Taxes: EUR 20 million
Net GloBE Income: EUR 100 million
ETR: 20% • Substance-based Income Exclusion: nil
Additional Current Top-up Tax: nil
Qualified Domestic Minimum Top-up Tax: nil
Thus, Top-up Tax = (0% x EUR 100 million) + 0 + 0 = 0

However, the Group now identifies a major jurisdiction A corporate income tax error in regard to Year 1. That error has caused an underpayment of EUR 2 million of tax for Year 1. However, the correction of the error will not cause any change to the GloBE Income for Year 1.

Q1: What are the adjusted amounts of Top-up Tax for Years 1 and 3?

Q2: Assume the same facts as above, except that the error in Year 1 has caused an overpayment of EUR 2 million of jurisdiction A corporate income tax for Year 1. Again, the correction of the error will not cause any change to the GloBE Income for Year 1. What are the adjusted amounts of Top-up Tax for Years 1 and 3?

Answer

Q1:

The correction of the jurisdiction A tax underpayment will cause an increase in Covered Taxes of EUR 2 million.

Art. 4.6.1 requires an increase in Covered Taxes for a prior Fiscal Year to be treated as relating to the current Fiscal Year (Year 3). There would thus be no adjustment to the Top-up Tax (i.e., EUR 10 million) for Year 1.

In Year 3, the Adjusted Covered Taxes are increased to EUR 22 million – therefore, the ETR becomes 22%. As there was no Top-up Tax in Year 3 prior to the correction, the correction will not cause any adjustment to the Top-up Tax (i.e., nil) for Year 3.

Therefore, the increase in the jurisdiction A tax will not any adjustment to Top-up Tax, in either Year 1 or Year 3.

Q2:

The correction of the jurisdiction A tax overpayment will cause a decrease in Covered Taxes of EUR 2 million.

Art. 4.6.1 requires a decrease in Covered Taxes for a prior Fiscal Year (Year 1) to be reflected in a recalculation of the ETR and Top-up Tax for Year 1, unless an election is available and is made (in this case, the election is not available, as the decrease amount exceeds EUR 1 million).

For Year 1:

the Adjusted Covered Taxes will now be EUR 3 million,
the ETR will be 3%, and
the Top-up Tax will be: (12% x EUR 100 million) + 0 + 0 = EUR 12 million.

Which means that there will be incremental Top-up Tax of EUR 2 million.

In accordance with Art. 4.6.1 and Art. 5.4.1, the incremental Top-up Tax:

is treated as Additional Current Top-up Tax in Year 3,
the Year 3 Top-up Tax will be: (0% x EUR 100 million) + EUR 2 million + 0 = EUR 2 million, and
there will be no adjustments to the assessments for Year 1.

Do you agree?

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