GloBE Rules Series

ITQ G-

017

May 20, 2022

Question

An MNE Group has 1 Constituent Entity (ACo) located in jurisdiction A. The UPE owns a direct or indirect 75% Ownership Interest in ACo, with the balance of 25% owned by third parties.

In year 1:

The MNE Group is “within scope” of the GloBE rules.
A UTPR Top-up Tax Amount of 1,000 is allocated to jurisdiction A.
That UTPR Top-up Tax Amount relates to the Top-up Tax of XCo, a Low-Taxed Constituent Entity located in jurisdiction X. ACo has no transactions with, and no direct or indirect equity investment in, XCo.
The corporate income tax rate in jurisdiction A is 20%.
ACo has: - Revenue: 7,000 - Deductions: 3,000 - Taxable profits: 4,000

Under the jurisdiction A tax law, the UTPR Top-up Tax Amount is imposed by denial of deductions (across-the-board, not specific deductions).

In year 2:

The MNE Group is not “within scope” of the GloBE rules.
At the start of year 2, the MNE Group sells 100% of the shares in ACo to a third party.
The corporate income tax rate in jurisdiction A is increased to 25%.
ACo has: - Revenue: 6,000 - Deductions: 3,000 - Taxable profits: 3,000

What UTPR Top-up Tax (if any) will be imposed on ACo in years 1 and 2?

Answer

Introductory point: UTPR will be imposed on ACo, regardless of: (1) the fact that ACo is 25% owned by third parties; and (2) the fact that ACo has no transactions with, and no direct or indirect equity investment in, XCo.

Year 1:

ACo will be denied all of its existing deductions of 3,000: Art. 2.4.1.
That will cause an additional cash tax expense of 3,000 x 20% = 600.
And that will leave 400 of UTPR to be imposed.

Year 2:

Art. 2.4.2 will require there to be a second adjustment under Art. 2.4.1, in regard to year 2.
Therefore, ACo will be denied deductions of 1,600: Art. 2.4.1.
That will cause an additional cash tax expense of 1,600 x 25% = 400.
This second adjustment will be made in year 2, regardless of: (1) the fact that the MNE Group is not “within scope” of the GloBE rules; and (2) the fact that ACo is wholly owned by third parties: Commentary on Art. 2.4. (I hope the third party acquirers do their tax due diligence thoroughly!)

Do you agree?

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