GloBE Rules Series

ITQ G-

019

June 17, 2022

Question

ACo, located in jurisdiction A, is the UPE of an MNE Group.

ACo owns 100% of the shares in BCo (located in jurisdiction B) and 100% of the shares in CCo (located in jurisdiction C). None of ACo, BCo or CCo is an Investment Entity or a Flow-through Entity.

Jurisdictions B and C have implemented the GloBE rules, but jurisdiction A has not. None of the 3 jurisdictions has implemented a Qualified Domestic Minimum Top-up Tax.

For the current year:

A is a Low-Tax Jurisdiction, with a Top-up Tax of 300. ACo has revenue of 700 and deductions of 450, giving taxable profits of 250. ACo has 200 full-time equivalent employees, and tangible assets with a net book value of 100.
B is a Low-Tax Jurisdiction, with a Top-up Tax of 400. BCo has revenue of 500 and deductions of 300, giving taxable profits of 200. BCo has 150 full-time equivalent employees, and tangible assets with a net book value of 250.
C is a Low-Tax Jurisdiction, with a Top-up Tax of 200. CCo has revenue of 400 and deductions of 550, giving a tax loss of 150. CCo has 150 full-time equivalent employees, and tangible assets with a net book value of 150.
All 3 jurisdictions have the same corporate income tax rate (20%).
Jurisdictions B and C impose UTPR tax by denying deductions (across-the-board).

Based on these facts, what amounts of IIR tax and UTPR tax will be imposed for the current year, and in which jurisdictions?

Answer

There will be no IIR tax: jurisdiction A has not implemented the GloBE rules, and BCo has no Ownership Interest in CCo and vice versa.

The Total UTPR Top-up Tax Amount (i.e., the sum of the Top-up Tax calculated for each Low-Taxed Constituent Entity) = 300 (ACo) + 400 (BCo) + 200 (CCo) = 900: Art. 2.5.1.

Art. 2.6.1:

1. Jurisdiction A: nil – GloBE rules not implemented in A.

2. Jurisdiction B: UTPR Percentage = [50% x 150 / 300] + [50% x 250 / 400] = 25% + 31.25% = 56.25%

UTPR Top-up Tax Amount allocated to B = 900 x 56.25% = 506.25

3. Jurisdiction C: UTPR Percentage = [50% x 150 / 300] + [50% x 150 / 400] = 25% + 18.75% = 43.75% UTPR Top-up Tax Amount allocated to C = 900 x 43.75% = 393.75

Art. 2.4.1:

1. Jurisdiction B: All of BCo's deductions of 300 will be disallowed, which would cause BCo to have an additional cash tax expense of 60 in the current year – i.e., 300 x 20% = 60. That will leave a remaining UTPR Top-up Tax Amount of 446.25 – i.e., 506.25 – 60 = 446.25. The 446.25 will be carried forward for adjustment in Art. 2.4.1 in future years: Art. 2.4.2.

2. Jurisdiction C: All of CCo's deductions of 550 will be disallowed, which would cause CCo to move from a tax loss of 150 to a taxable profit of 400. It would therefore have an additional cash tax expense of 80 in the current year – i.e., 400 x 20% = 80. That will leave a remaining UTPR Top-up Tax Amount of 313.75 – i.e., 393.75 – 80 = 313.75. The 313.75 will be carried forward for adjustment in Art. 2.4.1 in future years: Art. 2.4.2. [Note that, if the C tax law allows tax losses to be carried forward, the disallowance of CCo's 150 tax loss in the current year might cause an additional cash tax expense of 30 in future years – this might reduce the UTPR Top-up Tax Amount carried forward by 30.]

Art. 2.6.3 & 2.6.4: Due to Art. 2.6.4, in the next year, B and C will not be deemed to have a UTPR Percentage of zero under Art. 2.6.3.

Do you agree?

ITQ Disclaimer

This International Tax Quiz (ITQ) contains general information only, and none of International Insights Pte Ltd, its employees or directors is, by means of this ITQ, rendering professional advice or services. You use the content of this ITQ strictly at your own risk. You should not rely on all or any part of the content of this ITQ in making decisions to take action (including inaction) in regard to tax or other matters. Before making any decision or taking any action (including inaction) that may affect your tax position, your finances or your business, you should consult a qualified professional advisor. None of International Insights Pte Ltd, its employees or directors shall be responsible for any loss whatsoever sustained by any person who relies on the content of this ITQ.