GloBE Rules Series

ITQ G-

024

August 5, 2022

Question

ACo, a company located in jurisdiction A, is a Constituent Entity in a "within scope" MNE Group.

ACo is a special purpose company which has been formed to undertake a large construction project in jurisdiction A.

The project is expected to produce total pretax accounting profits and taxable income of 10,000 over its 10 years duration (i.e., Years 1 to 10).

For financial accounting purposes, ACo recognizes profit on a "percentage of completion" (POC) basis. Under the POC basis, ACo expects to recognize 1,000 of pretax profit in each of Years 1 to 10.

For jurisdiction A corporate income tax purposes, profit on long-term projects is recognized on a "completed contract" (CC) basis. Under the CC basis, ACo expects to recognize no taxable income in each of Years 1 to 9, but it will recognize 10,000 of taxable income in Year 10.

The jurisdiction A corporate income tax rate is 15%.

In each year, ACo's GloBE Income is equal to its financial accounting pretax profit.

Q1: What amounts of Top-up Tax (if any) will be triggered in each of Years 1 to 10?

Q2: Would your answer to Q1 be different if the MNE Group made an election under Article 4.4.7 for each of Years 1 to 4?

Answer

Q1:

Year 1: (a) GloBE Income (GI): 1,000; (b) Current tax (CT): nil; (c) Deferred tax (Total Deferred Tax Adjustment Amount under Art. 4.4.1) (DT): 150; (d) Recaptured deferred tax (Art. 4.4.4) (RDT): (150); (e) Adjusted Covered Tax (ACT): nil; (f) ETR: 0% (g) Top-up Tax (Additional Current Top-up Tax in Year 6): 150.

Year 2: (a) GI: 1,000; (b) CT: nil; (c) DT: 150; (d) RDT: (150); (e) ACT: nil; (f) ETR: 0%; (g) Top-up Tax (Additional Current Top-up Tax in Year 7): 150.

Year 3: (a) GI: 1,000; (b) CT: nil; (c) DT: 150; (d) RDT: (150); (e) ACT: nil; (f) ETR: 0%; (g) Top-up Tax (Additional Current Top-up Tax in Year 8): 150.

Year 4: (a) GI: 1,000; (b) CT: nil; (c) DT: 150; (d) RDT: (150); (e) ACT: nil; (f) ETR: 0%; (g) Top-up Tax (Additional Current Top-up Tax in Year 9): 150.

For each of Years 5 to 9: (a) GI: 1,000; (b) CT: nil; (c) DT: 150; (d) RDT: nil; (e) ACT: 150; (f) ETR: 15%; (g) Top-up Tax: nil.

Year 10: (a) GI: 1,000; (b) CT: 1,500; (c) DT: (1,350); (d) RDT: nil; (e) ACT: 150; (f) ETR: 15%; (g) Top-up Tax: nil.

Thus, total tax paid = (1) Jurisdiction A tax: 1,500 + (2) Top-up Tax: 600 = 2,100

Effective tax rate: 2,100 / 10,000 = 21%

Q2:

Assuming an Art. 4.4.7 election is validly made in respect of each of Years 1 to 4 …

For each of Years 1 to 4: (a) GI: 1,000; (b) CT: nil; (c) DT: nil (see Note 1 below); (d) RDT: nil; (e) ACT: nil; (f) ETR: 0%; (g) Top-up Tax: 150.

For each of Years 5 to 9: (a) GI: 1,000; (b) CT: nil; (c) DT: 150; (d) RDT: nil; (e) ACT: 150; (f) ETR: 15%; (g) Top-up Tax: nil.

Year 10: (a) GI: 1,000; (b) CT: 1,500; (c) DT: (750) (see Note 2 below); (d) RDT: nil; (e) ACT: 750; ETR: 75%; (g) Top-up Tax: nil.

Note 1: By virtue of the Art. 4.4.7 elections (assuming they are valid), the increase in deferred tax liability is excluded from the Total Deferred Tax Adjustment Amount. In regard to validity, note that Art. 4.4.7 refers to “paid”, not “reversed”!

Note 2: In Year 10, there should be 2 movements in the Total Deferred Tax Adjustment Amount: (i) reduction of 1,350 as the deferred tax liability in the financial accounts reverses; and (ii) increase of 600 under Art. 4.4.2(a) (see Note 3 below). These 2 movements result in a net reduction of 750.

Note 3: Art. 4.4.2(a) refers to "paid", not "reversed".

Thus, total tax paid = (1) Jurisdiction A tax: 1,500 + (2) Top-up Tax: 600 = 2,100

Effective tax rate: 2,100 / 10,000 = 21%

Do you agree? In particular, do you agree (in Year 2) with the net reduction of 750 in the Total Deferred Tax Adjustment Amount?

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