GloBE Rules Series

ITQ G-

027

August 26, 2022

Question

XCo is the only Constituent Entity (within an "in-scope" MNE Group), which is located in jurisdiction X.

Jurisdiction X's corporate income tax has a 10% rate and allows the carry back of tax losses.

In Year 1, XCo derives:

GloBE Income: 100
Taxable profits: 100

In Year 2, XCo incurs:

GloBE Loss: 80
Tax loss: 100

XCo carries back all of the Year 2 tax loss to apply against the Year 1 taxable profits.

What amounts of Top-up Tax (if any) will arise for XCo in Year 1 and Year 2?

Answer

(1) Year 1 (before tax loss carried back):

GloBE Income: 100

Taxable profits: 100

Current tax expense: 10

Total Deferred Tax Adjustment Amount: nil

Adjusted Covered Taxes: 10

ETR: 10 / 100 = 10%

Top-up Tax: 5

(2) Year 2 (before tax loss carried back):

GloBE Loss: 80

Tax loss: 100

Current tax: nil

Total Deferred Tax Adjustment Amount: (80 x 15%) + (20 x 10%) = (14) (i.e., deferred tax asset for tax loss at 10% rate, increased to 15% rate to the extent of GloBE Loss of 80: Art. 4.4.2(c), Art. 4.4.3)

Adjusted Covered Taxes: (14)

As no GloBE Income, there is no ETR (Art. 5.1.1), and thus no Top-up Tax Percentage (Art. 5.2.1)

Expected Adjusted Covered Taxes (defined in Art. 4.1.5): 80 x 15% = (12)

Thus, Additional Current Top-up Tax: (12) – (14) = 2 (Art. 4.1.5)

Thus, Top-up Tax: 2

(3) Year 1 (after tax loss carried back):

GloBE Income: 100

Taxable profits: nil

Current tax expense: nil (or Reduction to Covered Taxes under Art. 4.1.3(c))

Total Deferred Tax Adjustment Amount: 14

(Amended) Adjusted Covered Taxes: 14

As this is an increase of 4 in Adjusted Covered Taxes, Art. 4.6.1 directs that this be treated as an adjustment to Covered Taxes in Year 2.

Accordingly, Top-up Tax of 5 in Year 1 remains.

(4) Year 2 (after tax loss carried back):

In Year 2, 4 is added to Adjusted Covered Taxes, which become (10) (i.e., (14) + 4 = (10))

This will cause the Additional Current Top-up Tax in Year 2 to reduce to nil, because the (amended) Adjusted Covered Taxes are not less than the Expected Adjusted Covered Taxes.

Thus, (amended) Top-up Tax: nil

(5) Final answer:

Year 1: Top-up Tax = 5

Year 2: Top-up Tax = nil

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.