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GloBE Rules Series

ITQ G-

028

September 9, 2022

Question

XCo is a Constituent Entity in an MNE Group, which is "within scope" of the GloBE rules. 


XCo is located in jurisdiction X, which levies a corporate income tax. XCo is the only Constituent Entity located in jurisdiction X. 


In Year 1: 

  1. XCo purchases (at the start of Year 1) a fixed asset for 150, which it depreciates for financial accounting purposes at 10% per annum, and which it depreciates for X corporate income tax purposes at 20% per annum 

  2. XCo has GloBE Income of 100, after expensing 15 of depreciation for the fixed asset 

  3. XCo has taxable income (for the purposes of X corporate income tax) of 50, after deducting 30 of depreciation for the fixed asset 

  4. XCo has no other temporary differences between its financial accounting pretax profit and taxable income 

  5. The X corporate income tax rate is 25% 


In Year 2: 

  1. XCo has GloBE Income of 220, after expensing 15 of depreciation for the fixed asset 

  2. XCo has taxable income of 80, after deducting 30 of depreciation for the fixed asset 

  3. XCo has no other temporary differences between its financial accounting pretax profit and taxable income 

  4. Jurisdiction X increases its corporate income tax rate to 30% (effective in Year 2) 


Based on these facts, what amounts of Top-up Tax (if any) does XCo have in each of Years 1 and 2? 


Please assume that jurisdiction X has no Substance-based Income Exclusion and no Qualified Domestic Minimum Top-up Tax.

Answer

Year 1: 

  1. Current tax expense: 50 x 25% = 12.5 

  2. Total Deferred Tax Adjustment Amount: 15 x 15% = 2.25 (i.e., recast at 15%, no adjustments or exclusions are relevant) (Art. 4.4.1) 

  3. Adjusted Covered Taxes: 12.5 + 2.25 = 14.75 (Art. 4.1.1) 

  4. ETR: 14.75 / 100 = 14.75% (Art. 5.1.1) 

  5. Top-up Tax: 0.25% x 100 = 0.25 (Art. 5.2.3) 


Year 2: 

  1. Current tax expense: 80 x 30% = 24 

  2. Total Deferred Tax Adjustment Amount: 15 x 15% = 2.25 (again, recast at 15%, no adjustments or exclusions are relevant) (Art. 4.4.1) 

  3. Adjusted Covered Taxes: 24 + 2.25 = 26.25 (Art. 4.1.1) 

  4. ETR: 26.25 / 220 = 11.9318% (Art. 5.1.1) 

  5. Top-up Tax: 3.0682% x 220 = 6.75 (Art. 5.2.3) 


Final answer: 


Top-up tax: 0.25 (Year 1) and 6.75 (Year 2), despite fact that jurisdiction X's corporate income tax rate is 25% in Year 1 and 30% in Year 2 – the power of permanent differences!

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