GloBE Rules Series

ITQ G-

029

September 16, 2022

Question

ACo is the only Constituent Entity (within an in-scope MNE Group) which is located in jurisdiction A. The Fiscal Year for the MNE Group is the calendar year. The MNE Group has Constituent Entities which are located in 10 jurisdictions.

Jurisdiction A imposes a corporate income tax with a 10% rate.

In 2023:

ACo incurs a tax loss (for jurisdiction A corporate income tax purposes) of 100, which it can carry forward indefinitely
If the GloBE rules were applicable to ACo in 2023, ACo would have incurred a GloBE Loss of 70 in 2023. The difference between the tax loss (100) and the notional GloBE Loss (70) is due to a "double deduction" for certain expenditure, which is allowed under the jurisdiction A corporate income tax law
The GloBE rules are not effective, in 2023, in any jurisdiction where the MNE Group operates

In 2024:

ACo derives taxable income (for jurisdiction A corporate income tax purposes) of 100, before deducting (in full) the carry-forward tax loss
If the GloBE rules were applicable to ACo in 2024, ACo would have derived GloBE Income of 100 in 2024
The GloBE rules are effective in jurisdiction B, from the start of 2024. The MNE Group includes BCo, a Constituent Entity which is located in jurisdiction B (BCo does not own, directly or indirectly, any shares in ACo)
The GloBE rules are not effective, in 2024, in any other jurisdiction where the MNE Group operates

In 2025:

ACo derives taxable income (for jurisdiction A corporate income tax purposes) of 100 If the GloBE rules were applicable to ACo in 2025, ACo would have derived GloBE Income of 100 in 2025
The GloBE rules are effective in jurisdiction U (where the UPE is located), from the start of 2025
The GloBE rules are not effective, in 2025, in any jurisdiction where the MNE Group operates, other than jurisdictions B and U

Based on these facts, and ignoring the Substance-based Income Exclusion and Qualified Domestic Minimum Top-up Tax, does ACo have Top-up Tax in 2023, 2024 or 2025?

Answer

(1) Introduction:

The GloBE rules are first effective, in any jurisdiction where the MNE Group operates, in 2024 – i.e., in jurisdiction B.

Therefore, 2024 is the "Transition Year" (defined in Art. 10.1.1) for the MNE Group, in regard to all jurisdictions (including jurisdiction A) where the MNE Group operates in 2024.

Thus, ACo's deferred tax balances at the beginning of 2024 must be determined: Art. 9.1.1.

(2) 2023:

No Top-up Tax in 2023.

(3) 2024:

The first step is to determine the opening balance in the deferred tax asset for the 2023 tax loss. Prima facie, the deferred tax asset = 100 x 15% = 15 (with 15% recast: Art. 9.1.1). However, under Art. 9.1.2, 30 of the tax loss (i.e., the amount which is referable to the "double deduction" for certain expenditure), is excluded. Thus, the opening deferred tax asset is: 70 x 15% = 10.5

Next, the Adjusted Covered Taxes, ETR and Top-up Tax are calculated:

Adjusted Covered Taxes: 0 (current tax expense) + 10.5 (Total Deferred Tax Adjustment Amount – i.e., reversal of deferred tax asset) = 10.5
GloBE Income: 100
ETR: 10.5 / 100 = 10.5%
Top-up Tax: 4.5% x 100 = 4.5 – which would be imposed in jurisdiction B as UTPR.

(4) 2025:

Adjusted Covered Taxes: 10 (current tax expense) + 0 (Total Deferred Tax Adjustment Amount) = 10
GloBE Income: 100
ETR: 10 / 100 = 10%
Top-up Tax: 5% x 100 = 5 – which would be imposed in jurisdiction U as IIR (nil would be imposed in jurisdiction B as UTPR: Art. 2.5.2).

Do you agree?

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