GloBE Rules Series

ITQ G-

032

October 7, 2022

Question

A Group

ACo is the UPE of an MNE Group ("A Group"), which includes XCo (100% subsidiary of ACo).

ACo is located in jurisdiction A, and XCo is located in jurisdiction X. Jurisdiction X has implemented the GloBE rules, but jurisdiction A has not.

XCo is the parent of a 100% subsidiary, YCo, which is located in jurisdiction Y. YCo is the only member of the A Group which is located in Y. Jurisdiction Y has not implemented the GloBE rules.

A Group uses the calendar year as its fiscal year.

B Group

BCo is the UPE of another MNE Group ("B Group"), which includes YCo 2 (100% subsidiary of BCo).

BCo is located in jurisdiction B, which has implemented the GloBE rules.

YCo 2 is located in jurisdiction Y – it is the only member of the B Group which is located in Y.

B Group uses the calendar year as its fiscal year.

Sale of XCo

On 30 September in Year 1, ACo sells 100% of the shares in XCo to BCo.

In the 12 months ending 31 December in Year 1, YCo's financial accounting net income is 100 and its Adjusted Covered Taxes are 5. Please assume that there are no differences between the computation of YCo's financial accounting net income and GloBE Income.

In the 12 months ending 31 December in Year 1, YCo 2's financial accounting net income is 100 and its Adjusted Covered Taxes are 30. Again, please assume that there are no differences between the computation of YCo 2’s financial accounting net income and GloBE Income.

Question

For Year 1, will there be one or more tax liabilities under the GloBE rules in regard to jurisdiction Y? If yes, which entity or entities will be subject to the liability or liabilities?

Answer

Preliminary point

XCo and YCo will be members of both the A Group and the B Group in Year 1: Art. 6.2.1(a).

A Group

In computing the ETR and Top-up Tax for jurisdiction Y in Year 1, A Group will take into account only the Financial Accounting Net Income or Loss and Adjusted Covered Taxes of YCo that are taken into account in ACo’s consolidated financial statements for Year 1: Art. 6.2.1(b).

Accordingly, YCo's GloBE Income should be 75 (i.e., 100 x 9/12) and its Adjusted Covered Taxes should be 3.75 (i.e., 5 x 9/12).

Jurisdiction Y's ETR should be 3.75 / 75 = 5%.

If we ignore the Substance-based Income Exclusion and Additional Current Top-up Tax, the jurisdictional Top-up Tax for jurisdiction Y should be: 10% x 75 = 7.5.

Jurisdiction A has not implemented the GloBE rules. Thus, the IIR will not be imposed on ACo.

Assuming XCo is not an Investment Entity, it will qualify as an Intermediate Parent Entity in regard to YCo: Art. 10.1.1 definition. In accordance with Art. 6.2.1(h) and Art. 2.1.2, an IIR of 7.5 will be imposed on XCo.

B Group

In computing the ETR and Top-up Tax for jurisdiction Y in Year 1, B Group will take into account only the Financial Accounting Net Income or Loss and Adjusted Covered Taxes of YCo that are taken into account in BCo's consolidated financial statements for Year 1: Art. 6.2.1(b).

Accordingly, YCo's GloBE Income should be 25 (i.e., 100 x 3/12) and its Adjusted Covered Taxes should be 1.25 (i.e., 5 x 3/12).

Jurisdiction Y's Net GloBE Income, aggregate Adjusted Covered Taxes, ETR and Top-up Tax will need to take into account both YCo and YCo 2.

Net GloBE Income: 25 + 100 = 125

Adjusted Covered Taxes: 1.25 + 30 = 31.25

ETR: 31.25 / 125 = 25%

Thus, if we ignore Additional Current Top-up Tax, jurisdiction Y will have no Top-up Tax in Year 1.

Final answer

A Group: IIR of 7.5 imposed on XCo.

B Group: no IIR.

2 points to note: (i) For B Group, YCo 2's high ETR shelters YCo's low-taxed profits; and (2) B Group should do its tax due diligence carefully: XCo (which it purchases) has an IIR liability in regard to A Group.

Do you agree?

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