GloBE Rules Series

ITQ G-

033

October 14, 2022

Question

XCo is the UPE of an MNE Group which is "within scope" of the GloBE rules. XCo and all (except one) of the subsidiaries within the group, are located in jurisdiction X. Jurisdiction X has not implemented the GloBE rules.

Z Sub is one of XCo's subsidiaries, and is located in jurisdiction Z. Z Sub owns IP, which it licenses to third parties in return for royalties. Z Sub has no employees (it receives services from a sister subsidiary located in jurisdiction X), and it owns no assets other than the IP. Z Sub is not an Investment Entity. Jurisdiction Z has implemented the GloBE rules, but it has not implemented a QDMTT.

In year 1, Z Sub derives 100 of royalties, and incurs an IP amortisation expense of 18 and intra-group service fees of 2, resulting in a pre-tax profit of 80. Z Sub qualifies for a tax incentive in jurisdiction Z, which is a corporate income tax rate of 5%. Z Sub is not subject to any royalty withholding tax in other jurisdictions.

Ignoring any permanent or timing differences between financial accounting net income, GloBE Income, and taxable profits in jurisdiction Z, Z Sub has GloBE Income of 80 in year 1, and Adjusted Covered Taxes of 4 in year 1.

On 30 September in year 2, XCo sells 100% of the shares in Z Sub to YCo, which is the UPE of another MNE Group which is "within scope" of the GloBE rules. YCo is located in jurisdiction Y. Although jurisdiction Y has not implemented the GloBE rules, several jurisdictions where the YCo group has subsidiaries have done so. Z Sub is the YCo group's only subsidiary in jurisdiction Z.

YCo records Z Sub's IP at fair value in its consolidated financial statements for year 2. That fair value is significantly higher than the carrying value of the IP in Z Sub's financial statements.

Assume that, in year 2, Z Sub's financial statements report the same financial information as in year 1 – i.e., royalty income of 100, amortisation expense of 18 and intra-group service fees (paid to YCo subsidiaries after 30 September) of 2, pre-tax profits of 80, no royalty withholding tax, jurisdiction Z corporate income tax rate of 5%. Please ignore any permanent or timing differences between financial accounting net income, GloBE Income, and taxable profits in jurisdiction Z. Also assume that both XCo and YCo use the calendar year as the fiscal year.

Based on this information, will Z Sub have a tax liability under the GloBE rules in year 1 and/or year 2?

Answer

1. Year 1

Z Sub is the only member of the XCo MNE Group which is located in jurisdiction Z.

Jurisdiction Z's ETR (Art. 5.1.1): 4 / 80 = 5%.

Substance-based Income Exclusion (Art. 5.3): zero (Z Sub has no Eligible Employees and no Eligible Tangible Assets).

Z Jurisdictional Top-up Tax (assuming no Additional Current Top-up Tax) (Art. 5.2): 80 x 10% = 8.

X has not implemented the GloBE rules, but Z has done so.

Can Z's UTPR apply to the Z Jurisdictional Top-up Tax?

Except for one issue, the answer is "yes". But that issue might prevent the UTPR applying. Art. 2.6.1 allocates the UTPR Top-up Tax Amount to UTPR Jurisdictions, according to a formula which uses "Number of Employees" and "Total value of Tangible Assets". However, Z has zero for both of these items. Specifically, the formula in Art. 2.6.1, in this case, would be: 50% x 0/0 + 50% x 0/0 – which presumably is equal to zero!

Therefore, Z Sub should not have a UTPR tax liability in year 1.

2. Year 2

2.1 Preliminary point

Z Sub will be a member of both the XCo Group and the YCo Group in Year 2: Art. 6.2.1(a).

2.2 XCo Group

XCo Group's status as an MNE Group is dependent on the membership of Z Sub, which is the only group member which is not located in jurisdiction X: Art. 1.2.1. As Z Sub will be included in XCo's consolidated financial statements for Year 2, the XCo Group should retain its status as an MNE Group in Year 2, despite Z Sub's departure part-way through the year.

It should be unnecessary to compute the Jurisdictional Top-up Tax for Z for Year 2 – because, just as in year 1, the allocation of the UTPR Top-up Tax Amount to Z in year 2 should be zero.

Thus, in regard to the XCo Group, Z Sub should not have a UTPR tax liability in year 2.

2.3 YCo Group

In computing the ETR and Top-up Tax for jurisdiction Z in year 2, YCo Group will take into account only the Financial Accounting Net Income or Loss and Adjusted Covered Taxes of Z Sub that are taken into account in YCo's consolidated financial statements for year 2: Art. 6.2.1(b).

Accordingly, Z Sub's GloBE Income should be 20 (i.e., 80 x 3/12) and its Adjusted Covered Taxes should be 1 (i.e., 4 x 3/12). In computing Z Sub’s GloBE Income, Z Sub will retain the historical carrying value of the IP – i.e., there will be no step-up to fair value: Art. 6.2.1(c).

Jurisdiction Z's ETR should be 1 / 20 = 5%.

Substance-based Income Exclusion (Art. 5.3): zero (Z Sub has no Eligible Employees and no Eligible Tangible Assets; and the YCo Group has no other Constituent Entities in Z).

Z Jurisdictional Top-up Tax (assuming no Additional Current Top-up Tax) (Art. 5.2): 20 x 10% = 2.

That Top-up Tax will be allocated, as a UTPR Top-up Tax Amount, to the various UTPR Jurisdictions in which the YCo Group has members – but not jurisdiction Z. For the same reason as discussed above, the formula in Art. 2.6.1 should allocate zero UTPR Top-up Tax Amount to Z.

Thus, in regard to the YCo Group, Z Sub should not have a UTPR tax liability in year 2.

3. Final answer

Z Sub should not have a UTPR tax liability in either year 1 or year 2.

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