GloBE Rules Series

ITQ G-

037

November 18, 2022

Question

XCo 1 is a company located in jurisdiction X. It has 3 shareholders: UPE 1, UPE 2, and UPE 3 (each of which is a UPE of an MNE Group "in scope" of the GloBE rules).

XCo 1 has only 1 class of issued shares, which are owned in these percentages: UPE 1 (50%), UPE 2 (25%), and UPE 3 (25%).

All 3 of the UPEs include XCo 1's financial results in their consolidated financial statements under the equity method.

XCo 1 owns 80% of the shares in YCo, a company located in jurisdiction Y. The other 20% is owned by third parties.

UPE 1 owns 100% of the shares in XCo 2, a Constituent Entity located in jurisdiction X. UPE 1 does not own any other subsidiaries in X, and UPE 2 & 3 own no subsidiaries in X.

In the current Fiscal Year:

(1) XCo 1 has GloBE Income of 100, and Adjusted Covered Taxes of 10.

(2) XCo 2 has GloBE Income of 100, and Adjusted Covered Taxes of 25.

(3) YCo has GloBE Income of 100, and Adjusted Covered Taxes of 5.

Based on this information, what will be the impact, under the GloBE rules, on UPE 1, UPE 2, and UPE 3? Please ignore any Additional Current Top-up Tax, Substance-based Income Exclusion, and/or Qualified Domestic Minimum Top-up Tax.

Answer

XCo 1 and YCo are not Constituent Entities in the respective MNE Group of UPE 1, UPE 2 or UPE 3, because none of those UPEs consolidate XCo 1 and YCo on a line-by-line basis: see Arts. 1.2 & 1.3. Thus, except for the "JV" liability discussed below, there is no impact, under the GloBE rules, for any of the 3 UPEs.

XCo 1 is a "Joint Venture" (defined in Art. 10.1.1) in regard to UPE 1, which reports XCo 1's financial results in its consolidated financial statements under the equity method, and which holds at least 50% of XCo 1's "Ownership Interests" (defined in Art. 10.1.1). I have assumed that XCo 1 is not a UPE of an "in scope" MNE Group, and is not otherwise excluded from being a "Joint Venture": see paras. (a) & (b) of the Art. 10.1.1 definition of "Joint Venture".

XCo 1 is not a "Joint Venture" in regard to either UPE 2 or UPE 3, because neither holds at least 50% of XCo 1's Ownership Interests.

YCo is a "JV Subsidiary" (defined in Art. 10.1.1). XCo 1 and YCo together form a "JV Group" (Art. 10.1.1 definition).

In accordance with Art. 6.4.1(a), the Top-up Tax of XCo 1 and YCo will be computed as if they were Constituent Entities of a separate MNE Group and as if XCo 1 was the UPE of that Group. Importantly, this means that, in computing the jurisdictional Top-up Tax for jurisdiction X, XCo 1's numbers are not blended with XCo 2's numbers.

Thus: (i) XCo 1's Top-up Tax is: 5% x 100 = 5; and (ii) YCo's Top-up Tax is: 10% x 100 = 10.

UPE 1's "Allocable Share of the Top-up Tax" (defined in Art. 2.2.1) is: (i) in regard to XCo 1: 50% x 5 = 2.5; and (ii) in regard to YCo: 50% x 80% x 10 = 4.

Those 2 amounts (2.5 and 4) will be included in UPE 1's IIR tax: Art. 6.4.1(b).

XCo 2's numbers will not cause a Top-up Tax liability for UPE 1's MNE Group.

As noted above, there will be no impact, under the GloBE rules, on either UPE 2 or UPE 3.

Do you agree?

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