GloBE Rules Series

ITQ G-

039

December 2, 2022

Question

ACo, a company located in jurisdiction A, is the UPE of an MNE Group which is "within scope" of the GloBE rules.

BCo is a company located in jurisdiction B (which has not implemented a QDMTT). BCo qualifies as an "Investment Fund" (Art. 10.1.1 definition). BCo has one class of issued shares.

ACo owns a 60% Ownership Interest in BCo. The other 40% Ownership Interests are owned by third party investors.

ACo includes BCo's financial results in its consolidated financial statements on a line-by-line basis.

In the current year, BCo reports 200 of pretax profits in its financial statements. Included in those pretax profits are: (1) dividends on long-term (greater than 12 months) portfolio shareholdings: 65; (2) gains on sale of such shareholdings: 35; (3) interest on corporate and government bonds: 60; and (4) gains on sale of such bonds: 40. Please ignore expenses.

BCo is tax-exempt in jurisdiction B. Also, please assume that BCo does not incur any foreign withholding tax, and it does not have any "Eligible Employees" (Art. 10.1.1 definition) or "Eligible Tangible Assets" (Art. 5.3.4 definition). In addition, please assume that no election is made under Art. 7.5 or Art. 7.6.

ACo is subject to CFC tax in jurisdiction A with respect to its investment in BCo. For the purposes of the CFC rules, BCo's interest income and gains on sale of bonds, are taxable. The CFC tax rate is 25%.

Based on this information, what is BCo's Top-up Tax (if any) for the current year?

Answer

BCo's GloBE Income = 200 – 65 ("Excluded Dividends": Art. 10.1.1 definition) = 135.

The 35 of gains on sale of long-term portfolio shareholdings are not "Excluded Equity Gain or Loss" (Art. 10.1.1 definition) because of the exception for Portfolio Shareholdings.

For the purposes of Art. 7.4, the MNE Group's Allocable Share of BCo's GloBE Income is: 60% x 135 = 81.

BCo is tax-exempt in jurisdiction B and does not incur any foreign withholding tax. Therefore, subject to Art. 4.3, BCo's Adjusted Covered Taxes would be nil.

However, ACo incurs a CFC tax rate of 25% in regard to BCo's interest income (60) and gains on sale of bonds (40). Thus, ACo's CFC tax is: 25% x 100 x 60% = 15 – i.e., reflecting ACo's 60% Ownership Interest in BCo.

Prima facie, that 15 is allocated to BCo under Art. 4.3.2(c). However, both the interest income and the gains on sale of bonds, fall within the definition of "Passive Income" in Art. 10.1.1. Therefore, the "cap" in Art. 4.3.3 will need to be applied. The amount in para. (a) is 15. The amount in para. (b) is calculated as: 15% x 100 = 15. Accordingly, based on the numbers, the cap does not restrict the tax allocated to BCo. (Note that the 35 of gains on sale of long-term portfolio shareholdings is excluded from the definition of "Passive Income" by the closing words in the definition: "but only to the extent …").

Therefore, BCo's Adjusted Covered Taxes will be 15.

In calculating BCo's ETR, Art. 7.4.2 requires us to use the MNE Group's Allocable Share of BCo's GloBE Income – i.e., 81.

Accordingly, BCo's ETR is: 15 / 81 = 18.5185%. Thus, BCo has no Top-up Tax Percentage: Art. 7.4.5.

Which means that BCo has no Top-up Tax.

Do you agree?

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