GloBE Rules Series

ITQ G-

040

December 9, 2022

Question

ACo, a company located in jurisdiction A, is the UPE of an MNE Group which is "within scope" of the GloBE rules. Jurisdiction A has a corporate income tax rate of 20%. ACo has no tax losses.

ACo directly owns 100% of the shares in XCo, a company located in jurisdiction X. Jurisdiction X has a corporate income tax rate of 25%. XCo has no tax losses.

XCo directly owns 100% of the shares in YCo, a company located in jurisdiction Y. Jurisdiction Y does not levy a corporate income tax.

In the current year, YCo derives 200 of profits, comprising (1) 100 of interest income (no related expenses), and (2) 150 of service fees (less 50 of related expenses). YCo does not incur any foreign withholding taxes.

Jurisdiction X has CFC rules. Under those rules, an amount equal to YCo's 100 of interest income is imputed to XCo.

Jurisdiction A also has CFC rules. Under those rules, an amount equal to the whole of YCo's profits (i.e., 200) is imputed to ACo. However, ACo will obtain a credit for the CFC tax paid by XCo on the same amount.

Based on this limited information, what will be YCo's Adjusted Covered Taxes in the current year?

Answer

1. XCo's CFC tax

XCo's CFC tax: 25% x 100 = 25

Prima facie, that amount of 25 will be allocated to YCo under Art. 4.3.2(c), subject to Art. 4.3.3 (see below).

2. ACo's CFC tax

ACo’s CFC tax: [20% x 200] – credit for XCo's CFC tax

I will assume that jurisdiction A's tax law limits the credit to ACo's CFC tax on the same income (i.e., 100 of interest income).

Based on that assumption, the credit will be: 20% x 100 = 20

Thus, ACo's CFC tax: 40 – 20 = 20

Prima facie, that amount of 20 will be allocated to YCo under Art. 4.3.2(c), subject to Art. 4.3.3 (see below).

3. Art. 4.3.3

YCo's 100 of interest income is included in "Passive Income" (Art. 10.1.1 definition), but its 100 of profit from service fees is not.

XCo's CFC tax of 25 is wholly in respect of "Passive Income".

A question arises as to how much (if any) of ACo's CFC tax of 20 is in respect of "Passive Income". After giving the credit for XCo’s CFC tax in respect of YCo’s 100 of interest income, is the remainder of ACo's CFC tax (20) wholly in respect of the 100 of net service fees – or, alternatively, is it 50% in respect of the 100 of net service fees and 50% in respect of the 100 of interest income? The Commentary and the Examples do not answer that question.

I will assume that the answer is that ACo's CFC tax is wholly in respect of 100 of net service fees – i.e., none of ACo’s CFC tax of 20 is in respect of "Passive Income".

Based on that assumption:

Jurisdiction Y's Top-up Tax Percentage is 15%.

Art. 4.3.3, para. (b) amount: 15% x 100 = 15.

Art. 4.3.3, para. (a) amount: 25 (XCo) + 0 (ACo) = 25.

Thus, Art. 4.3.3 "cap" is 15.

4. Final amounts allocated to YCo under Art. 4.3.2(c)

XCo's CFC tax (capped under Art. 4.3.3) = 15

ACo's CFC tax (not capped under Art. 4.3.3) = 20

Total CFC tax amounts allocated to YCo (i.e., YCo's Adjusted Covered Taxes): 15 + 20 = 35.

Do you agree?

ITQ Disclaimer

This International Tax Quiz (ITQ) contains general information only, and none of International Insights Pte Ltd, its employees or directors is, by means of this ITQ, rendering professional advice or services. You use the content of this ITQ strictly at your own risk. You should not rely on all or any part of the content of this ITQ in making decisions to take action (including inaction) in regard to tax or other matters. Before making any decision or taking any action (including inaction) that may affect your tax position, your finances or your business, you should consult a qualified professional advisor. None of International Insights Pte Ltd, its employees or directors shall be responsible for any loss whatsoever sustained by any person who relies on the content of this ITQ.