GloBE Rules Series

ITQ G-

041

December 16, 2022

Question

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

ACo is the owner of valuable IP, which it licenses to group companies throughout the world, in return for arm's length royalties. ACo's carrying value of the IP in its 2022 financial statements is 100.

Jurisdiction A does not impose a corporate income tax.

BCo, a newly formed company in jurisdiction B, is also a Constituent Entity in the same MNE Group. BCo currently does not have any business operations, and it has no employees. Jurisdiction B has a corporate income tax, with a 25% tax rate. BCo is the only Constituent Entity located in jurisdiction B.

At the start of 2023, ACo sells its IP to BCo for 1,000 (the IP's fair market value). BCo finances the acquisition by issuing new shares to the UPE in the MNE Group (located in jurisdiction U). By virtue of the sale, BCo becomes the licensor of the IP to the group company licensees.

In its 2023 and later financial statements, BCo amortises the IP at a rate of 10% per annum (i.e., 100 each year). BCo derives 110 of royalty income each year (please assume that no foreign withholding tax is paid on those royalties). For jurisdiction B corporate income tax purposes, BCo deducts tax depreciation on the IP at a rate of 10% per annum (i.e., 100 each year).

The GloBE rules first apply to the MNE Group in 2024.

Based on this information, will the MNE Group have a Top-up Tax for jurisdiction B in 2024? Please assume that BCo continues to have no employees in 2024.

Answer

The key issue in this case is whether, in computing its GloBE Income in 2024, BCo will use a basis in the IP of 1,000 (the fair market value price which it pays to ACo) or 100 (ACo's carrying value) – in other words, whether the intra-group sale of the IP in 2023 (i.e., before the start of the GloBE rules) achieves a "step-up" in the basis of IP for GloBE purposes.

The answer is: BCo will use 100 – i.e., no step-up will be achieved.

2024 is a "Transition Year" for the MNE Group: see Art. 10.1.1 definition.

Art. 9.1.3: "In the case of a transfer of assets between Constituent Entities after 30 November 2021 and before the commencement of a Transition Year, the basis in the acquired assets … shall be based on the disposing Entity's carrying value of the transferred assets upon disposition …".

In 2024:

BCo's Adjusted Covered Taxes: (110 – 100) x 25% = 2.5
BCo's GloBE Income: 110 – (100 x 10%) = 100
Jurisdiction B ETR: 2.5 / 100 = 2.5%
Jurisdiction B Top-up Tax: 12.5% x 100 = 12.5 (ignoring QDMTT)

Thus, my answer is: Jurisdiction B Top-up Tax = 12.5

Do you agree?

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