GloBE Rules Series

ITQ G-

043

January 13, 2023

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 only Constituent Entity located in jurisdiction A. Jurisdiction A has a corporate income tax rate of 20%.

The UPE is a large manufacturing company which is located, and has significant manufacturing operations, in jurisdiction U. The UPE has 3 subsidiaries (including ACo) located outside jurisdiction U. The 3 subsidiaries are low-risk buy / sell distributors of the UPE’s goods: they own no valuable IP, they own no inventory (they buy goods from the UPE on a "flash title" basis), and they operate from leased premises.

For the 2024 fiscal year, jurisdiction A is the only jurisdiction (in which the MNE Group operates) for which the GloBE rules are in effect (IIR, UTPR, and QDMTT).

UPE enjoys a tax incentive in jurisdiction U, causing its ETR (calculated under the GloBE rules) to be 10% in 2024. The UPE's GloBE Income in 2024 is EUR 200 million. The UPE's Substance-based Income Exclusion is EUR 80 million.

For 2024, ACo has the following financial information (determined in accordance with the Acceptable Accounting Standard used by the UPE in preparing its consolidated Financial Statements) (all in EUR millions):

Profit before Income Tax: 0.5
Revenue: 15
Income tax expense (100% Covered Taxes, no "uncertain tax positions"): 0.06
Net positive adjustments (i.e., add-back) (under Art. 3.2 and following) in computing GloBE Income: 0.6
Adjusted Covered Taxes: 0.08
Substance-based Income Exclusion: 0.4

Based on this information, will ACo have a tax liability under jurisdiction A's GloBE rules (IIR, UTPR and/or QDMTT) for 2024?

Answer

1. Juris. A: de minimis exclusion (Art. 5.5)

Not applicable, as ACo’s GloBE Revenue is not less than EUR 10m and its GloBE Income is not less than EUR 1m (see the Commentary’s discussion on how to determine the “average” numbers in the first year when GloBE rules apply).

2. Juris. A: transitional CbCR safe harbour

Not applicable, as none of the 3 tests is satisfied: (1) de minimis test failed, because Total Revenue is not less than EUR 10m; (2) simplified ETR test failed, because computation is: 0.06 / 0.5 = 12%, which is less than Transition Rate of 15%; and (3) routine profits test failed, because Profit (Loss) before Income Tax is not equal to or less than SBIE amount.

3. Juris. A Top-up Tax

ACo's ETR: 0.08 / 1.1 = 7.2727%.

Thus, Top-up Tax Percentage = 7.7273%.

Excess Profit: 1.1 – 0.4 = 0.7

Thus, Top-up Tax = (7.7273% x 0.7) – QDMTT = 0.054 – QDMTT

Thus, jurisdiction A QDMTT = EUR 0.054m.

4. Juris. U Top-up Tax

UPE's ETR = 10%.

Thus, Top-up Tax Percentage = 5%.

Excess Profit: 200 – 80 = 120.

Thus, Top-up Tax = 5% x 120 = EUR 6m.

Jurisdiction A is the only jurisdiction (in which the MNE Group operates) for which the GloBE rules are in effect in 2024. Thus, 100% of the Top-up Tax, prima facie, should be allocated to jurisdiction A as UTPR. Note that the allocation percentage would be 100% only if ACo has at least one employee in jurisdiction A, and at least one "Tangible Asset" in jurisdiction A (e.g., office furniture): see the formula in Art. 2.6.1.

However, Art. 9.3 (exclusion from the UTPR of MNE Groups in the initial phase of their international activity) should apply here – which would mean that no Top-up Tax would be allocated to jurisdiction A under the UTPR.

5. Final answer

The only Top-up Tax which will be imposed for 2024 will be EUR 0.054m of jurisdiction A QDMTT.

Do you agree?

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