GloBE Rules Series

ITQ G-

044

January 20, 2023

Question

XCo, a company located in jurisdiction X, is a Constituent Entity in an MNE Group which is "within scope" of the GloBE rules. XCo, a small manufacturing company, is the only Constituent Entity located in jurisdiction X.

YCo, a company located in jurisdiction Y, is also a Constituent Entity in the MNE Group. YCo is the only Constituent Entity located in jurisdiction Y. XCo and YCo are "sister subsidiaries".

The UPE is located in jurisdiction U.

For 2024, the GloBE rules are in effect in jurisdictions X and Y (for both jurisdictions, both the IIR and UTPR are in effect, but not a QDMTT); however, the GloBE rules are not in effect in jurisdiction U or in any of the other 8 jurisdictions in which the MNE Group has Constituent Entities.

For 2024, XCo 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: 1.4
Revenue: 9
Income tax expense (100% Covered Taxes, no "uncertain tax positions"): 0.2
Negative adjustments (i.e., reductions) (under Art. 3.2 and following) in computing GloBE Income (note: there are no positive adjustments): (0.5)
Adjusted Covered Taxes: 0.1
Substance-based Income Exclusion: 0.6

And for 2024, YCo 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: 1.2
Revenue: 15
Income tax expense (100% Covered Taxes, no "uncertain tax positions"): 0.1
Net positive adjustments (i.e., add-back) (under Art. 3.2 and following) in computing GloBE Income: 2.0
Adjusted Covered Taxes: 0.3
Substance-based Income Exclusion: 0.4

Based on this information, will either or both of XCo and YCo have a tax liability under the GloBE rules for 2024?

Answer

1. Juris. X Top-up Tax

XCo fails the transitional CbCR safe harbour: (i) de minimis test is failed, because Profit before Income Tax is not less than EUR 1m; (ii) simplified ETR test is failed, because simplified ETR is: 0.2 / 1.4 = 14.3%; and (iii) routine profits test is failed, because Profit before Income Tax exceeds SBIE amount.

However, XCo satisfies the de minimis exclusion in Art. 5.5: Average GloBE Revenue = EUR 9m, and Average GloBE Income = EUR 0.9 (see the Commentary’s discussion on how to determine the "average" numbers in the first year when GloBE rules apply).

If the election is made (I will assume that it is), Art. 5.5 requires that the Top-up Tax for 2024 is zero.

2. Juris. Y Top-up Tax

YCo fails the transitional CbCR safe harbour: (i) de minimis test is failed, because Total Revenue is not less than EUR 10m, and Profit before Income Tax is not less than EUR 1m; (ii) simplified ETR is failed, because simplified ETR is: 0.1 / 1.2 = 8.3%; and (iii) routine profits test is failed because Profit before Income Tax exceeds SBIE amount.

YCo also fails the de minimis exclusion in Art. 5.5: Average GloBE Revenue is not less than EUR 10m, and Average GloBE Income is not less than EUR 1m.

Calculation of Top-up Tax…

GloBE Income: 1.2 + 2.0 = 3.2

ETR: 0.3 / 3.2 = 9.375%

Top-up Tax Percentage: 5.625%

Excess Profits: 3.2 – 0.4 = 2.8

Top-up Tax: 5.625% x 2.8 = EUR 0.1575m

3. UTPR

Art. 9.3 will not apply to exclude the application of the UTPR in 2024, as the MNE Group is not "in its initial phase of its international activity": there are Constituent Entities in more than 6 jurisdictions.

The UTPR of EUR 0.1575m will be allocated between jurisdictions X and Y, according to the allocation formula in Art. 2.6. Note that UTPR for 2024 will be allocated (in part) to jurisdiction X, even though that jurisdiction qualifies for the de minimis exclusion in 2024.

Do you agree?

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