GloBE Rules Series

ITQ G-

045

January 27, 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.

ACo carries on a manufacturing business in jurisdiction A, and is provided with a tax incentive under the jurisdiction A tax law.

ACo is trying to determine how the tax incentive should be designed in the future, having regard to the GloBE rules.

For that purpose, ACo assumes: (1) its GloBE Income will be 1,000; (2) its Substance-based Income Exclusion (SBIE) amount will be 800; and (3) it will not satisfy a safe harbour or the de minimis exclusion.

Q1: If jurisdiction A provides an income tax exemption for the SBIE amount (800), and levies a 15% income tax on the remainder of ACo's GloBE Income (200), will there be no Top-up Tax?

Q2: If the answer to Q1 is that there would be a Top-up Tax, what rate of tax should jurisdiction A levy on the remainder of ACo's GloBE Income (200) to ensure that the Top-up Tax is zero?

For the purposes of these questions, please assume that (apart from the exemption of the SBIE amount) there are no permanent or timing differences between the computation of GloBE Income and the computation of taxable profits under the jurisdiction A tax law.

Answer

Adjusted Covered Taxes: 15% x 200 = 30

GloBE Income: 1,000 (i.e., not reduced by the SBIE amount)

Thus, ETR = 30 / 1,000 = 3% (Art. 5.1)

Top-up Tax Percentage = 12%

Excess Profit = 1,000 – 800 = 200

Thus, Jurisdictional Top-up Tax = 12% x 200 = 24 (Art. 5.2)

To ensure that the Top-up Tax is zero, jurisdiction A would need to levy a tax of 150 on the remainder of ACo’s GloBE Income (200).

With Adjusted Covered Taxes of 150, ACo's ETR would be: 150 / 1,000 = 15%.

The tax of 150 on 200 of income is a 75% tax rate!

Comments

With a 15% jurisdiction A tax rate on the 200, the total tax paid would be: 30 (juris. A tax) + 24 (Top-up Tax) = 54.

Alternatively, with a 75% jurisdiction A tax rate on the 200, the total tax paid would be: 150 (juris. A tax) + 0 (Top-up Tax) = 150.

Ironically, of the 2 alternatives, the MNE Group would pay less tax by allowing the Top-up Tax to apply.

An important point to note is that the SBIE amount does not reduce GloBE Income. Therefore, a low ETR can still occur, even though most of the GloBE Income is SBIE and the remainder is subject to a 15% tax rate.

Do you agree?

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