GloBE Rules Series

ITQ G-

047

February 10, 2023

Question

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

ACo owns 90% of the shares in BCo, a company located in jurisdiction B. The other 10% of the shares in BCo are owned by third parties. BCo is the only member of the MNE Group located in jurisdiction B.

BCo owns 100% of the shares in CCo, a company located in jurisdiction C.

Jurisdictions A and B have implemented the GloBE rules (both IIR and UTPR), and they have also each implemented a QDMTT.

For a Fiscal Year:

ACo is subject to 4 jurisdiction A taxes: (1) Corporate income tax: 100; (2) CFC tax (in respect of BCo's CFC taxable income of 1,400, which includes 400 of Passive Income): 150 (before credit for BCo's taxes), 30 (after credit for BCo's taxes); (3) IIR tax (in respect of the jurisdiction B Top-up Tax): to be determined ("TBD"); and (4) QDMTT: TBD.
For purposes of both the GloBE rules and the QDMTT, ACo’s GloBE Income is 2,000, and its Substance-based Income Exclusion ("SBIE") is 1,200.

For the same Fiscal Year:

BCo is subject to 3 jurisdiction B taxes: (1) Corporate income tax: 50; (2) CFC tax (in respect of CCo's CFC taxable income, which does not include any Passive Income): 120 (before credit for CCo's taxes), 80 (after credit for CCo's taxes); and (3) QDMTT: TBD.
For purposes of both the GloBE rules and the QDMTT, BCo's GloBE Income is 1,400 (including 400 of Passive Income), and its SBIE is 800.

Based on this information:

Q1: What is ACo's IIR tax liability in respect of the jurisdiction B Top-up Tax?

Q2: What is ACo's QDMTT liability?

Q3: What is BCo's QDMTT liability?

Answer

(1) Art. 4.3.3 calculation for BCo

Art. 4.3.3, para. (a): ACo's CFC tax with respect to BCo's Passive Income = 30 x 400 / 1,400 = 8.57 (i.e., I have applied a proportionate approach – see my comment below).

Art. 4.3.3, para. (b):

ACo's residual CFC tax = 30 – 8.57 = 21.43 (see my comment below)

BCo's Covered Taxes = 21.43 + 50 = 71.43

BCo's ETR = 71.43 / 1,400 = 5.1%

BCo's Top-up Tax Percentage = 9.9%

Para. (b) amount = 9.9% x 400 = 39.6

Thus, Art. 4.3.3 amount = 8.57

[Note that Example 4.3.3-1 (in the Inclusive Framework's Examples document) considers a situation where 100% of the CFC taxable income comprises Passive Income. In that situation, all of the CFC tax is "with respect to such Passive Income", as referred to in Art. 4.3.3(b). In contrast, in the current question, the CFC taxable income is 1,400, of which the Passive Income is only 400. The Top-up Tax Percentage in para. (b) is calculated "without regard to the Covered Taxes incurred with respect to such Passive Income by [ACo]" – i.e., without regard to 8.57. Thus, the Adjusted Covered Taxes for the ETR calculation takes into account the CFC tax on the non-Passive Income (i.e., the residual CFC tax) of 21.43.]

(2) ACo's QDMTT

GI = 2,000

SBIE = 1,200

ACT = 100 (ACo's CFC tax is not taken into account – see Administrative Guidance (AG), para. 118.28)

ETR = 100 / 2,000 = 5%

TUT% = 10%

EP = 2,000 – 1,200 = 800

QDMTT = 10% x 800 = 80

(3) BCo's QDMTT

GI = 1,400

SBIE = 800

ACT = 50 (see AG, paras. 118.28 & 118.30; and see my comment below.)

ETR = 50 / 1,400 = 3.57%

TUT% = 11.43%

EP = 1,400 – 800 = 600

QDMTT = 11.43% x 600 = 68.58

[Note that BCo's CFC tax in respect of CCo is 100% allocated to CCo, by Art. 4.3.2(c). As CCo has no Passive Income (stated in the question), then the cap in Art. 4.3.3 does not apply. As the CFC tax is allocated to CCo, it is not included in BCo's ACT.]

(4) Jurisdiction B GloBE Top-up Tax

GI = 1,400

SBIE = 800

ACT = 50 + 30 = 80

ETR = 80 / 1,400 = 5.71%

TUT% = 9.29%

EP = 1,400 – 800 = 600

TUT = (9.29% x 600) – 68.58 = 55.74 – 68.58 = 0

(5) ACo's IIR tax (with respect to jurisdiction B Top-up Tax)

Nil.

Thus, my answers:

Q1: 0

Q2: 80

Q3: 68.58

Do you agree?

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