GloBE Rules Series

ITQ G-

048

February 24, 2023

Question

Jurisdiction X has implemented the GloBE rules.

Jurisdiction X has a corporate income tax with a 25% tax rate. Jurisdiction X also has a minimum tax with a 20% tax rate. The computation of the minimum tax is identical to the computation of Top-up Tax under the GloBE rules, with 3 exceptions: (1) the tax rate (already noted); (2) the Top-up Tax formula for the minimum tax does not subtract a QDMTT; and (3) there is no jurisdictional blending of income and taxes – i.e., each company’s minimum tax liability (if any) is calculated separately. If there is a minimum tax liability for a company, that is a current tax liability for the company, even if it exceeds the amount of Top-up Tax which would otherwise apply under the GloBE rules – i.e., no part of the minimum tax is carried forward or back to other years.

XCo, a company located in jurisdiction X, is a Constituent Entity within an MNE Group which is “within scope” of the GloBE rules. XCo is the only Constituent Entity located in jurisdiction X. XCo carries on a major manufacturing business in jurisdiction X, and therefore it qualifies for a 100% exemption from jurisdiction X corporate income tax. However, XCo is subject to the jurisdiction X minimum tax.

For a Fiscal Year, XCo (1) has GloBE Income of 3,000; (2) has Substance-based Income Exclusion of 1,800; and (3) does not qualify for a safe harbour or de minimis exclusion (either under the GloBE rules or under the minimum tax).

Based on this information:

Q1: Does the jurisdiction X minimum tax qualify as a QDMTT?

Q2: Assuming the answer to Q1 is "yes", what amount of QDMTT will be imposed on XCo?

Q3: Assuming the answer to Q1 is "no", what amount of Top-up Tax (under the GloBE rules) will arise for jurisdiction X?

Answer

1. Does jurisdiction X minimum tax qualify as a QDMTT?

Exception (1) (tax rate is 20%) does not cause disqualification: AG, para. 118.38.

Exception (2) (Top-up Tax formula does not subtract QDMTT) does not cause disqualification: AG, para. 118.34.

Exception (3) (no jurisdictional blending of income and taxes) is more difficult to analyse. Para. 118.33 says: "For QDMTT purposes, … a jurisdiction could have stricter limitations on blending of income and taxes across the ordinary Constituent Entities in the jurisdiction provided that the limitations on blending produce outcomes that are functionally equivalent to the GloBE Rules." Outcomes will be functionally equivalent to the GloBE rules if the variations “systemically produce a greater incremental tax liability or do not systematically produce lower tax liability than would be expected under the GloBE Rules and Commentary.": AG, para. 10. No jurisdictional blending (i.e., separate calculation for each Constituent Entity located in a jurisdiction) will generally lead to either the same or a greater tax liability than under the GloBE rules – however, I'm not sure that it can be stated that such an outcome will occur in all situations.

Note that, for the exception (3), it is irrelevant that XCo is the only Constituent Entity located in jurisdiction X. The issue is whether the minimum tax qualifies as a QDMTT – not its application to XCo.

With some hesitation, I would conclude that the minimum tax should qualify as a QDMTT.

2. If a QDMTT: what amount of QDMTT will be imposed on XCo?

GI: 3,000

ACT: nil

ETR: 0%

TUT%: 20% (i.e., minimum tax rate is 20%)

Excess Profits: 3,000 – 1,800 = 1,200

QDMTT: 20% x 1,200 = 240

[GloBE Top-up Tax: (15% x 1,200) – 240 = 180 – 240 Thus, nil]

3. If not a QDMTT: what amount of GloBE Top-up Tax will arise for jurisdiction X?

GI: 3,000

ACT: 240

ETR: 8%

TUT%: 7%

Excess Profits: 3,000 – 1,800 = 1,200

TUT: 7% x 1,200 = 84

[Total tax: 240 (minimum tax) + 84 (GloBE Top-up Tax) = 324]

Note how the disqualification of the minimum tax as a QDMTT causes an increase of 84 in total tax.

Do you agree?

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