GloBE Rules Series

ITQ G-

049

March 3, 2023

Question

An MNE Group's UPE, which is located in jurisdiction U, is subject to the jurisdiction U CFC rules. Those CFC rules qualify as a Blended CFC Tax Regime, as defined in the Administrative Guidance (AG). Under the CFC rules, the foreign effective tax rate must be 13.125% in order to generate sufficient foreign tax credits (ignoring any foreign tax credit limitation) to prevent the imposition of a tax charge.

In a Fiscal Year, UPE has a tax charge of 50 under the CFC rules.

UPE directly owns 100% of the shares in 4 CFCs. For the Fiscal Year, the CFCs have this financial information:

1. XCo 1 (located in jurisdiction X)

Net income (P&L): 220
GloBE Income: 200
Attributable Income: 80
Constituent Entity for GloBE purposes

2. XCo 2 (located in jurisdiction X)

Net income (P&L): 100
GloBE Income: Nil
Attributable Income: 70
Non-Constituent Entity for GloBE purposes

3. YCo (located in jurisdiction Y)

Net income (P&L): 150
GloBE Income: 150
Attributable Income: 100
Constituent Entity for GloBE purposes

4. ZCo (located in jurisdiction Z)

Net income (P&L): 200
GloBE Income: 150
Attributable Income: 50
Constituent Entity for GloBE purposes

The MNE Group has these GloBE Jurisdictional ETRs (as defined in the AG) for the Fiscal Year:

X: 8%
Y: 11%
Z: 14%

Based on this information, what will be the allocation of CFC tax under Art. 4.3.2(c)?

Please ignore any possible cap under Art. 4.3.3.

Answer

The question requires the application of AG, section 2.10.3.

First step: calculate Blended CFC Allocation Key for each CFC (including XCo 2, which is a non-Constituent Entity), using this formula (AG, para. 58.3):

Attributable Income of Entity x (Applicable Rate – GloBE Jurisdictional ETR).

Based on the question, the Applicable Rate is 13.125% (see AG, para. 58.5).

Thus, Blended CFC Allocation Keys:

XCo 1: 80 x (13.125% – 8%) = 4.10
XCo 2: 70 x (13.125% – 8%) = 3.59
YCo: 100 x (13.125% – 11%) = 2.13
ZCo: 50 x (13.125% – 14%) = 0 (see AG, para. 58.6)

Sum of All Blended CFC Allocation Keys: 4.10 + 3.59 + 2.13 + 0 = 9.82

Second step: calculate Blended CFC Tax allocated to each Entity (including XCo 2), using this formula (AG, para. 58.3):

Blended CFC Allocation Key / Sum of All Blended CFC Allocation Keys x Allocable Blended CFC Tax.

Based on the question, the Allocable Blended CFC Tax is 50 (see AG, para. 58.3).

Thus, Blended CFC Tax allocated to:

XCo 1: 4.10 / 9.82 x 50 = 20.88
XCo 2: 3.59 / 9.82 x 50 = 18.28
YCo: 2.13 / 9.82 x 50 = 10.85
ZCo: 0 / 9.82 x 50 = 0

Total: 20.88 + 18.28 + 10.85 + 0 = 50.01 (due to rounding)

Thus, allocation of CFC taxes under Art. 4.3.2(c):

XCo 1: 20.88
YCo : 10.85

The 18.28 of Blended CFC tax allocated to XCo 2 is not allocated under Art. 4.3.2(c), because XCo 2 is not a Constituent Entity.

Do you agree?

ITQ Disclaimer

This International Tax Quiz (ITQ) contains general information only, and none of International Insights Pte Ltd, its employees or directors is, by means of this ITQ, rendering professional advice or services. You use the content of this ITQ strictly at your own risk. You should not rely on all or any part of the content of this ITQ in making decisions to take action (including inaction) in regard to tax or other matters. Before making any decision or taking any action (including inaction) that may affect your tax position, your finances or your business, you should consult a qualified professional advisor. None of International Insights Pte Ltd, its employees or directors shall be responsible for any loss whatsoever sustained by any person who relies on the content of this ITQ.