GloBE Rules Series

ITQ G-

051

March 17, 2023

Question

SCo, a company located in jurisdiction S, is a sovereign wealth fund which is 100% owned by the government of jurisdiction S. SCo’s principal purpose is to invest the government’s funds through the making and holding of investments.

The applicable financial accounting standard which applies in jurisdiction S does not provide an exclusion, from consolidation, for “investment entities”. However, jurisdiction S law exempts SCo from the requirement to prepare consolidated financial statements – and thus, SCo does not do so.

Jurisdiction S has implemented the GloBE rules. Jurisdiction S does not have a CFC regime. SCo is a taxpayer under the jurisdiction S corporate income tax law.

One of SCo’s many investments is a 60% direct shareholding in XCo, a company located in jurisdiction X. The other 40% of the shares are owned by unrelated investors who are located in jurisdiction Y. XCo carries on an R&D business in jurisdiction X, which enables it to qualify for an exemption from the 25% jurisdiction X corporate income tax. However, jurisdiction X has implemented the GloBE rules and a QDMTT (which is effectively identical to the GloBE rules). XCo has no subsidiaries.

For the purposes of the GloBE rules and the QDMTT, XCo has: (1) GloBE Income of 100; (2) Adjusted Covered Taxes of nil; and (3) a Substance-based Income Exclusion of 40.

Based on this information, what tax liability will arise, in respect of XCo, under the GloBE rules (in jurisdictions S or X) or QDMTT (in jurisdiction X)?

In answering this question, please assume that the revenue threshold in Art. 1.1.1 is satisfied.

Answer

SCo meets the definition of "Governmental Entity" in Art. 10.1.1.

SCo is therefore an "Excluded Entity" (Art. 1.5.1(a)). Thus, SCo is excluded from being a "Constituent Entity" (Art. 1.3.3). Accordingly, SCo will not be liable for IIR tax in jurisdiction S (Art. 2.1.1), even if there were a Top-up Tax for jurisdiction X (which is there is not – see below).

The applicable accounting standard in jurisdiction S does not provide SCo with an exclusion from consolidation. However, the jurisdiction S law exempts SCo from the requirement to prepare consolidated financial statements. Therefore, prima facie, SCo would have a "Controlling Interest" in its subsidiaries, under para. (b) of the definition in Art. 10.1.1.

However, that conclusion is reversed by the Administrative Guidance (para. 36.4 in new Commentary on the definition of "Ultimate Parent Entity" in Art. 1.4.1): a sovereign wealth fund that meets the definition of a Governmental Entity (1) will not be considered to be a UPE, and (2) will not be considered to be part of an MNE Group.

I would also note that the government in jurisdiction S is not an "Entity" (para. 17.1 in new Commentary on definition of "Entity" in Art. 10.1.1), and therefore the GloBE rules do not apply to it.

As SCo is not the UPE of an MNE Group, XCo is not included in a Group (Art. 1.2.2). Therefore, XCo is not a "Constituent Entity" (Art. 1.3.1).

Accordingly, for jurisdiction X, there is (1) no ETR (Art. 5.1.1); (2) no Net GloBE Income (Art. 5.1.2); (3) no Additional Current Top-up Tax (Arts. 4.5.1 & 5.4.1); and (4) therefore, no Jurisdictional Top-up Tax (Art. 5.2).

Therefore, XCo will not be liable for UTPR tax in jurisdiction X (see also Art. 2.4.1), and XCo will also not be liable for QDMTT in jurisdiction X.

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.