GloBE Rules Series

ITQ G-

054

April 14, 2023

Question

A Holdco, A Sub 1 and A Sub 2 are companies located in jurisdiction A. A Holdco is a direct 100% subsidiary of the UPE of an MNE Group, which is "within scope" of the GloBE rules. A Holdco directly owns 100% of the shares in each of A Sub 1 and A Sub 2 (i.e., A Sub 1 and A Sub 2 are sister subsidiaries). A Holdco, A Sub 1 and A Sub 2 are the only Constituent Entities located in jurisdiction A. None of the companies is an Investment Entity.

Jurisdiction A has implemented a QDMTT, which is effectively identical to the GloBE rules.

The MNE Group's tax director estimates that, absent planning, the group will incur a significant QDMTT liability in the next fiscal year. In particular, the director estimates that the following numbers will apply for the next fiscal year:

A Holdco:
- GloBE Income: Nil
- Adjusted Covered Taxes: Nil
A Sub 1:
- GloBE Income: 500
- Adjusted Covered Taxes: 50
A Sub 2:
- GloBE Income: 400
- Adjusted Covered Taxes: 48

The tax director proposes this plan: (1) A Sub 2 would subscribe for redeemable preference shares (RPS) in A Sub 1; (2) A Sub 1 would use the cash from the RPS to buy-back some of its common shares from A Holdco; (3) A Holdco would use the cash from (2) to subscribe for new common shares in A Sub 2; (4) the terms of the RPS would be drafted such that the RPS would be treated as a liability for A Sub 1 under the Acceptable Financial Accounting Standard applicable in jurisdiction A; and (5) those terms of the RPS would also require ACo 2 to treat the RPS as equity under the same Acceptable Financial Accounting Standard.

The RPS would carry a coupon dividend of 100 in the next fiscal year (the dividend would be due and payable on the last business day of that fiscal year).

The tax director explains that there will be no impact on corporate income tax, because the RPS will be treated as equity for jurisdiction A corporate income tax purposes by both A Sub 1 and A Sub 2: thus, A Sub 1 would not obtain a deduction for the coupon dividend, and A Sub 2 would qualify for a 100% exemption under the jurisdiction A corporate income tax law.

The tax director asks you whether this plan will cause a reduction in the group's QDMTT liability in the next fiscal year.

Answer

A Sub 1

If the coupon payment is an expense in calculating A Sub 1's Financial Accounting Net Income or Loss, no adjustment (in regard to the coupon payment) will be made in computing A Sub 1's GloBE Income. In particular, Art. 3.2.7 will not apply, as both A Sub 1 and A Sub 2 are located in jurisdiction A.

Thus, no adverse GloBE impact.

A Holdco

The profit (if any) which A Holdco derives on the buy-back of common shares will qualify as "Excluded Equity Gain or Loss" (defined in Art. 10.1.1), and thus will be excluded from A Holdco's GloBE Income.

Thus, no adverse GloBE impact.

A Sub 2

Preliminary issue: ignoring the Administrative Guidance (AG), would the coupon receipt qualify as "Excluded Dividends"? The definition in Art. 10.1.1 excludes dividends or other distributions in respect of a "Short-term Portfolio Shareholding" (defined in Art. 10.1.1).

The RPS is probably not a "Portfolio Shareholding": that term is defined in Art. 10.1.1 to mean “Ownership Interests in an Entity that are held by the MNE Group” – this indicates that the RPS should be considered together with the common shares in A Sub 1 held by A Holdco. Those 2 shareholdings together would carry 100% rights in regard to A Sub 1.

Thus, ignoring the AG, the coupon receipt would probably qualify as "Excluded Dividends", and would thus be excluded from A Sub 1's GloBE Income.

Impact of AG: Section 2.3 of the AG adds new Commentary to the definition of "Ownership Interest" in Art.10.1.1: "To the extent [two] Constituent Entities have classified [an] instrument differently under the relevant accounting standard(s), the classification adopted by the issuer should be applied by the issuer and the holder for GloBE purposes".

Thus, the RPS will be treated as debt for GloBE purposes – the RPS will not be an "Ownership Interest", and the coupon receipt will not be "Excluded Dividends".

This is an adverse GloBE impact – i.e., the tax director's plan will not cause any reduction in the QDMTT position in jurisdiction A.

Do you agree?

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