GloBE Rules Series

ITQ G-

058

May 12, 2023

Question

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is "within scope" of the GloBE rules. It is the only Constituent Entity located in jurisdiction A. Jurisdiction A has a corporate income tax rate of 25%.

ACo directly owns 100% of the shares in 2 subsidiaries: BCo (located in jurisdiction B) and CCo (located in jurisdiction C).

(1) Year 1:

ACo's jurisdiction A corporate income tax computation has these financial numbers:

Domestic source tax loss: (300)
Income inclusion under jurisdiction A CFC rules, in respect of BCo: 100
Foreign tax credit (FTC) in respect of that CFC inclusion: 20
Dividend income received from CCo: 100 (such dividend income is taxable under jurisdiction A law)
FTC in respect of that dividend income: 22
Royalties received from DCo, an unrelated company resident in jurisdiction D: 100 (such royalties are treated as foreign source income under jurisdiction A law)
FTC in respect of those royalties: 10

Please assume that under the jurisdiction A corporate income tax law: (1) for FTC purposes, all foreign source income is placed in the same "basket"; (2) for FTC purposes, no expenses are allocated against foreign source income; (3) all foreign source income numbers described above include the "gross-up" for the relevant FTC; (4) a domestic source tax loss is offset against foreign source income, before application of FTCs; and (5) all excess FTCs are carried forward to future years, to be offset against tax on domestic source income which is recharacterized (i.e., "re-sourced") as foreign source income.

Also in Year 1, ACo has a GloBE Loss: (300).

(2) Year 2:

ACo's jurisdiction A corporate income tax computation has these financial numbers:

Domestic source taxable income: 300
Actual foreign source income (from CFC inclusions, foreign source dividends, foreign source royalties, or other): 0

Also, in Year 2, ACo has GloBE Income of 300 (and its Substance-based Income Exclusion is zero).

Based on this limited information, what is ACo's jurisdiction A corporate income tax and Top-up Tax for Year 1 and Year 2?

Answer

(1) Year 1

(a) Corporate income tax (CIT):

Domestic source loss: (300)

Foreign source income: 100 + 100 + 100 = 300

Taxable income: (300) + 300 = 0

CIT payable: 0

Carry-forward loss: 0

Carry-forward FTCs: 20 + 22 + 10 = 52

(b) GloBE rules:

GloBE Loss: (300)

Current tax expense: 0

Substitute Loss Carry-forward DTA recognised : 30 (52 of carry-forward FTCs, recast at 15%; adjusted to 30 by Art. 4.4.1(a): see note 1 below)

Adjusted Covered Taxes: (30)

No ETR and no Top-up Tax (see note 2 below)

Note 1:

i. AG, section 2.8 sets out an exception to Art. 4.4.1(e).

ii. The amount of the Substitute Loss Carry-forward DTA is (prima facie) the lesser of (1) Carry-forward FTCs (52), and (2) domestic source tax loss x tax rate (75) – i.e., 52.

iii. However, Art. 4.4.1(a) applies to exclude the deferred tax expense with respect to the FTC on the dividend from CCo (which would qualify as an "Excluded Dividend").

iv. Thus, the Substitute Loss Carry-forward DTA should be: 20 + 10 = 30 (which happens to equal 15% x 200).

Note 2: There will be no ETR because jurisdiction A does not have Net GloBE Income: Art. 5.1.1. In regard to Top-up Tax: Art. 4.1.5 will not apply, because the Adjusted Covered Taxes is not less than the Expected Adjusted Covered Taxes.

(2) Year 2

(a) CIT:

Domestic source income (prima facie): 300

Actual foreign source income: 0

Domestic source income re-sourced as foreign source income: 300

Tax (prima facie): 25% x 300 = 75

FTCs: 52

CIT payable: 75 – 52 = 23

(b) GloBE rules:

GloBE Income: 300

Current tax expense: 23

Deferred tax expense on reversal of Substitute Loss Carry-forward DTA: 30

Adjusted Covered Taxes: 23 + 30 = 53

ETR: 53 / 300 = 17.7%

Top-up Tax: 0

Do you agree?

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