GloBE Rules Series

ITQ G-

059

May 26, 2023

Question

BCo, a company located in jurisdiction B, is a Constituent Entity in an MNE Group which is "within scope" of the GloBE rules.

BCo has the following financial income for a fiscal year (determined in accordance with the Acceptable Accounting Standard used by the UPE in preparing its Consolidated Financial Statements):

1. Profit (i.e., net income, after tax) (in P&L): 50,000.

2. Equity accounting method in respect of associated company, CCo (BCo holds 30% Ownership Interest in CCo):

a. Included in Profit: share of net income from CCo: 10,000.

b. Not included in Profit: gross dividend received from CCo: 7,000 (this dividend is taxable in Jurisdiction B).

c. Included as expense in computing Profit: Jurisdiction C withholding tax on dividend: 1,400.

d. Included as expense in computing Profit: BCo's management expenses directly relating to investment in CCo: 1,000.

3. Other foreign sourced income (not derived from CCo):

a. Included in Profit: Jurisdiction D gross interest: 2,000.

b. Included as expense in computing Profit: Jurisdiction D withholding tax on interest: 200.

c. Included in Profit: Jurisdiction D digital services income: 3,000.

d. Included as expense in computing Profit: Jurisdiction D digital services tax (imposed on gross revenue): 900. e. Included as expense in computing Profit: BCo's employment expenses directly relating to Jurisdiction D digital services income: 2,000.

4. Jurisdiction B tax (included as expense in computing BCo's Profit):

a. Alternative Minimum Tax (AMT) (not computed on GloBE Income): 10,000. [Note: BCo is subject to AMT because its Jurisdiction B regular income tax liability has fallen below the AMT threshold. The AMT is calculated by applying a 5% tax rate to gross revenue, and then subtracting foreign tax credits.]

b. In computing AMT, foreign tax credits have been subtracted:

i. Dividend withholding tax (Jurisdiction C): 1,200.

ii. Interest withholding tax (Jurisdiction D): 200.

iii. Digital services tax (Jurisdiction D): 200.

Based on this information, what is BCo's GloBE Income or Loss for the fiscal year?

Answer

Computation of BCo's GloBE Income:

1. Profit: 50,000.

2. Equity accounting method in respect of CCo:

a. Included in Profit: share of net income from CCo - adjust: (10,000).

b. Not included in Profit: gross dividend (Excluded Dividend) - do not adjust: 0.

c. Included as expense in computing Profit: Juris. C dividend withholding tax - included in "Net Taxes Expense" - adjust: 1,400.

d. Included as expense in computing Profit: management expenses - see Note 1 below - adjust: 1,000.

3. Other foreign sourced income (not derived from CCo):

a. Included in Profit: Juris. D gross interest - do not adjust: 0.

b. Included as expense in computing Profit: Juris. D interest withholding tax - included in "Net Taxes Expense" - adjust: 200.

c. Included in Profit: Juris. D digital services income - do not adjust: 0.

d. Included as expense in computing Profit: Juris. D digital services tax - not included in "Net Taxes Expense" (see Note 2 below) - do not adjust: 0.

e. Included as expense in computing Profit: employment income - do not adjust: 0.

4. Juris. B taxes:

a. AMT - included in "Net Taxes Expense" (see Note 3 below) - adjust: 10,000.

b. In computing AMT, foreign tax credits have been subtracted - i.e., AMT of 10,000 is net of the FTCs - do not adjust: 0.

Thus, GloBE Income = 50,000 + (10,000) + 1,400 + 1,000 + 200 + 10,000 = 52,600.

Note 1: Does the definition of "Excluded Equity Gain or Loss" in Art. 10.1.1 include directly related expenses? No guidance is provided in the Comm, Examples or AG. Based on the fact that the definition refers to "gain, profit or loss", I favour the view that directly related expenses are included in the definition.

Note 2: Is a DST a Covered Tax (defined in Art. 4.2)? As the Juris. D DST is imposed on a gross basis, then it probably is not a "Covered Tax", on the basis that it is not imposed in lieu of a generally applicable corporate income tax.

Note 3: Is the AMT a Covered Tax (defined in Art. 4.2), having regard to the fact that it is imposed on a gross basis? No guidance is provided in the Comm, Examples or AG. Based on the fact that the AMT applies in place of the regular corporate income tax, I favour the view that it is imposed in lieu of a generally applicable corporate income tax.

Do you agree?

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