GloBE Rules Series

ITQ G-

060

June 2, 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. ACo is the only Constituent Entity located in jurisdiction A. The jurisdiction A corporate income tax rate is 20%.

Before considering its investment in partnerships, ACo has these financial numbers for a fiscal year:

GloBE Income: 2,000
Adjusted Covered Taxes: 310

ACo is a partner in 2 jurisdiction A partnerships. Both partnerships are tax transparent under the jurisdiction A corporate income tax law. ACo accounts for its investment in both partnerships using the equity method.

The relevant information for the 2 partnerships:

Partnership A1:
- ACo's ownership interest: 25%.
- In the fiscal year, the partnership incurs a financial statement and tax loss of 800. Under the jurisdiction A corporate income tax law, ACo's share of the tax loss (i.e., 25% x 800 = 200) is included as a deduction in the computation of its corporate income tax.

Partnership A2:
- ACo's ownership interest: 20%.
- In the fiscal year, the partnership derives a financial statement and tax profit of 200. Under the jurisdiction A corporate income tax law, ACo's share of the tax profit (i.e., 20% x 200 = 40) is included as income in the computation of its corporate income tax.

Based on this information, what is the jurisdiction A Top-up Tax in the fiscal year? Please ignore the Substance-based Income Exclusion.

Answer

1. If no Equity Investment Inclusion Election is made

a. GloBE Income: 2,000 (i.e., no inclusion from the 2 partnerships, due to Art. 3.2.1(c)).

b. Adjusted Covered Taxes: 310 – (200 x 20% = 40) = 270 (i.e., (i) inclusion of (40) from partnership A1, as Art. 4.1.3(a) does not apply; (ii) no positive inclusion from partnership A2, due to Art. 4.1.3(a)) [See AG, section 2.9.1: the use of "income excluded", but not "loss excluded", in Art. 4.1.3(a) causes an asymmetrical outcome].

c. ETR: 270 / 2,000 = 13.5%.

d. Top-up Tax = 1.5% x 2,000 = 30.

2. If Equity Investment Inclusion Election is made

a. GloBE Income: 2,000 – 200 + 40 = 1,840 (i.e., election de-activates Art. 3.2.1(c)).

b. Adjusted Covered Taxes: 310 – (200 x 20% = 40) + (40 x 20% = 8) = 278.

c. ETR: 278 / 1,840 = 15.1%.

d. Top-up Tax: 0.

Do you agree?

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