GloBE Rules Series

ITQ G-

061

June 9, 2023

Question

XCo 1 and XCo 2 are members of an "in scope" MNE Group. They are the only Constituent Entities located in jurisdiction X, which has a corporate income tax rate of 25%.

XCo 1 owns 100% of the shares in XCo 2.

Before considering the equity investments of the 2 companies, they have these respective GloBE numbers for a fiscal year:

XCo 1:
- GloBE Income: 1,600
- Adjusted Covered Taxes: 300

XCo 2:
- GloBE Income: 800
- Adjusted Covered Taxes: 200

At the start of the fiscal year, XCo 1 became a tax equity investor in a newly formed tax-transparent partnership in jurisdiction X, which will undertake an energy project. There is one other partner in the partnership: a jurisdiction X energy project developer, which is unrelated to XCo 1.

XCo 1 invested 1,000 in the partnership at the start of the fiscal year. At that time, XCo 1's expected return on its ownership interest was positive, but only because of the expected non-refundable tax credits (see below).

XCo 1 uses the equity method to account for its ownership interest.

For the fiscal year, the partnership allocates to XCo 1:

A financial statement loss and a tax loss of 200

A non-refundable, non-transferable tax credit of 180

These allocations are effective for jurisdiction X tax purposes.

During the fiscal year, XCo 2 sells all of its 20% shareholding in XCo 3, an unrelated company. XCo 2 derives a profit of 1,200 on the sale. Under the jurisdiction X tax law, 20% of the profit is taxable at the standard 25% tax rate (i.e., 80% is excluded). Prior to the sale, XCo 2 used the equity method to account for its ownership interest in XCo 3.

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

Answer

(1) If no Equity Investment Inclusion Election (EIIE) is made for jurisdiction X

XCo 1:

GloBE Income (GI): 1,600 (the loss of 200 is excluded by Art. 3.2.1(c)). Adjusted Covered Taxes (ACT): 300 – (200 x 25%) – 180 = 70 (see AG, section 2.9.1).

XCo 2:

GI: 800 (the profit of 1,200 is excluded by Art. 3.2.1(c)). ACT: 200 (the tax of 60, which is included in XCo 2's current tax expense, is excluded by Art. 4.1.3(a)).

Jurisdiction X ETR: (70 + 200) / (1,600 + 800) = 270 / 2,400 = 11.25% Jurisdiction X Top-up Tax: 4.75% x 2,400 = 114

(2) If an EIIE is made for jurisdiction X

XCo 1's Ownership Interest in the partnership should be a "Qualified Ownership Interest" (New Comm, para. 57.8).

Both the tax loss and the non-refundable, non-transferrable tax credit should be "Qualified Flow-through Tax Benefits" (New Comm, para. 57.5).

Thus, the treatment described in the new Comm, paras. 57.5 to 57.7 should apply to XCo 1 (New Comm, para. 57.4).

XCo 1:

GI: 1,600 (the loss of 200 is excluded by Art. 3.2.1(c)).

ACT: 300 (New Comm, para. 57.5).

XCo 2:

The making of the EIIE will also impact XCo 2's computations:

GI: 800 + (1,200 x 20%) = 800 + 240 = 1,040 [See Note 1]

ACT: 200 + (240 x 25%) = 200 + 60 = 260 [See Note 2]

Note 1: See new Comm, para. 57.2(a)(iii): the taxable proportion of the profit (i.e., 1,200 x 20% = 240) is included in GloBE Income. Note 2: See new Comm, para. 57.2(b): the current and deferred tax expense "associated with [this item]" is 240 x 25% = 60.

Jurisdiction X ETR: (300 + 260) / (1,600 + 1,040) = 560 / 2,640 = 21.2%

Jurisdiction X Top-up Tax: 0

Do you agree?

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