GloBE Rules Series

ITQ G-

062

June 16, 2023

Question

XCo, a company located in jurisdiction X, is a Constituent Entity in an MNE Group. The MNE Group will become subject to the GloBE rules, for the first time, for the fiscal year ending 31 December 2024. XCo's tax year for jurisdiction X purposes also ends on 31 December.

Jurisdiction X imposes a 20% corporate income tax, and applies a worldwide tax system. It provides non-transferable foreign tax credits (FTCs) to relieve double taxation. Excess FTCs can be carried forward for 5 years - at the end of 5 years, remaining FTCs lapse. The jurisdiction X tax law also provides non-transferable investment tax credits (ITCs) for qualifying expenditure. Excess ITCs can be carried forward for 6 years, for offset against the taxpayer's income tax liability. To the extent an ITC has not been offset after 6 years, it becomes refundable - i.e., the remaining amount of ITC is paid to the taxpayer as cash.

In the 2023 year, XCo receives a dividend from its 100% subsidiary, YCo, which is located in jurisdiction Y. The dividend brings with it an FTC of 35, which is a combination of jurisdiction Y dividend withholding tax and underlying corporate tax. XCo uses 20 of the FTC in 2023, and carries forward the balance of 15. XCo's 2023 financial statements do not recognise a deferred tax asset for the FTC, because the recognition criteria are not met.

Also in 2023, XCo qualifies for an ITC of 25. XCo does not have a sufficient tax liability in 2023 to use any of the ITC. The full amount of 25 is therefore carried forward. XCo's 2023 financial statements treat the 25 ITC as income.

In 2024:

XCo's Adjusted Covered Taxes (before considering the FTC and ITC carried forward from 2023) is 200.
XCo uses all of its carried forward FTC and ITC to offset its income tax liability.

Based on this information, what is the amount of XCo's Adjusted Covered Taxes in 2024?

Answer

2024 is the "Transition Year" for the MNE Group (definition in Art. 10.1.1).

This question requires the application of Art. 9.1.1.

1. FTC (15)

The fact that no deferred tax asset (DTA) is recognised in XCo's 2023 financial statements for the FTC because the accounting recognition criteria are not met, will not prevent such a DTA being recognised, for GloBE purposes: AG, section 4.1.3 (new Comm, para. 6.3); also, text of Art. 9.1.1.

By virtue of AG, section 4.1.3 (new Comm, para. 6.1), Art. 4.4.1(e) does not apply to DTAs arising prior to the Transition Year.

The dividend from YCo is an "Excluded Dividend" (definition in Art. 10.1.1). Prima facie, Art. 4.4.1(a) would probably prevent the recognition, for GloBE purposes, of a DTA with respect to the FTC. However, the restriction in Art. 4.4.1(a) does not apply to attributes imported into the GloBE rules by Art. 9.1.1, unless Art. 9.1.2 applies: see AG, section 4.1.3 (new Comm, para. 6.3). Art. 9.1.2 will exclude the DTA if it is "generated in a transaction that takes place after 30 November 2021". Is the declaration and payment of the dividend by YCo, in 2023, such a "transaction"? The Comm to Art. 9.1.2 suggests that the provision is targeted at transfers of assets involving the Constituent Entity, not a dividend received by the Constituent Entity - although this is not totally clear. Nevertheless, my preferred view is that Art. 9.1.2 should not apply to the dividend from YCo.

As jurisdiction X's corporate income tax rate is 20%, the amount of the DTA will be reduced, in accordance with the formula in AG, section 4.1.3 (new Comm, para. 6.1): 15 / 20% x 15% = 11.25.

Thus, for GloBE purposes, a DTA of 11.25 will be recognised at the beginning of the Transition Year.

2. ITC (25)

The threshold issue is whether the ITC is a "Non-Qualified Refundable Tax Credit" (NQRTC) (defined in Art. 10.1.1). [It is clearly not a "Qualified Refundable Tax Credit" (QRTC), due to the breach of the 4-year condition.] The definition of NQRTC refers to "refundable in whole or in part". The ITC is refundable, but only after 6 years - does this qualify as "refundable in whole or in part"? Based on the Comm to the Art. 10.1.1 definition of QRTC, it seems that the ITC would be "refundable".

XCo treats the ITC as income in its 2023 financial statements. Therefore, those financial statements do not reflect any DTA for the ITC.

According to AG, section 4.1.3 (new Comm, para. 6.2): "[The] settlement of refundable tax credits that accrued prior to the beginning of the Transition Year, whether or not the amount satisfies an income tax liability, generally should not be treated as a reduction to Adjusted Covered Taxes."

3. Adjusted Covered Taxes (ACT) computation

XCo's ACT (before considering the FTC and ITC carried froward from 2023): 200

Impact of offsetting FTC:

a. Current tax expense: (15)

b. DTA reversal: 11.25

Impact of offsetting ITC:

a. Current tax expense: Nil (see above).

Thus, XCo's ACT: 200 + (15) + 11.25 = 196.25

Do you agree?

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