GloBE Rules Series

ITQ G-

063

June 23, 2023

Question

XCo 1, a company located in jurisdiction X, is a Constituent Entity in an MNE Group which is "within scope" of the GloBE rules. The UPE (located in jurisdiction U) owns 100% of the shares in XCo 1.

XCo 1 owns (1) 8% of the shares in XCo 2, which is another company located in jurisdiction X (the other shares in XCo 2 are owned by unrelated parties); and (2) 30% of the shares in YCo, which is a company located in jurisdiction Y (the other shares in YCo are owned by unrelated parties).

XCo 1 has the following financial income for the 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): 40,000.

2. Equity method of accounting:

a. Deducted in computing Profit: XCo 1's share of loss from YCo: (10,000).

b. YCo is treated as tax transparent in jurisdiction X (but not jurisdiction Y) – for X corporate income tax purposes, the share of YCo's loss is deductible for XCo 1.

c. No dividend or other distribution was paid by YCo.

3. 8% shareholding in XCo 2 (all of XCo 1's shares were held for 14 months):

a. Included in Profit: dividend from XCo 2: 3,000 (tax exempt for X corporate income tax purposes).

b. Included in Profit: gain on sale of all of XCo 1's shares in XCo 2: 5,000 (tax exempt for X corporate income tax purposes).

4. Change in accounting policy, causing an adjustment to the opening equity in XCo 1's balance sheet for the fiscal year:

a. Adjustment is an increase of 10,000 to opening equity.

b. The change in accounting policy relates equally to the 5 preceding fiscal years (i.e., an adjustment of 2,000 relates to each of the 5 preceding fiscal years) – 2 of these fiscal years were prior to, and the other 3 fiscal years were after, the application of the GloBE rules to XCo 1.

c. In computing the adjustment of 10,000, X corporate income tax of 2,000 has been deducted.

5.Income tax expense (deducted in computing Profit):

a. 20,000.

b. Included in the 20,000 is 12,000, which is refundable by jurisdiction X to the UPE when dividends are paid by XCo 1 to the UPE. The dividends will be tax-exempt to the UPE under jurisdiction X law.

Based on this information, what is XCo 1's GloBE Income or Loss for the fiscal year?

Answer

Computation of GloBE Income or Loss:

1. Profit: 40,000

2. YCo:

a. YCo is a "Hybrid Entity" (defined in Art. 10.2.5). However, that status has an impact only on Art. 4.3.2(d), which is irrelevant to this question.

b. If the MNE Group does not make an Equity Investment Inclusion Election (EIIE) (see AG, section 2.9.2), the 10,000 allocated loss would be added back as an "Excluded Equity Gain or Loss" (defined in Art. 10.1.1) under Art. 3.2.1(c). As the allocated loss is deductible for X tax purposes, this would cause a reduction in XCo 1's ETR.

c. If the MNE Group makes an EIIE, the 10,000 would not be added back. I will assume that an EIIE is made – thus: no adjustment.

3. XCo 2:

a. 3,000 dividend is an "Excluded Dividend" (defined in Art. 10.1.1), as the 8% shareholding is not a "Short-term Portfolio Shareholding". (I have assumed that XCo 2 is not an Investment Entity.) Deducted under Art. 3.2.1(b). Thus: (3,000) deducted.

b. 5,000 gain is not an "Excluded Equity Gain or Loss" (defined Art. 10.1.1), as the 8% shareholding is a "Portfolio Shareholding". Not added back under Art. 3.2.1(c). Thus: no adjustment.

4. Change in accounting policy:

a. This item qualifies as "Prior Period Errors and Changes in Accounting Principles" (defined in Art. 10.1.1). As it is an increase to opening equity, the adjustment is an add back under Art. 3.2.1(h).

b. There are 2 issues with the amount of add back: (i) transition between pre- and post-GloBE fiscal years; and (ii) deduction of X corporate income tax of 2,000.

c. First issue: Only the amounts relating to the 3 fiscal years after the introduction of GloBE rules, will be adjusted: Comm on Art. 3.2.1(h), para. 83.

d. Second issue: Although not discussed in the Comm, it would make sense to add back the pre-tax amount. The relevant tax should qualify as Adjusted Covered Taxes under Art. 4.1.1(c). Therefore, if the pre-tax amount is not added back, the ETR could be materially increased.

e. Thus: 12,000 x 3/5 = 7,200 added.

5. Income tax expense:

a. Prima facie, 20,000 is added back.

b. 12,000 is a "Disqualified Refundable Imputation Tax" (defined in Art. 10.1.1). It is not a "Qualified Imputation Tax" (defined in Art. 10.1.1), as the UPE is tax-exempt on the dividend in jurisdiction X. c. Thus, the 12,000 is included in "Net Taxes Expense" (defined in Art. 10.1.1).

Thus, the whole 20,000 is added back under Art. 3.2.1(a). Thus: 20,000 added.

GloBE Income = 40,000 - 3,000 + 7,200 + 20,000 = 64,200.

Do you agree?

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