GloBE Rules Series

ITQ G-

066

August 11, 2023

Question

ACo (a company located in jurisdiction A) and BCo (a company located in jurisdiction B) are both Constituent Entities in an MNE Group which will be "within scope" of the GloBE rules, when the rules commence (on 1 January 2024). ACo and BCo are the only Constituent Entities located in their respective jurisdictions. Jurisdiction U (in which the UPE is located) has enacted the IIR, but it does not have any CFC rules.

Jurisdiction A has no corporate income tax. Jurisdiction B has a corporate income tax with a 20% tax rate. Neither jurisdiction A nor jurisdiction B has a QDMTT.

For many years, ACo has been the owner of IP, which it licenses to group companies in return for arm's length royalties (totalling EUR 40m annually). No foreign withholding tax is imposed on the royalties. ACo's accounting carrying value in the IP is zero. ACo has a zero tax basis in the IP, and there are no deferred taxes relating to the IP.

The MNE Group is concerned about the IIR Top-up Tax which will be triggered in respect of jurisdiction A, when the GloBE rules commence.

The MNE Group has suggested this "solution": Before the GloBE rules commence, ACo will sell the IP (together with the licences) to BCo for fair market value (which is EUR 400m). This will mean that, when the GloBE rules commence, BCo will derive the EUR 40m of annual royalties, not ACo.

The MNE Group has estimated that, in the first year of operation of the GloBE rules (2024), BCo's GloBE position (before considering the impact of its purchase of the IP) would be this:

GloBE Income: EUR 200m
Adjusted Covered Taxes: EUR 40m
Substance-based Income Exclusion: EUR 20m

Under the applicable accounting standard, BCo will have an accounting carrying value in the IP of zero.

For jurisdiction B corporate income tax purposes, BCo's tax basis in the IP will be EUR 400m. For tax purposes, BCo will amortise the IP at a rate of 25% per annum, straight line.

Based on this information, will the MNE Group's Top-up Tax in 2024 be lower if the above-mentioned "solution" is implemented, or if the status quo (i.e., ACo retains the IP) is maintained?

Please (1) assume that the sale transaction would be undertaken on 31 December 2023; and (2) ignore any possible safe harbour or de minimis exclusion.

Answer

1. If status quo (i.e., ACo retains IP) is maintained

a. ACo:

GloBE Income: EUR 40m.

Adjusted Covered Taxes (ACT): zero.

ETR: 0%.

Top-up Tax (assuming ACo has zero SBIE): EUR 40m x 15% = EUR 6m.

b. BCo:

GloBE Income: EUR 200m.

ACT: EUR 40m.

ETR: 40m / 200m = 20%.

Top-up Tax = zero.

Thus, total Top-up Tax = EUR 6m.

2. If "solution" is implemented

a. ACo:

The question does not indicate what ACo does with the EUR 400m sale price. If ACo is immediately liquidated or immediately pays a dividend of the full EUR 400m, ACo should have no GloBE Income, and thus no Top-up Tax, in 2024.

However, if ACo invests the EUR 400m (e.g., intra-group loan), the income on the investment would generally produce GloBE Income and thus Top-up Tax. For example, if ACo lends the EUR 400m intra-group at 8% p.a. interest, its GloBE Income for 2024 should be EUR 32m, and its Top-up Tax should be EUR 4.8m. But, against this, we would need to consider whether the group borrower would obtain a tax deduction for the interest expense and, if so, the tax effect of that deduction.

b. BCo:

GloBE Income (see Note 1): EUR 200m + EUR 40m = EUR 240m.

ACT (see Note 2): EUR 28m.

SBIE: EUR 20m.

ETR: EUR 28m / EUR 240m = 11.7%.

Excess Profits: EUR 240m - EUR 20m = EUR 220m.

Top-up Tax: EUR 220m x 3.3% = EUR 7.26m.

Note 1: Under Art. 9.1.3, BCo's GloBE carrying value in the IP would be equal to ACo's accounting carrying value - i.e., zero. Thus, no IP amortisation would be deducted in computing GloBE Income. See para. 10.1 of Comm to Art. 9.1.3 (added by Feb23 AG, section 4.3.3).

Note 2:

Tax depreciation on IP for 2024: EUR 400m x 25% = EUR 100m.
2024 taxable income: EUR 240m - EUR 100m = EUR 140m.
ACT: EUR 140m x 20% = EUR 28m.

To determine the final tax cost with the "solution", we would need to determine what ACo does with the EUR 400m sales price.

If ACo is immediately liquidated or if it immediately pays a dividend of the full EUR 400m, ACo should have no Top-up Tax in 2024 - and thus, the conclusion would be that the status quo would produce a lower Top-up Tax liability for the MNE Group than the "solution".

However, the analysis becomes more complicated if ACo invests the EUR 400m - particularly if it lends the cash intra-group, because then we would need to take into account both ACo's Top-up Tax and the tax effect on the borrower.

Do you agree?

ITQ Disclaimer

This International Tax Quiz (ITQ) contains general information only, and none of International Insights Pte Ltd, its employees or directors is, by means of this ITQ, rendering professional advice or services. You use the content of this ITQ strictly at your own risk. You should not rely on all or any part of the content of this ITQ in making decisions to take action (including inaction) in regard to tax or other matters. Before making any decision or taking any action (including inaction) that may affect your tax position, your finances or your business, you should consult a qualified professional advisor. None of International Insights Pte Ltd, its employees or directors shall be responsible for any loss whatsoever sustained by any person who relies on the content of this ITQ.