GloBE Rules Series

ITQ G-

068

August 25, 2023

Question

ACo, a company located in jurisdiction X, is a Constituent Entity in the A MNE Group, which is "within scope" of the GloBE rules.

ACo incurs R&D expenditure in jurisdiction X, which entitles ACo to a EUR 100 tax credit.

The tax credit entitles the holder to a credit of EUR 100 against its corporate income tax liabilities for the current tax year (year 1) or for either of the 2 subsequent tax years. The credit can be claimed in whole in one of those years, or in part in one or more years (providing the aggregate does not exceed EUR 100).

The tax credit:

Is not refundable
However, it can be transferred up to 2 times, at any time during the 3 years, to a related or unrelated party
In the situation where the tax credit is transferred, the jurisdiction X tax law has no requirements in regard to the price (if any) for the transfer

There is an established market in jurisdiction X for the transfer of tax credits. ACo does not have sufficient tax capacity in year 1 to use any of the tax credit.

ACo transfers the tax credit in year 2 to BCo, for a price of EUR 90.

BCo, a company located in jurisdiction X, is a Constituent Entity in the B MNE Group, which is "within scope" of the GloBE rules.

ACo and BCo are unrelated.

BCo uses EUR 70 of the tax credit in year 2, and the remaining EUR 30 of the tax credit in year 3, in both cases against BCo's jurisdiction X corporate income tax liability.

Based on these facts, what is the GloBE treatment of ACo and BCo?

Answer

The following analysis is based on July 2023 AG, chapter 2…

1. ACo

ACo is the Originator of the tax credit (amended para. 111 of Comm to Art. 3.2.4).

The tax credit is not a QRTC or NQRTC, because it is not refundable.

The tax credit is an MTTC in ACo's hands, because:

i. Legal transferability standard is satisfied – tax credit can be transferred to an unrelated party during year 1 or within 15 months of the end of year 1.

ii. Marketability standard is satisfied – transfer price (EUR 90) for transfer to BCo exceeds 80% of the net present value (NPV) of the tax credit (EUR 100).

(See para. 112.1 in Comm to Art. 3.2.4).

Thus, ACo's GloBE treatment:

a. Transfer price (EUR 90) included in ACo's GloBE Income in year 1 (in lieu of EUR 100).

b. Tax credit is not taken into account in computing ACo's Adjusted Covered Taxes.

(See para. 112.5 in Comm to Art. 3.2.4; and amended para. 5 of Comm to Art. 4.1.2(d)).

2. BCo

BCo is a purchaser of the tax credit.

The tax credit is an MTTC in BCo's hands, because:

i. Legal transferability standard is satisfied – tax credit can be transferred to an unrelated party in year 2.

ii. Marketability standard is satisfied – BCo's purchase price (EUR 90) exceeds 80% of the NPV of the tax credit (EUR 100).

(See para. 112.1 in Comm to Art. 3.2.4).

Thus, BCo's GloBE treatment:

a. Inclusion in BCo's GloBE Income in year 2: (EUR 100 – EUR 90) x 70% = EUR 7.

b. Inclusion in BCo's GloBE Income in year 3: (EUR 100 – EUR 90) x 30% = EUR 3.

c. The tax credit is not taken into account in computing BCo's Adjusted Covered Taxes.

(See para. 112.6 in Comm to Art. 3.2.4; and amended para. 5 of Comm to Art. 4.1.2(d)).

Do you agree?

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