GloBE Rules Series

ITQ G-

074

October 20, 2023

Question

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

ACo operates a cargo air transport business between several jurisdictions in the region, including jurisdiction B.

ACo has a branch in jurisdiction B. The branch, which has 20 employees and operates from an office in an airport in jurisdiction B, enters into cargo air transport contracts with customers which want to export goods from jurisdiction B. In addition, the branch manages the logistics and customs arrangements in regard to such contracts (e.g., presenting the relevant documents to the jurisdiction B customs authorities, receiving the goods from the customers, etc.). The branch also invoices and collects payments from such customers. Finally, the branch manages the logistics and customs arrangements for goods which are imported into jurisdiction B.

The A/B double tax treaty is identical to the 2017 OECD model treaty.

Under the jurisdiction A corporate income tax law, foreign sourced "active income" (i.e., income from the conduct of a business) is exempt.

ACo also owns 70% of the shares in BCo, a company located in jurisdiction B. BCo operates a cargo air transport business within jurisdiction B. The other 30% of the shares are owned by third party investors in jurisdiction B.

Jurisdiction B has implemented a QDMTT.

Is jurisdiction B permitted to impose its QDMTT on (i) BCo; and (ii) ACo's jurisdiction B branch?

Answer

BCo

Jurisdiction B is permitted to impose its QDMTT on 100% of the Top-up Tax in respect of BCo, even though the MNE Group owns only 70% of the shares in BCo: para. 118.10 of Comm on the definition of "QDMTT" in Art. 10.1.1 (introduced by Feb 2023 AG).

ACo's jurisdiction B branch

(a) 1st issue: exemption under A/B treaty?

ACo's business is the operation of aircraft in international traffic.

Although the branch would constitute a PE under Art. 5(1), the profits from the operation of aircraft in international traffic would be exempt from jurisdiction B tax under Art. 8(1).

2 sub-issues arise:

Would all of the branch's activities fall within the phrase, "the operation of aircraft in international traffic"? Based on the discussion in paras. 4 to 4.2 of the OECD Comm on Art. 8, in my opinion: yes, all of the branch's activities would fall within that phrase.
Is jurisdiction B's QDMTT a "covered tax"? In my opinion: yes, QDMTT should be a "tax on income" (Art. 2(1)). Interestingly, the OECD / IF have not yet discussed the question of whether an exemption from QDMTT should be able to be claimed under a treaty.

(b) 2nd issue: is jurisdiction B's QDMTT not permitted to apply anyway?

The branch should be a "permanent establishment" under para. (d) of the definition of that term in Art. 10.1.1. [Para. (a) should not apply, because jurisdiction B does not tax the income attributable to the branch in accordance with a provision similar to Art. 7 of the OECD model treaty.]

The branch is therefore a stateless PE (Art. 10.3.3(d)), and therefore a "Stateless Constituent Entity" (Art. 10.1.1 definition).

Para. 118.8.1 of Comm to definition of "QDMTT" in Art. 10.1.1 (introduced by July 2023 AG):

"In the case of Permanent Establishments that are Stateless Constituent Entities, jurisdictions are free to impose the QDMTT on these Entities provided that the place of business (or deemed place of business) is located therein and either there is no tax treaty applicable or there is an applicable tax treaty and the jurisdiction where the place of business (or deemed place of business) is located has the right to tax in accordance with such treaty."

In ACo's case, there is an applicable tax treaty, but jurisdiction B does not have the right to tax in accordance with such treaty. Thus, the jurisdiction B QDMTT is not permitted to apply to ACo's jurisdiction B branch.

Do you agree?

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