GloBE Rules Series

ITQ G-

077

November 10, 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 is the only Constituent Entity located in jurisdiction A.

The UPE is located in jurisdiction U, which has implemented the GloBE rules.

ACo conducts mining operations in jurisdiction A. Before commencing those operations, ACo signed a "tax stabilisation agreement" with the then government of jurisdiction A. Under this agreement, for a 20-year period from 2015, the government has agreed that the total amount of taxes imposed on ACo's profits for any year shall not exceed EUR 1 million. The agreement was not confirmed in any legislation enacted by jurisdiction A.

Some years after the agreement was signed, the government was defeated in a general election.

Jurisdiction A has introduced a QDMTT.

In 2025, the jurisdiction A tax authorities impose EUR 3 million of taxes on ACo. The EUR 3 million is comprised of: corporate income tax (EUR 0.4 million) and QDMTT (EUR 2.6 million).

ACo has objected to this total amount of taxes. It claims that, under the "tax stabilisation agreement", its taxes on profits for 2025 cannot exceed EUR 1 million. It therefore has asked that the total tax claim be reduced by EUR 2 million.

The jurisdiction A tax authorities have (so far) resisted ACo's claim, on the basis that (1) the "tax stabilisation agreement", which was signed by the previous government, was not properly authorised by the head of State; and (2) the "tax stabilisation agreement" was not confirmed by legislation.

Due to the uncertainty on whether the "tax stabilisation agreement" will be respected, the MNE Group has recorded a tax expense of EUR 1 million in its 2025 consolidated financial statements, and has disclosed a contingent liability of EUR 2 million in the notes to those financial statements.

Under the GloBE rules, is there any Top-up Tax for 2025 in respect of jurisdiction A? If so, what is the amount?

Would your answers be different if the MNE Group recorded a tax expense of EUR 3 million in its 2025 consolidated financial statements?

For both sets of questions, please ignore the QDMTT Safe Harbour.

Answer

Scenario 1: EUR 1 million tax expense, EUR 2 million contingent liability

The fundamental issue is this: what is the "amount payable", under a QDMTT, for the purposes of the Top-up Tax formula in Art. 5.2.3?

Under the general rule, the amount of the "QDMTT payable" "shall be equal to the amount accrued by the Constituent Entities in the jurisdiction for the Fiscal Year": para. 20.1 of Comm to Art. 5.2.3.

Threshold issue: has the contingent liability been "accrued"?

Under IAS 37 (Provisions, Contingent Liabilities and Contingent Assets), an entity shall not recognise a contingent liability (para. 37), but instead shall disclose the contingent liability (para. 86).

Para. 20.1 and related paragraphs do not discuss the meaning of the word, "accrued".

On balance, I think that a contingent liability is not "accrued", for the purposes of para. 20.1.

If that is correct, then the next issue is this: how much of the tax expense of EUR 1 million relates to corporate income tax (CIT) and how much relates to QDMTT?

Again, there is no guidance on this issue in the Comm. I think a reasonable approach would be to pro-rate the EUR 1 million tax expense between the 2 types of taxes. This would mean that EUR 133,333 would relate to CIT and EUR 866,667 would relate to QDMTT.

Under the exception to para. 20.1, the balance of the QDMTT (i.e., EUR 1,733,333) would not be "QDMTT payable". This would mean that the Top-up Tax under Art. 5.2.3 would be EUR 1,733,333.

Scenario 2: EUR 3 million tax expense

We need to work out how much of the EUR 1 million cap under the "tax stabilisation agreement" relates to CIT and how much relates to QDMTT.

Using the same "pro-rating" approach as above, we would compute the same numbers: EUR 133,333 would relate to CIT and EUR 866,667 would relate to QDMTT.

Under the exception to para. 20.1, the balance of the QDMTT (i.e., EUR 1,733,333) would not be "QDMTT payable". This would mean that the Top-up Tax under Art. 5.2.3 would be EUR 1,733,333.

Do you agree?

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