GloBE Rules Series

ITQ G-

081

December 15, 2023

Question

XCo, a large operating company located in jurisdiction X, is the UPE of an MNE Group which is "within scope" of the GloBE rules. XCo uses the calendar year as its fiscal year. XCo is the only Constituent Entity located in jurisdiction X.

Jurisdiction X has not implemented either the GloBE rules or a QDMTT. However, the GloBE rules (IIR and UTPR) and QDMTTs have been implemented in several jurisdictions where the MNE Group’s Constituent Entities are located.

Jurisdiction X has both Federal and State income taxes. The State income taxes are fully deductible for Federal income tax purposes (i.e., for Federal income tax purposes, State income tax is a deduction in computing taxable income). Jurisdiction X has 6 States (A to F).

The Federal and State income taxes are all imposed on a comprehensive measure of income.

The respective statutory income tax rates are:

Federal: 15%
A: 5%
B: 8%
C: 6%
D: 4%
E: 5%
F: 10%

Jurisdiction X offers various income tax incentives. In 2025, XCo qualifies for an income tax exemption: it is liable for zero income tax, both Federally and in the 2 States (B and F) in which XCo operates.

In 2025, XCo has the following numbers for GloBE purposes:

GloBE Income: EUR 100 million
Substance-based Income Exclusion: EUR 20 million
Adjusted Covered Taxes: zero

Based on this information, will there be any tax liability under the GloBE rules for 2025 in respect of jurisdiction X?

Answer

This question focuses on whether the Transitional UTPR Safe Harbour (UTPR SH) will be available to the MNE Group in 2025. Based on the facts, the MNE Group will not qualify for the Transitional CbCR Safe Harbour in respect of jurisdiction X.

To qualify for the UTPR SH, jurisdiction X must have "a corporate income tax rate that applies at a rate of at least 20 percent". (Section 5.2 in July 2023 AG).

Para. 5 says this: "The corporate income tax rate for each jurisdiction is the nominal statutory tax rate generally imposed on in-scope MNE Groups on a comprehensive measure of income. This rate may take into account sub-national taxes provided that such taxes are structured so that in the case of all sub-national jurisdictions, the combined rate generally applicable to in-scope MNE Groups will be equal to or greater than 20%."

The facts raise 2 issues:

Issue 1: what impact does the deductibility of the State income taxes (for Federal income tax purposes) have on the "corporate income tax rate"?

In my view, no impact – para. 5 refers to "nominal statutory tax rate".

Issue 2: what impact does State D have on the "corporate income tax rate"?

For all the other States, the combined rate of Federal and State nominal statutory income tax rates is 20% or greater.

However, for State D, the combined rate is 19%.

XCo does not operate in State D. Nevertheless, para. 5 requires consideration of the combined rate "in the case of all sub-national jurisdictions".

Therefore, State D's combined Federal / State rate of 19% will cause XCo to fail the "corporate income tax rate" condition.

Accordingly, the MNE Group will not qualify for the UTPR SH.

Final answer: For 2025, UTPR Top-up Tax liabilities will exist in one or more jurisdictions where the MNE Group has Constituent Entities, based on a Total UTPR Top-up Tax Amount of: 15% x EUR 80 million = EUR 12 million.

Do you agree?

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