GloBE Rules Series

ITQ G-

086

January 26, 2024

Question

ACo 1 and ACo 2 are both Constituent Entities in an MNE Group which is "within scope" of the GloBE rules. They are both located in jurisdiction A.

ACo 1 and ACo 2 are the only partners in a partnership formed under jurisdiction B law. They each have a 50% interest in the partnership. The partnership is tax-transparent in both jurisdiction A and jurisdiction B.

The partnership conducts a trading business in jurisdiction B.

In the 2030 fiscal year, these financial numbers are produced by the partnership's business:

GloBE Income: 100
Adjusted Covered Taxes (i.e., jurisdiction B taxes): 5
Payroll costs of employees: 40
Carrying value of tangible assets: 80

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

The MNE Group has no operations in jurisdiction B, other than the partnership. Based on this limited information, what will be the amount (if any) of jurisdiction B Top-up Tax for the MNE Group for the 2030 fiscal year?

Answer

(1) Definitions

The partnership is an "Entity" (Art. 10.1.1), a "Flow-through Entity" (Art. 10.2.1), a "Tax Transparent Entity" (Art. 10.2.1(a)), a "stateless Entity" (Art. 10.3.2(b)), and a "Constituent Entity" (Art. 1.3.1(a)).

Its business in jurisdiction B is a "Permanent Establishment" (para. (a) of Art. 10.1.1 definition). [There is an issue as to whether there is 1 PE (i.e., a PE of the partnership) or 2 PEs (i.e., a PE of each of ACo 1 and ACo 2). IMHO: the better view is 1 PE.] The PE is "located" in jurisdiction B (Art. 10.3.3(a)), and therefore the PE can have a payroll carve-out (Art. 5.3.3) and a tangible asset carve-out (Art. 5.3.4).

The PE is not an "Entity" (Art. 10.1.1 – arguably), but it is a "Constituent Entity" (Art. 1.3.1(b)). Therefore, the partnership is a "Main Entity" (Art. 10.1.1).

(2) GloBE Income (GI)

The FANIL of the partnership is allocated to the PE (Arts. 3.4 & 3.5.1(a)). This causes the FANIL of the partnership to be nil (Art. 3.5.5).

Therefore, the PE has GI of 100, and the partnership has nil GI.

(3) Adjusted Covered Taxes (ACT)

The ACT of 5 is allocated to the PE (Art. 4.3.2(a)).

(4) SBIE

The payroll carve-out and tangible asset carve-out are determined for the PE (Art. 5.3.6).

Payroll carve-out: 7.4% x 40 = 2.96 (Art. 9.2).

Tangible asset carve-out: 6.2% x 80 = 4.96 (Art. 9.2).

Thus, SBIE for jurisdiction B = 2.96 + 4.96 = 7.92 (Art. 5.3.2).

(5) Top-up Tax (TUT)

ETR = 5 / 100 = 5%

TUT % = 10%

Excess Profit = 100 – 7.92 = 92.08

TUT = 10% x 92.08 = 9.208

Do you agree?

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