GloBE Rules Series

ITQ G-

087

February 2, 2024

Question

The Jurisdiction X corporate income tax has a standard rate of 20%. However, for qualifying companies, a reduced income tax rate of 5% is imposed.

The government is concerned about the adverse impact of the GloBE rules on inbound investment.

It has suggested this proposal for companies which currently qualify for the 5% corporate income tax rate:

An additional income tax (called an extra-profit tax) will be imposed on these companies. The extra-profit tax will have the same tax base as the corporate income tax, and it will have a 10% tax rate.
The extra-profit tax will not be deductible or creditable for corporate income tax purposes, and vice versa.
The extra-profit tax will reduce the company's jurisdiction X tax liabilities, other than corporate income tax, on a euro for euro basis – i.e., property tax, excise tax, and VAT. However, the extra-profit tax will not be refundable, in whole or part.

Based on this limited information: will the extra-profit tax qualify as a Covered Tax, under the GloBE rules?

Answer

Assumption: the jurisdiction X corporate income tax (CIT) qualifies as a "Covered Tax", under para. (a) of the definition in Art. 4.2.1 – i.e., a tax with respect to income or profits.

Prima facie, as the extra-profit tax (EPT) "will have the same tax base as the [CIT]", it will also qualify as a "Covered Tax", under para. (a).

Issue (1): Will the fact that the EPT will not be deductible or creditable for CIT purposes, and the CIT will not be deductible or creditable for EPT purposes, change the analysis?

IMHO: No – both taxes will continue to be imposed with respect to income or profits, although neither tax provides relief for the other.

Issue (2): Will the fact that the EPT will reduce the company's jurisdiction X "specified tax" liabilities, on a euro for euro basis, change the analysis? (Note: (i) the 3 forms of "specified tax" are not "Covered Taxes"; (ii) the EPT will not be refundable, in whole or part.)

The Commentary on Art. 4.2.1 defines "tax" as: "a compulsory unrequited payment to General Government. … Taxes are unrequited in the sense that any benefits provided by government to the taxpayer are not in proportion to their payments."

Is the EPT, to the extent it reduces the company’s "specified tax" liabilities, not unrequited? In other words: to the extent of the reduction in "specified taxes", does the EPT generate a benefit provided by the government that is in proportion to the EPT payment? In addressing this question, the context is that other companies (i.e., companies which do not qualify for the 5% CIT rate) will generally be subject to the 3 forms of “specified tax”, without reduction.

I don't know what the answer is. However, the fact that other companies will generally be subject to the 3 forms of "specified tax", without reduction, suggests that an EPT taxpayer will receive a benefit in proportion to the EPT payment. Therefore, on balance, I favour a conclusion that the EPT (to the extent it reduces the 3 forms of "specified tax") will not be a "tax", and therefore will not be a "Covered Tax".

What do you think?

PS: Under the US foreign tax credit regulations, the fact that the EPT will reduce the 3 forms of "specified tax" should not adversely impact its status as a foriegn income tax.

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