GloBE Rules Series

ITQ G-

095

April 12, 2024

Question

An MNE Group's UPE, which is located in jurisdiction U, is subject to the jurisdiction U CFC rules. Those CFC rules qualify as a Blended CFC Tax Regime, as defined in the February 2023 AG. Under the CFC rules, the foreign effective tax rate must be 13.125% in order to generate sufficient foreign tax credits (ignoring any foreign tax credit limitation) to prevent the imposition of a tax charge. Also, under those CFC rules, a foreign tax credit is allowed for QDMTT on the same terms as any other creditable Covered Tax.

In the 2024 Fiscal Year, UPE has a tax charge of 30 under the CFC rules.

UPE directly owns shares in 3 CFCs. For the 2024 Fiscal Year, the CFCs have this information (all in EUR millions):

ACo 1 (located in jurisdiction A) (100% owned by UPE)

GloBE Income: 100
Covered Tax (disregarding any CFC tax): 8
QDMTT payable: 2
Qualifies for QDMTT Safe Harbour
Attributable income (for purposes of CFC rules): 80
Constituent Entity for GloBE purposes

2. ACo 2 (located in jurisdiction A) (50% owned by UPE)

Exempt from QDMTT
Qualifies for Transitional CbCR Safe Harbour, under de minimis test
Total Revenue: 8
Profit before Income Tax: 0.9
Simplified Covered Taxes: 0.1
Attributable income (for purposes of CFC rules): 5 (reflecting 50% ownership interest)
Joint Venture for GloBE purposes

3. ACo 3 (located in jurisdiction A) (40% owned by UPE)

Exempt from QDMTT
Attributable income (for purposes of CFC rules): 100 (reflecting 40% ownership interest)
Not a Constituent Entity or Joint Venture for GloBE purposes

Based on this information, what will be the allocation of CFC tax under Art. 4.3.2(c)? Please ignore any possible cap under Art. 4.3.3.

Answer

A. Preliminary points:

ACo 3 is a non-GloBE Entity (i.e. an Entity which is not a Constituent Entity, Joint Venture, or JV Subsidiary), but it is a CFC. Thus, para. 58.7 (in the Commentary to Art. 4.3.2) sets out a special procedure for its role in the allocation of blended CFC tax.

 Also, as ACo 2 is a Joint Venture, Art. 6.4 requires its ETR to be calculated separately from ACo 1. Therefore, for the purposes of para. 58.6.2, there are 2 blending groups in jurisdiction A: ACo 1 and ACo 2.

B. GloBE Jurisdictional ETRs:

(i) ACo 1: As ACo 1 qualifies for QDMTT Safe Harbour, it uses formula in para. 58.6.2(b): (8 + 2) / 100 = 10%.

 (ii) ACo 2: As ACo 2 qualifies for Transitional CbCR Safe Harbour, para. 58.6.2(a) requires it to use the Simplified ETR (regardless of fact that it qualifies for the safe harbour under the de minimis test): 0.1 / 0.9 = 11.1111%.

 (iii) ACo 3: Not applicable: para. 58.7.

C. Attributable income of Entity: (i) ACo 1: 80; (ii) ACo 2: 5; (iii) ACo 3: 100.

D. Blended CFC Allocation Key: (i) ACo 1: 80 x (13.125% - 10%) = 2.5; (ii) ACo 2: 5 x (13.125% - 11.1111%) = 0.1007; (iii) ACo 3: 2.5 (i.e., ACo 1's Blended CFC Allocation Key, as required by para. 58.7).

E. Sum of All Blended CFC Allocation Keys: 2.5 + 0.1007 + 2.5 = 5.1007.

F. Blended CFC tax allocated to Entity: (i) ACo 1: 2.5 / 5.1007 x 30 = 14.7039; (ii) ACo 2: 0.1007 / 5.1007 x 30 = 0.5922; (iii) ACo 3: 2.5 / 5.1007 x 30 = 14.7039.

As ACo 3 is a non-GloBE Entity, the CFC tax allocated to it (14.7039) does not qualify as Covered Tax for the MNE Group.  

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