GloBE Rules Series

ITQ G-

096

April 19, 2024

Question

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is "within scope" of the GloBE rules.

BCo, a company located in jurisdiction B, is also a Constituent Entity in the same MNE Group.

Jurisdiction A has a corporate income tax rate of 20%, and jurisdiction B has a corporate income tax rate of 10%.

BCo provides services to ACo. In a Fiscal Year, BCo charges ACo 100 for the services. The 100 is recognised as expense and as income in the Financial Accounting Net Income or Loss of ACo and BCo, respectively.

In its jurisdiction B corporate income tax return for the Fiscal Year, BCo makes a book-to-tax adjustment of 10 (i.e., a further 10 of taxable income is recognised by BCo), in accordance with the jurisdiction B transfer pricing "safe harbour" rules. No adjustment is made by ACo.

What will be the impact under the GloBE rules, for each of ACo and BCo?

Answer

"The primary issue is whether adjustments of 10 should be made to the GloBE Income of ACo and BCo (respectively) under Art. 3.2.3.

According to paras. 101 & 103 of the Comm to Art. 3.2.3:

"[Adjustments should be made under Article 3.2.3], unless the transfer pricing adjustment increases … the MNE Group's taxable income in a jurisdiction that has a nominal tax rate below the Minimum Rate … . [A] unilateral transfer pricing adjustment that increases taxable income in an under-taxed jurisdiction should not be reflected in the GloBE Income because such adjustment would produce double taxation under the GloBE Rules (i.e. the adjustment would expose the income to Top-up Tax in the jurisdiction in which the unilateral adjustment is made and the income is already subject to local tax in the other jurisdiction …)".

Thus, there should be no adjustment to the GloBE Income of ACo and BCo (respectively).

The subsidiary issue is whether the jurisdiction B tax incurred by BCo on the additional 10 of taxable income qualifies as Adjusted Covered Tax for GloBE purposes. The answer is yes. Thus, BCo's ETR will increase to that extent.

Note that this result does not impact the economic double taxation of the 10, under the corporate income tax laws of jurisdictions A and B.

Do you agree?

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