GloBE Rules Series

ITQ G-

097

April 26, 2024

Question

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

YCo, a company located in jurisdiction Y, is also a Constituent Entity in the same MNE Group.

Jurisdiction X has a corporate income tax rate of 20%, and jurisdiction Y has a corporate income tax rate of 25%.

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

In its jurisdiction X corporate income tax return for the Fiscal Year, XCo makes a book-to-tax adjustment of 10 (i.e., XCo reduces its deduction claim by 10 to 90), in accordance with the jurisdiction X transfer pricing "safe harbour" rules. No adjustment is made by YCo.

Before considering Art. 3.2.3, the GloBE ETR of both XCo and YCo for the Fiscal Year is 15%.

What impact (if any) will Art. 3.2.3 have on XCo or YCo?

Answer

The 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 para. 101 of the Comm to Art. 3.2.3:

"[When a unilateral transfer pricing adjustment is made], the transfer price used for taxable income purposes is presumed to be consistent with the Arm's Length Principle. The GloBE Income or Loss should be adjusted accordingly under Article 3.2.3 where necessary to prevent double taxation or double non-taxation under the GloBE Rules. Specifically, a unilateral transfer pricing adjustment will result in a corresponding adjustment to the GloBE Income or Loss of all counterparties under Article 3.2.3, unless the transfer pricing adjustment increases or decreases the MNE Group's taxable income in a jurisdiction that has a nominal tax rate below the Minimum Rate …".

This means that the GloBE Income of XCo and YCo, respectively, will reflect a deemed transfer price of 90. This will cause XCo's GloBE Income to increase by 10, and YCo's GloBE Income to reduce by 10.

The ETR impact will be: XCo's ETR will decrease below 15%, and YCo's ETR will increase above 15%.

Therefore, the Art. 3.2.3 adjustment will cause a Top-up Tax liability in respect of XCo, but not in respect of YCo.

Accordingly, the MNE Group will be subject to some level of double taxation caused by the unilateral transfer pricing adjustment: (1) XCo's increased corporate income tax liability; and (2) Top-up Tax liability in respect of XCo.

Note: The second sentence in para. 101 (see above) says: "The GloBE Income or Loss should be adjusted accordingly under Article 3.2.3 where necessary to prevent double taxation or double non-taxation under the GloBE Rules." IMHO: the phrase, "double taxation or double non-taxation under the GloBE rules", does not refer to double taxation between the GloBE rules and the domestic corporate income tax law, which is the situation faced here by XCo.

Do you agree?

ITQ Disclaimer

This International Tax Quiz (ITQ) contains general information only, and none of International Insights Pte Ltd, its employees or directors is, by means of this ITQ, rendering professional advice or services. You use the content of this ITQ strictly at your own risk. You should not rely on all or any part of the content of this ITQ in making decisions to take action (including inaction) in regard to tax or other matters. Before making any decision or taking any action (including inaction) that may affect your tax position, your finances or your business, you should consult a qualified professional advisor. None of International Insights Pte Ltd, its employees or directors shall be responsible for any loss whatsoever sustained by any person who relies on the content of this ITQ.