GloBE Rules Series

ITQ G-

098

May 3, 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 12.5%.

In the current Fiscal Year, and in the 2 preceding Fiscal Years, ACo's ETR for GloBE purposes is/was 13%, 18%, and 19% (respectively). Also, in the current Fiscal Year, and in the 2 preceding Fiscal Years, BCo's ETR for GloBE purposes is/was 17%, 16%, and 18% (respectively).

BCo provides services to ACo. In the current 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., BCo increases its income from the services to ACo by 10), in accordance with the jurisdiction B transfer pricing "safe harbour" rules. No adjustment is made by ACo.

What impact (if any) will Art. 3.2.3 have on ACo or BCo?

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.

In this scenario, the Comm to Art. 3.2.3 provides confusing guidance.

Firstly, para. 101 says:

"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 …".

The "unless" part of that statement covers the facts here: BCo's unilateral TP adjustment of 10 increases BCo's taxable income in a jurisdiction with a 12.5% nominal tax rate. Thus, para. 101 indicates that there should be no adjustments to ACo's and BCo's GloBE Income or Loss under Art. 3.2.3.

Secondly, however, para. 103 says:

"Finally, 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 and/or Top-up Tax if the other jurisdiction is an under-taxed jurisdiction)."

The Comm's definition of "under-taxed jurisdiction" in para. 101 indicates that it includes a jurisdiction in which the nominal tax rate is below 15%, without there being a requirement that the jurisdiction's ETR in the current Fiscal Year is also below 15%.

The confusing guidance is that, in BCo's case, an adjustment under Art. 3.2.3 would not "expose the income to Top-up Tax in the jurisdiction in which the unilateral adjustment is made", as stated in the parentheses in the quote from para. 103: BCo's ETR in the current Fiscal Year is 17%.

Nevertheless, despite that confusion in the parentheses, the 2 express statements in paras. 101 & 103 should require that no adjustments be made under Art. 3.2.3.

What do you think?

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