GloBE Rules Series

ITQ G-

099

May 17, 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.

Each of Jurisdiction X and Y has a corporate income tax rate of 20%.

XCo manufactures and sells goods to YCo. In each of years 1, 2 and 3, the consideration paid by YCo to XCo for the purchase of the goods is EUR 100m. This amount is reflected in the respective financial statements of XCo and YCo, in each of years 1, 2 and 3.

In year 3, the MNE Group agrees a bilateral APA (BAPA) with the tax authorities in jurisdictions X and Y. The BAPA applies to years 1 to 5 (i.e., there is a "roll-back" to years 1 and 2). Under the BAPA, the arm's length consideration for the purchase of the goods is agreed as EUR 90m for each of years 1, 2 and 3.

Based on this information, what impact will implementation of the BAPA have on the GloBE ETRs of XCo and YCo, in each of years 1, 2 and 3?

Answer

Para. 99 of the Comm to Art. 3.2.3 directs that Art. 4.6.1 apply to implement the transfer pricing changes under a bilateral APA (BAPA).

Art. 4.6.1 distinguishes between 2 situations: (1) increases and non-material decreases in Covered Taxes, and (2) material decreases in Covered Taxes.

YCo falls within situation (1): the BAPA results in an increase of EUR 2m in Covered Taxes in each of years 1, 2 and 3. Art. 4.6.1 requires that the adjustments to Covered Taxes and GloBE Income be made to YCo in the current Fiscal Year – i.e., year 4. Thus, in year 4, YCo’s ETR will be computed, after: (i) increasing Covered Taxes by EUR 6m, and (ii) increasing GloBE Income by EUR 30m. There will be no adjustments to YCo’s ETR in years 1, 2 and 3.

In contrast, XCo falls within situation (2): the BAPA results in a material decrease (i.e., EUR 1m or more) in Covered Taxes in each of years 1, 2 and 3. Art. 4.6.1 requires that the adjustments to Covered Taxes and GloBE Income be made to XCo in each of years 1, 2 and 3. Thus, in each of those years, XCo’s ETR will be recalculated, under Art. 5.4.1, by: (i) decreasing Covered Taxes by EUR 2m, and (ii) decreasing GloBE Income by EUR 10m. Any amount of incremental Top-up Tax resulting from such recalculations shall be treated as Additional Current Top-up Tax under Art. 5.2.3 in year 4: Art. 5.4.1.

Do you agree?

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