GloBE Rules Series

ITQ G-

100

May 24, 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. ACo owns 100% of the shares in BCo.

BCo is treated as fiscally transparent under the jurisdiction A corporate income tax law.

Jurisdictions A and B have a corporate income tax rate of 12% and 20%, respectively. Jurisdiction A provides a foreign tax credit for foreign tax incurred on foreign source taxable profits.

For the 2024 fiscal year:

BCo derives pre-tax profits of 100. It has no permanent or timing differences vs. the corporate income tax laws of jurisdictions A and B, respectively.
BCo pays a dividend of 30 (out of 2023 profits) to ACo. Dividend withholding tax of 3 is deducted by BCo and remitted to the jurisdiction B tax authorities.
BCo incurs interest of 10 on a loan from ACo. Under the terms of the loan agreement, BCo "grosses up" the interest for the jurisdiction B withholding tax of 10%. Thus, BCo pays 10 to ACo and 1.11 to the jurisdiction B tax authorities.

Based on this limited information:

Q1: Which taxes will each of ACo and BCo take into account in performing the Simplified ETR computation under the Transitional CbCR Safe Harbour?
Q2: Which taxes will each of ACo and BCo take into account in computing their respective ETRs under the GloBE rules?

Answer

1. BCo’s pre-tax profits of 100: With the relative corporate income tax rates and the jurisdiction A FTC, it is unlikely that there will be any ACo jurisdiction A tax in regard to BCo's pre-tax profits of 100.

However, to the extent that there is, then:

(Q1) Simplified ETR: The tax will be retained by ACo.

(Q2) GloBE ETR: As BCo is a Hybrid Entity, ACo's jurisdiction A tax (if any) will be allocated to BCo, under Art. 4.3.2(d). To the extent that BCo derives Passive Income, the amount allocated to BCo might be capped by Art. 4.3.3.

BCo will incur 20 of jurisdiction B corporate income tax on its pre-tax profits of 100:

(Q1) + (Q2): For both the Simplified ETR and the GloBE ETR, the tax will be retained by BCo.

2. BCo's dividend of 30: As BCo is treated as fiscally transparent by jurisdiction A, the dividend will not be recognised for jurisdiction A corporate income tax purposes. Thus, there will be no jurisdiction A tax on the dividend. In regard to the jurisdiction B DWT of 3:

(Q1) Simplified ETR: The jurisdiction B DWT of 3 will be retained by ACo.

(Q2) GloBE ETR: The jurisdiction B DWT of 3 will be allocated to BCo, under Art. 4.3.2(e).

3. BCo's interest payment of 10: As BCo is treated as fiscally transparent by jurisdiction A, the interest will not be recognised for jurisdiction A corporate income tax purposes. Thus, there will be no jurisdiction A tax on the interest. In regard to the jurisdiction B IWT of 1.11:

(Q1) Simplified ETR: The tax will be retained by ACo – it will not be allocated to BCo. See Note.

(Q2) GloBE ETR: The tax will be retained by ACo – it will not be allocated to BCo. See Note.

Note: For both the Simplified ETR and the GloBE ETR, the IWT of 1.11 will qualify as Covered Tax only if it is included in ACo's income tax expense. If this does not occur, and instead ACo accounts for 10 of interest income and no related tax (and the 1.11 is accounted by BCo), then the 1.11 will not qualify as Covered Tax for either Simplified ETR or GloBE ETR purposes.

Do you agree?

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