GloBE Rules Series

ITQ G-

101

May 31, 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. XCo owns 100% of the shares in YCo.

Jurisdiction X has a 20% corporate income tax, and a 15% QDMTT. The corporate income tax includes CFC rules and a foreign tax credit.

Jurisdiction Y has a 5% corporate income tax, and a 15% QDMTT.

XCo is a pure holding company. Its only source of income is dividends received from YCo.

YCo carries on a trading business. It buys goods from, and sells goods to, other members of the MNE Group.

In a particular fiscal year:

XCo derives no profits (i.e., it receives no dividends from YCo).
YCo derives 100 of pre-tax profits. Please assume that there are no permanent or timing differences vs. the corporate income tax laws of jurisdictions X and Y, respectively.
XCo includes 100 in its jurisdiction X taxable income, under the CFC rules, in respect of YCo.

Based on this limited information, what amounts of corporate income tax and QDMTT will each of XCo and YCo be required to pay in respect of this fiscal year?

Answer

1. YCo:

Corporate income tax (CIT) = 100 x 5% = 5.

QDMTT = 100 x 10% = 10 (assuming that YCo's SBIE is 0, or jurisdiction Y's QDMTT does not provide for a SBIE).

In computing YCo's QDMTT, there can be no allocation of XCo's CFC tax: para. 118.30 of Comm to definition of "QDMTT" in Art. 10.1.1.

2. XCo:

CIT = [100 (i.e., CFC inclusion) x 20%] - 15 (i.e., FTC for YCo's CIT and QDMTT) = 5.

Note that in Notice 2023-80, the US IRS states that QDMTT should qualify for US FTC purposes: see ITQ195. However, this would depend on each country's FTC law.

QDMTT = 0, as XCo has no GloBE Income. If, hypothetically, XCo did have some GloBE Income, XCo's CFC tax (i.e., 5) would not qualify as a Covered Tax for the purposes of XCo's QDMTT: para. 118.28 of Comm to definition of "QDMTT" in Art. 10.1.1.

Thus, total tax = 15 (YCo) + 5 (XCo) = 20.

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.