GloBE Rules Series

ITQ G-

102

June 7, 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. ACo is the only Constituent Entity located in jurisdiction A.

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 a disregarded entity for jurisdiction A tax purposes; however, for jurisdiction B tax purposes, BCo is treated as a taxable company. BCo is the only Constituent Entity located in jurisdiction B.

Jurisdiction A has a 25% corporate income tax, and a 15% QDMTT. The corporate income tax applies to foreign sourced income, and it includes a foreign tax credit.

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

ACo is a pure holding company. As noted above, it holds 100% of the shares in BCo. Also, ACo holds 2% of the shares in XCo (an unrelated company) – these shares were purchased by ACo during the fiscal year (see below).

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

In a particular fiscal year:

ACo receives 60 of dividends from XCo – these dividends are tax-exempt under the jurisdiction A corporate income tax.
ACo does not receive any dividends from BCo.
BCo derives 100 of pre-tax profits. Please assume that there are no permanent or timing differences vs. the corporate income tax laws of jurisdictions A and B, respectively.

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

Answer

Introductory point: BCo is a "Hybrid Entity" (Art. 10.2.5).

(1) BCo

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

QDMTT: 100 x 10% = 10

No Covered Tax is allocated from ACo to BCo: para. 118.30 of Comm to Art. 10.1.1 definition of "QDMTT".

Total BCo tax = 5 + 10 = 15.

(2) ACo

CIT: [100 (i.e., inclusion from BCo) x 25%] – 15 [FTC for jurisdiction B's CIT and QDMTT] = 10. The 60 of dividend from XCo is exempt.

Whether jurisdiction A allows an FTC for the jurisdiction B QDMTT will depend on the jurisdiction A law. In Notice 2023-80, the US IRS states that QDMTT should qualify for US FTC purposes: see ITQ195.

QDMTT:

GloBE Income: 60

2 points: (i) 60 is not an "Excluded Dividend" (defined in Art. 10.1.1), because ACo's shareholding in XCo is a "Short-term Portfolio Shareholding" (defined in Art. 10.1.1) – thus, 60 is not excluded from GloBE Income under Art. 3.2.1(b); (ii) 100 is not included in ACo's GloBE Income, despite the fact that BCo is treated as a disregarded entity for jurisdiction A tax purposes, because the 100 would not be included in ACo's Financial Accounting Net Income or Loss: Arts. 3.1.1 & 3.1.2.

QDMTT Covered Tax: nil

The CIT of 10 does not qualify as Covered Tax for ACo's QDMTT, because it relates to income (which is not "Passive Income", as defined in Art. 10.1.1) derived through BCo, a Hybrid Entity: see paras. 118.28 & 118.29 of Comm to Art. 10.1.1 definition of "QDMTT".

Thus, QDMTT: 60 x 15% = 9.

Total ACo tax = 10 + 9 = 19.

Do you agree?

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