GloBE Rules Series

ITQ G-

109

August 2, 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. BCo is the only Constituent Entity located in jurisdiction B.

Prior to entering into the loan transaction described below, ACo has these expected tax numbers for the current year:

GloBE Income (GI): 1,000
Adjusted Covered Taxes (ACT): 130
Substance-based Income Exclusion (SBIE): 900
Taxable income (for jurisdiction A corporate income tax (CIT) purposes): 1,000
CIT: 120 (12% CIT rate)
Excess interest expense brought forward from previous years (available for deduction against current year interest income, if any (currently, nil)): 100

Also prior to entering into the loan transaction described below, BCo has these expected tax numbers for the current year:

GI: 200
ACT: 10
SBIE: 0
Taxable income (for jurisdiction B CIT purposes): 200
CIT: 10 (5% CIT rate)

At the start of the current year, ACo lends money to BCo. The terms of the loan satisfy the arm’s length principle. The current year’s interest expense, which is deductible for jurisdiction B CIT purposes, is 100. Please assume that the full amount of 100 of ACo’s excess interest expense brought forward from previous years is deductible in the current year, against the 100 of ACo’s interest income.

Based on this limited information, what amounts of Top-up Tax will arise for the current year in regard to jurisdictions A and B?

Please ignore safe harbours and the de minimis exclusion.

Answer

(1) ACo:

GloBE Income (GI) = 1,000 + 100 = 1,100.

Adjusted Covered Tax (ACT) = 130 + 12 = 142 [See Notes below].

ETR = 142 / 1,100 = 12.9%.

Top-up Tax Percentage (TUTP) = 2.1%.

SBIE = 900.

Excess Profit = 1,100 – 900 = 200.

Top-up Tax (TUT) = 200 x 2.1% = 4.2.

Notes:

The loan will not cause any change to ACo's taxable income for jurisdiction A CIT purposes, and thus there will be no change to ACo's current tax expense.
ACo would probably have a deferred tax asset (DTA) of 12 (100 x 12%) for the brought forward interest expense, after giving effect to Art. 4.4.1(c). The reversal of the DTA (caused by the use of the brought forward interest expense against the 100 of interest income) would cause a deferred tax expense of 12.

(2) BCo:

GI = 100 [See Note below].

ACT = 5.

ETR = 5%.

TUTP = 10%.

Excess Profit = 100.

TUT = 100 x 10% = 10.

Note:

The brought forward interest expense allows ACo to "shelter" the 100 of interest income from jurisdiction A CIT. Nevertheless, the intragroup loan is not an "Intragroup Financing Arrangement" (as defined in Art. 10.1.1), because ACo is not a "High Tax Counterparty" (also defined in Art. 10.1.1) – for the reason that jurisdiction A is a "Low-Tax Jurisdiction", regardless of whether ACo's ETR is determined with or without regard to the intragroup interest income. Therefore, the intragroup interest expense is not excluded (under Art. 3.2.7) from BCo's GloBE Income.

This example illustrates a weakness in Art. 3.2.7: the provision does not apply if the lender is located in a "Low-Tax Jurisdiction", and its Top-up Tax is significantly reduced by the Substance-based Income Exclusion.

Do you agree?

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