GloBE Rules Series

ITQ G-

119

November 22, 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 has a business in jurisdiction A. It also has 3 PEs, one in each of jurisdiction B, C, and D, respectively. None of jurisdictions A, B, C or D has implemented the GloBE rules.

In a particular fiscal year:

The B PE derives 1,000 of gross income, and it incurs 800 of expenses. It is subject to a 22% jurisdiction B CIT rate – therefore, it pays 44 of jurisdiction B CIT.
The C PE derives 2,000 of gross income, and it incurs 1,600 of expenses. It is subject to a 12% jurisdiction C CIT rate – therefore, it pays 48 of jurisdiction C CIT.
The D PE derives 1,500 of gross income, and it incurs 1,200 of expenses. It is subject to a 17% jurisdiction D CIT rate – therefore, it pays 51 of jurisdiction D CIT.
ACo’s business in jurisdiction A derives 10,000 of gross income, and it incurs 8,000 of expenses. It is subject to a 20% jurisdiction A CIT rate – therefore, in regard to its business in jurisdiction A, it pays 400 of A CIT
ACo derives 500 of royalty income from jurisdiction D, and incurs 10% (i.e., 50) of jurisdiction D royalty withholding tax.
ACo incurs 1,000 of interest expense (included in 8,000 of expenses of ACo’s business in jurisdiction A).

Under the jurisdiction A CIT law, the profits made by the PEs and the royalties derived from jurisdiction D are taxable, and a credit is given for the foreign tax paid on those profits and royalties.

In computing the credit: (1) cross-crediting is allowed – i.e., the credit is calculated on the total foreign tax incurred on the total profits of the PEs and royalties, in a single “basket”; (2) the credit is limited to the lower of the foreign tax and the jurisdiction A tax on the foreign income; (3) in determining the jurisdiction A tax on the foreign income, ACo’s interest expense which is allocated to the foreign income is first deducted – the interest expense is apportioned between the domestic income and the foreign income (on a pro rata basis).

Based on this information, what amounts (if any) of jurisdiction A tax will be allocated to each PE under Art. 4.3.2?

Answer

See paras. 52 to 54 of Comm to Art. 4.3.2.

1. Step 1: identify foreign source income (FSI):

A threshold issue is whether the allocated interest expense is deducted in computing FSI (GloBE concept) of each PE.

This will depend on whether the allocated interest expense is recognised as an expense in calculating the GloBE Income or Loss of each PE: paras. 52.11 & 52.12 of Comm. In the absence of any indication in the question that it is, I will assume that the allocated interest expense is not recognised for that purpose. This will mean that the allocated interest expense is not deducted in computing FSI (GloBE concept) of each PE.

Thus, the FSI is: (i) PE in B: 200; (ii) PE in C: 400; (iii) PE in D: 300; (iv) royalties: 500 (I assume the royalties are treated as foreign source under the jurisdiction A tax law).

Total FSI: 200 + 400 + 300 + 500 = 1,400.

2. Step 2: Allocable Covered Taxes (ACT):

ACo's prima facie jurisdiction A corporate income tax (CIT): [2,000 + 1,400] x 20% = 680.

Interest allocated to FSI: 5,000 / 15,000 x 1,000 = 333 (allocation according to gross income).

FSI: 1,400 – 333 = 1,067.

FTC limitation = 1,067 x 20% = 213 (rounded).

Foreign tax = 44 + 48 + 51 + 50 = 193.

Thus, FTC = 193.

ACo's actual jurisdiction A CIT: 680 – 193 = 487.

ACT = 487 – [2,000 x 20%] – 0 = 87.

3. Step 3: Cross-Crediting Allocation Key (CCAK):

CCAK for PEs: (i) B: [200 x 20%] – 44 = 0; (ii) C: [400 x 20%] – 48 = 32; (iii) D: [300 x 20%] – 51 = 9.

CCAK for ACo: [500 x 20%] – 50 = 50.

Sum of all CCAKs: 0 + 32 + 9 + 50 = 91.

4. Step 4: Allocation to PEs and ACo / Main Entity:

Allocations to PEs: (i) B: 87 x 0 / 91 = 0; (ii) C: 87 x 32 / 91 = 31 (rounded); (iii) D: 87 x 9 / 91 = 9 (rounded).

Allocation to ACo / Main Entity: 87 x 50 / 91 = 48 (rounded).

Thus, the allocations under Art. 4.3.2: (i) PE B: 0; (ii) PE C: 31; (iii) PE D: 9.

Do you agree?

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