GloBE Rules Series

ITQ G-

120

December 6, 2024

Question

Parent Entity, a company located in jurisdiction P, owns 100% of the shares in (1) ACo, a company located in jurisdiction A; and (2) BCo, a company located in jurisdiction B.

ACo is treated as a disregarded entity for jurisdiction P corporate income tax (CIT) purposes.

Under the jurisdiction P CIT law:

Tax is imposed on both domestic source income and foreign source income
Credit is given for foreign tax paid on foreign source income
Cross-crediting is allowed and there is only one “basket” – i.e., credit is calculated on total foreign tax paid on total foreign source income
Credit is limited to the lower of foreign tax paid and P CIT on foreign income (credit limitation)
Credit cannot be used against P CIT on domestic source income

In a particular fiscal year, ACo has gross revenue of 1,000, and gross expenses of 700.

Included in ACo’s gross revenue of 1,000 are 2 receipts:

100 service fee income received from Parent Entity. This receipt is disregarded under the P CIT.
150 royalty income received from PCo, an unrelated company located in jurisdiction P. This 150 is treated as domestic source income under P CIT law.

In the same fiscal year, BCo pays 500 of service fees to Parent Entity. This 500 is treated as domestic source income under P CIT law.

Based on this limited information, what amount of “foreign source income” (for the purposes of the allocation of cross-border current taxes under Art. 4.3.2) does Parent Entity have for this fiscal year?

Answer

References are to paras. 52.1 to 52.34 of Comm to Art. 4.3.2.

Preliminary point: ACo is a “Hybrid Entity”: Art. 10.2.5.

1. Parent Entity’s income through ACo:

ACo has gross revenue of 1,000, and expenses of 700. Therefore, Parent Entity’s prima facie “foreign source income” (for the purposes of Art. 4.3.2) (“FSI”) is 300: para. 52.3 (use of “net” amounts).

100 service fee income received from Parent Entity: Although this amount is disregarded under P CIT law, it is included in ACo’s GloBE Income or Loss. Thus, it is included in Parent Entity’s FSI (para. 52.8) – i.e., no adjustment for this amount.

150 royalty income received from PCo: Although this amount is treated as domestic source income under P CIT law, it is included in ACo’s GloBE Income or Loss. Thus, it is included in Parent Entity’s FSI (para. 52.6) – i.e., no adjustment for this amount.

Therefore, as no adjustments are made for the 100 or the 150, Parent Entity’s FSI remains at 300.

2. Parent Entity’s income from BCo:

Parent Entity receives 500 of service fees from BCo. The 500 is treated as domestic source income under P CIT law. It is therefore excluded from FSI: para. 52.2.

Thus, final answer: Parent Entity’s FSI is 300.

Do you agree?

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