GloBE Rules Series

ITQ G-

121

December 13, 2024

Question

ACo, a company located in jurisdiction A, owns 100% of the shares in XCo, a company located in jurisdiction X.

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

Under the jurisdiction A CIT law:

(1) Tax (15% rate) is imposed on both domestic source income and foreign source income

(2) Credit is given for foreign tax paid on foreign source income

(3) 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

(4) Credit is limited to the lower of foreign tax paid and A CIT on foreign income (credit limitation)

(5) In determining the credit limitation, only expenses which directly relate to foreign source income are taken into account

(6) Credit cannot be used against A CIT on domestic source income

In a particular fiscal year:

(i) ACo directly derives 2,000 of domestic source revenue, and incurs 1,400 of expenses directly related to that revenue.

(ii) ACo is entitled to a Qualified Refundable Tax Credit of 30. ACo uses this credit to reduce its A CIT liability.

(iii) XCo derives 1,000 of revenue, and incurs 500 of expenses.

(iv) Included in XCo’s 1,000 of revenue is a payment of 200 from ACo. This amount is disregarded under the A CIT law. Therefore, the resulting net amount of XCo’s profits (1,000 – 200 – 500 = 300) is included in ACo’s taxable income for A CIT purposes.

Based on this limited information, what amount of “Allocable Covered Taxes” (for the purposes of the allocation of cross-border current taxes under Art. 4.3.2) does ACo have for this fiscal year?

Answer

References are to paras. 52.13 to 52.23 of Comm to Art. 4.3.2.

Para. 52.13: Allocable Covered Taxes = A – B – C, where A = total current tax expense accrued by Main / Parent Entity with respect to applicable tax regime; B = domestic tax liability without regard to any foreign source income; and C = Blended CFC Taxes.

Item C is 0 in this example.

Item B …

Actual domestic source income: 2,000 – 1,400 = 600.

Deemed domestic source income (after adjustment for QRTC): 600 + 30 = 630 (para. 52.16).

Deemed domestic source income (after adjustment for disregarded payment): 630 – 200 = 430 (para. 52.19).

Item B = 430 x 15% = 64.5.

Item A …

Actual taxable income: (2,000 – 1,400) + (1,000 – 200 – 500) = 900 [See Note].

Actual current tax expense: (900 x 15%) – 30 = 105.

Item A = 105 + 30 = 135.

Therefore, Allocable Covered Taxes = 135 – 64.5 – 0 = 70.5.

Note: Although the 200 disregarded payment is taken into account in determining “foreign source income” in Step 1 (para. 52.8), I cannot find a requirement to take it into account in determining the total current tax expense in Step 2 – cf. the adjustment in the calculation of the domestic tax liability (para. 52.19).

Do you agree?

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