GloBE Rules Series

ITQ G-

122

December 20, 2024

Question

XCo 1, a company located in jurisdiction X, has a branch located in jurisdiction Y. The branch operates a business.

In a particular fiscal year:

The branch derives 1,000 of revenue, and it has expenses of 600.
Included in the 1,000 of revenue are: (i) 100 of interest income derived from ACo, a related company located in jurisdiction A; (ii) 150 of royalties derived from XCo 2, an unrelated company located in jurisdiction X; and (iii) 200 of service fees derived from the XCo 1 head office in jurisdiction X.
100 of interest income derived from ACo: 10% interest withholding tax (IWT) is deducted in jurisdiction A. The branch claims a full foreign tax credit for the IWT in its branch income tax return in jurisdiction Y.
150 of royalties derived from XCo 2: The 150 is treated as domestic source income in jurisdiction A. 10% royalty withholding tax (RWT) is deducted in jurisdiction X. The branch claims a full foreign tax credit for the RWT in its branch income tax return in jurisdiction Y.
200 of service fees derived from XCo 1 head office: The 200 is not recognised under the jurisdiction X corporate income tax (CIT) law.
In its jurisdiction Y income tax return, the branch reports taxable income of 400, and an income tax liability (after claiming the 2 foreign tax credits) of 50.

For the same fiscal year:

XCo 1 derives revenue of 2,000, and it has directly related expenses of 1,600.
Included in the 2,000 of revenue is 300 of royalties derived from ZCo, a related company located in jurisdiction Z. 10% RWT is deducted in jurisdiction Z. XCo 1 claims a full foreign tax credit for the RWT in its CIT return.

Under the jurisdiction X CIT law:

Tax (20% rate) 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 X CIT on foreign income (credit limitation)
In determining the credit limitation, only expenses which directly relate to foreign source income are taken into account
Credit cannot be used against X CIT on domestic source income

Based on this limited information, what are the “Cross-Crediting Allocation Keys” (for the purposes of the allocation of cross-border current taxes under Art. 4.3.2) for the branch and XCo 1 head office for this fiscal year?

Answer

For the purposes of the GloBE rules, the branch is a PE and the XCo 1 head office is a Main Entity.

References are to paras. 52.1 to 52.34 of Comm to Art. 4.3.2, and to section 3.1 of June 2024 AG.

1. Cross-Crediting Allocation Key for PE = (A x B) – C, where A = Main Entity taxable income arising from the PE; B = applicable tax rate; and C = creditable foreign taxes accrued with respect to PE’s income.

A …

PE has revenue of 1,000, and expenses of 600.

150 royalties are treated as foreign source income (FSI) (para. 52.6): thus, no adjustment.

200 service fees are treated as FSI (para. 52.8): thus, no adjustment.

Therefore, A = 1,000 – 600 = 400.

B = 20%.

C…

Creditable foreign taxes with respect to PE’s income = 10 (juris. A IWT) + 15 (juris. X RWT) + 50 (juris.Y tax) = 75: para. 23.

Thus, Cross-Crediting Allocation Key for PE = (400 x 20%) – 75 = 5.

2. Cross-Crediting Allocation Key for Main Entity = (D x E) – F, where D = Main Entity taxable income arising directly from FSI; E = applicable tax rate; and F = creditable foreign taxes accrued with respect to the FSI.

D = 300 (para. 24).

E = 20%.

F = 30.

Thus, Cross-Crediting Allocation Key for Main Entity = (300 x 20%) – 30 = 30.

Do you agree?

ITQ Disclaimer

This International Tax Quiz (ITQ) contains general information only, and none of International Insights Pte Ltd, its employees or directors is, by means of this ITQ, rendering professional advice or services. You use the content of this ITQ strictly at your own risk. You should not rely on all or any part of the content of this ITQ in making decisions to take action (including inaction) in regard to tax or other matters. Before making any decision or taking any action (including inaction) that may affect your tax position, your finances or your business, you should consult a qualified professional advisor. None of International Insights Pte Ltd, its employees or directors shall be responsible for any loss whatsoever sustained by any person who relies on the content of this ITQ.