GloBE Rules Series

ITQ G-

126

February 21, 2025

Question

XCo, a company located in jurisdiction X, is a Constituent Entity in an MNE Group which is “within scope” of the GloBE rules.

XCo owns 100% of the shares in YCo, a company located in jurisdiction Y.

In year 1, YCo derives: (1) pre-tax profits of 1,000; (2) GloBE Income of 900; (3) GloBE Income which is Passive Income (as defined in Art. 10.1.1) of 200; and (4) GloBE Income which is not Passive Income of 700. In respect of year 1, YCo’s pre-tax profits of 1,000 are subject to a jurisdiction Y corporate income tax (CIT) rate of 10% - i.e., 100 of tax.

In year 2, all of YCo’s year 1 pre-tax profits of 1,000 are included in XCo’s taxable income under the jurisdiction X CFC rules. XCo is subject to a 25% tax rate on that amount for year 2 – i.e., 250 tax. However, XCo can claim a credit for the full amount of YCo’s tax of 100.

In year 1, the Top-up Tax Percentage for jurisdiction Y (calculated without regard to XCo’s CFC tax on YCo’s Passive Income) is 3%.

Based on this limited information, what amounts of XCo’s CFC tax will be allocated to (1) YCo, and (2) XCo, under Art. 4.3?

Answer

See paras. 71.4 to 71.17 of Comm to Art. 4.4.1.

5-step process must be applied: para. 71.4.

Step 1:

Income / not GloBE Income (GI): 100.
GI / not Passive Income (PI): 700.
GI / PI: 200.

Step 2:

Pre-FTC CFC DTE:

Income / not GI: 100 x 25% = 25.
GI / not PI: 700 x 25% = 175.
GI / PI: 200 x 25% = 50.

Relevant Creditable Foreign Taxes (RCFT):

Income / not GI: 100 x 10% = (10).
GI / not PI: 700 x 10% = (70).
GI / PI: 200 x 10% = (20).

Step 3:

Income / not GI:

Recast DTE: 25 x 15/25 = 15.

RCFT: (10) (not recast).

Net 5 allocated to YCo, then excluded by Art. 4.4.1(a). Thus, not taken into account by either XCo or YCo: para. 71.8.

Step 4:

GI / not PI:

Recast DTE: 175 x 15/25 = 105.

RCFT: (70) (not recast).

Net 35 allocated to YCo.

Step 5:

GI / PI:

Recast DTE: 50 x 15/25 = 30.

RCFT: (20) (not recast).

Art. 4.3.3 limitation: 200 x 3% = 6.

Thus, 6 allocated to YCo, and 4 allocated to XCo.

Final answer: (1) YCo: 35 + 6 = 41; (2) XCo: 4.

Do you agree?

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