GloBE Rules Series

ITQ G-

127

February 28, 2025

Question

XCo is a Constituent Entity in an MNE Group, and is located in jurisdiction X.

Jurisdiction X imposes a 25% CIT rate and has a CFC tax regime (not a Blended CFC Tax Regime).

The jurisdiction X CFC tax regime provides for taxation of CFC income by including such income in the taxable income of the shareholder in the tax year immediately following the tax year in which the income is derived by the CFC. For the purposes of the CFC tax regime, “CFC income” is equal to Passive Income (as defined in Art. 10.1.1). A foreign tax credit is given for any tax incurred by the CFC in deriving the CFC income.

XCo owns 100% of the shares in YCo, which is located in jurisdiction Y.

Jurisdiction Y imposes a 5% CIT rate on Passive Income (as defined in Art. 10.1.1) and a 9% CIT rate on other income. YCo is the only Constituent Entity located in jurisdiction Y.

In year 1, YCo derives GloBE Income of 1,000, of which 500 is Passive Income (as defined in Art. 10.1.1) and 500 is other income.

In year 2, YCo derives GloBE Income of 1,500, of which 1,000 is Passive Income (as defined in Art. 10.1.1) and 500 is other income.

Based on these limited facts, how much of XCo’s CFC tax is allocated to (1) YCo and (2) XCo, in each of years 1 and 2?

Answer

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

Year 1:

Income / not GloBE Income (GI): 0.

GI / not Passive Income (PI): 500.

GI / PI: 500.

Pre-FTC DTE: 500 x 25% = 125.

Recast to 15%: 125 x 15/25 = 75.

FTC: 500 x 5% = (25) (no recast).

Net CFC DTE allocable to YCo (before Art. 4.3.3 limit): 75 – 25 = 50.

ETR for Juris. Y (ignoring CFC regime): 70 / 1,000 = 7%.

Top-up Tax Percentage (TuTP) (ignoring CFC regime): 15% – 7% = 8%.

Art. 4.3.3 limit: 500 x 8% = 40.

Thus, in year 1: (1) 40 allocated to YCo, and (2) 10 allocated to XCo.

Year 2:

Before Art. 4.3.3 limit:

Reversal of Year 1 allocation to YCo: (40).
Allocation of current CFC tax: 125 – 25 = 100.
Allocation of year 2 DTE:

Recast of pre-FTC DTE: 1,000 x 25% x 15/25 = 150.

FTC: 1,000 x 5% = (50) (no recast).

Net DTE: 150 – 50 = 100.

Art. 4.3.3 limit:

ETR for Juris. Y (ignoring CFC regime): 95 / 1,500 = 6.33%.

TuTP (ignoring CFC regime): 15% – 6.33% = 8.67%.

Art. 4.3.3 limit: 1,000 x 8.67% = 86.7.

Application of Art. 4.3.3 ordering rule:

Reversal of year 1 allocation: (40)
Current year CFC tax: 100 [Note: aggregate allocation, so far, is 60]
Year 2 DTE: 26.7 can be allocated to YCo. Excess of 73.3 (100 – 26.7) allocated to XCo.

Thus, in year 2: (1) 86.7 allocated to YCo, and (2) 73.3 allocated to XCo.

Do you agree?

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