GloBE Rules Series

ITQ G-

128

March 21, 2025

Question

ACo, a company located in jurisdiction A, is a Constituent Entity in an MNE Group which is "within scope" of the GloBE rules.
ACo is the only Constituent Entity located in jurisdiction A.

Jurisdiction A has a corporate income tax (CIT) rate of 10%, and it also imposes a 15% QDMTT.

Jurisdiction A allows a resident Constituent Entity to elect to be exempt from CIT and to be subject to the 15% QDMTT only.

Please assume that ACo's taxable income for CIT purposes and its GloBE Income for QDMTT purposes are both 1,000.

Would ACo pay less or more total jurisdiction A tax if it makes the election?

Answer

The question intentionally omits an important fact: the amount of ACo’s Substance-based Income Exclusion (SBIE).

I will initially assume that the SBIE is 0 …

If the election is not made, then ACo will pay: (1) CIT of 1,000 x 10% = 100; and (2) QDMTT of 1,000 x 5% = 50, which gives total tax of 100 + 50 = 150.

If the election is made, then ACo will pay: (1) CIT of 0; and (2) QDMTT of 1,000 x 15% = 150. Thus, total tax = 150.

I will now assume that the SBIE is relatively low: say, 200 …

If the election is not made, then ACo will pay: (1) CIT of 1,000 x 10% = 100; and (2) QDMTT of (1,000 – 200) x 5% = 40, which gives total tax of 100 + 40 = 140.

If the election is made, then ACo will pay: (1) CIT of 0; and (2) QDMTT of (1,000 – 200) x 15% = 120. Thus, total tax = 120.

I will now assume that the SBIE is relatively high: say, 600 …

If the election is not made, then ACo will pay: (1) CIT of 1,000 x 10% = 100; and (2) QDMTT of (1,000 – 600) x 5% = 20, which gives total tax of 100 + 20 = 120.

If the election is made, then ACo will pay: (1) CIT of 0; and (2) QDMTT of (1,000 – 600) x 15% = 60, which gives total tax of 60.

Therefore, based on this analysis, ACo will always pay less tax by making the election, if there is some amount of SBIE.

But there is another issue to consider: in the scenario where the election is not made (i.e., ACo will pay both CIT and QDMTT), will the CIT qualify as a Covered Tax?

To qualify as a Covered Tax, there must first be a Tax. The Art. 10.1.1 definition of “Tax” is “a compulsory unrequited payment to General Government”. Is the CIT “compulsory”, if an exemption from CIT is available by election?

If the availability of the election causes the CIT not to be a Tax (and therefore not a Covered Tax), ACo’s QDMTT liability (in the context where the election is not made) would increase, as it would reflect a Top-up Tax Percentage of 15%. This would be an additional reason why ACo would generally pay less tax by making the election.

Do you agree?

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