Differences Between Domestic CFC Regimes and the GloBE Rules That Allow Cross-Jurisdictional Blending

The Pillar Two GloBE rules apply a jurisdictional blending approach when determining the GloBE effective tax rate (ETR) for a jurisdiction. This blends income and taxes within the specific jurisdiction, effectively meaning that income taxed at a low rate is blended with other income that may be taxed at higher rates.

The GloBE rules do not allow global blending and they restrict blending of income and taxes with other jurisdictions.

One of the exceptions to this relates to CFC taxes.

CFC taxes incurred by a parent entity are pushed down to the CFC entity for the purposes of the GloBE rules.

This means that CFC tax incurred in one jurisdiction is accounted for in a different jurisdiction when calculating the jurisdictional GloBE ETR. This could, for instance, result in a jurisdiction that would otherwise be a low-taxed jurisdiction, being allocated taxes from another jurisdiction such that its GloBE ETR was then increased to at least 15% with no top-up tax due.

The OECD recognised that the CFC pushdown could be used to manipulate jurisdictional ETRs and included a limitation on the amount of tax that could be pushed down.

However, the definition of CFC taxes that are restricted in the GloBE rules is much narrower than under many domestic CFC regimes. In this article, we look at this issue.