Blended CFC Regimes and Avoiding Unrelievable CFC Taxes

Under Article 4.3.2(c) of the OECD Model Rules, tax paid under a CFC regime is generally allocated for GloBE purposes to the CFC entity.

However, Article 5.1.3 of the February 2023 OECD Administrative Guidance confirms that this is not the case for Qualified Domestic Minimum Top-Up Taxes (QDMTTs) given this could create a ‘feedback loop’ if the QDMTT was itself creditable.

This means that when calculating the effective tax rate for calculating top-up tax under a QDMTT, any taxes allocated under CFC regimes are not included.

However, there is another interaction between CFC taxes and QDMTT regimes as any top-up tax under a QDMTT is itself added to covered taxes of the CFC but only for the purposes of calculating the allocation of Blended CFC Taxes.

The way the rules operate is aimed at minimising unrelievable CFC taxes under Blended CFC Regimes.

When allocating taxes under a Blended CFC regime, the OECD Administrative Guidance applies a special formula to allocate the CFC tax to the CFCs.

The formula allocates CFC tax under a Blended CFC Tax Regime to entities located in jurisdictions in which the CFC GloBE Jurisdictional ETR is below the rate for the Blended CFC Tax Regime.  For more information on Blended CFC Regimes, see GILTI and Blended CFC Regimes.

The effect of this is that entities with lower covered taxes and larger CFC income will be allocated more of the CFC tax.

The Blended CFC allocation formula is:

(Blended CFC Allocation Key/Total of all Blended CFC Allocation Keys) * CFC Tax under the Blended CFC Regime

The Blended CFC Allocation Key is:

Attributable Income of the Entity * (CFC Rate – GloBE jurisdictional ETR)

Attributable Income of the entity is the owner’s proportionate share of the income of the CFC.

The CFC GloBE jurisdictional ETR is the GloBE ETR before taking the CFC tax into account.

Impact of the QDMTT Inclusion

Including the QDMTT in the CFC GloBE jurisdictional ETR for the Blended CFC Allocation means that the ETR in that jurisdiction for the purposes of allocating the CFC Tax will be increased.

This will generally mean that Blended CFC Tax (eg GILTI) will be allocated to jurisdictions without QDMTTs.

This is beneficial to MNEs as it restricts CFC taxes being wasted.

Firstly, there is no benefit to an MNE if CFC tax is allocated to a jurisdiction with a QDMTT, because as noted above the CFC tax isn’t included in the QDMTT ETR/top-up tax calculation.

Secondly, although CFC tax is included in the standard GloBE ETR and therefore, the Income Inclusion Rule or Under-Taxed Payments Rule, in most circumstances, the QDMTT would reduce any GloBE top-up tax to nil. The main exception to this is that differences in accounting standards between the UPE and the domestic entity could still result in top-up tax after the offset of the QDMTT.

It is therefore beneficial for an MNE to have Blended CFC Taxes allocated to jurisdictions that don’t impose a QDMTT, as this would be taken into account under the general GloBE rules and reduce the amount of top-up tax under an IIR or UTPR.

It should be noted that a QDMTT will only impact on the Blended CFC Allocation if the CFC regime provides a credit for the QDMTT on the same terms as other creditable taxes (eg this requirement should be met if a credit for a QDMTT was provided even if the credit couldn’t be utilised due to jurisdictional foreign tax credit limitation rules).

If there was no credit provided, the QDMTT wouldn’t be taken into account for the purposes of allocating the Blended CFC tax. This  would potentially result in Blended CFC Tax being allocated to jurisdictions with a QDMTT. As above this would effectively waste the potential relief for the Blended CFC Tax.

This also provides an incentive for the CFC regime to offer a tax credit for the QDMTT.