Top-Up Tax Allocation

Once the top-up tax for the jurisdiction has been calculated, it is then allocated to the constituent entities in the jurisdiction that have net Pillar Two GloBE income (ie not entities that have Pillar Two GloBE losses) so that the charging provisions (ie the income inclusion rule or under-taxed payments rule) can correctly apply.

Note, that if all of the constituent entities in the jurisdiction are wholly owned and the UPE is applying an income inclusion rule, the allocation amongst constituent entities wouldn’t be required given the UPE would simply account for the top-up tax.

Article 5.2.4 of the OECD Model Rules provide that the allocation is based on each relevant constituent entity’s share of the total net Pillar Two GloBE income of the jurisdiction.

Example

In jurisdiction X:

Company A has net Pillar Two GloBE income of 5 million

Company B has net Pillar Two GloBE income of 10 million

Company C has net Pillar Two GloBE income of 20 million

Company D has a net Pillar Two GloBE loss of 5 million

Total jurisdictional top-up tax is 5 million. This is allocated as follows:

Company A = 5 million * 5/35 = 714,286

Company B = 5 million * 10/35 =1,428,571

Company C = 5 million * 20/35 =2,857,143

Company D = 0