The 4 Different Jurisdictional Effective Tax Rates Under the GloBE Rules

The clarifications and additions to the Commentary to the Pillar Two GloBE Rules provided by the February 2023 and July 2023 OECD Administrative and Safe Harbours Guidance, means that there are now up to four jurisdictional effective tax rates (ETRs) that may need to be calculated to determine the impact of the GloBE Rules.

The Standard GloBE ETR

This is the basic GloBE ETR based on the GloBE Model Rules and is:

Adjusted Covered Taxed/Net Pillar Two GloBE Income

If the jurisdiction applies a Qualifying Domestic Minimum Top-Up Tax, this is not included in the ETR calculation.

Instead this is deducted from any top-up tax that is levied (and would otherwise be collected via an Income Inclusion Rule or Under-Taxed Payments Rule).

For more information see, ETR Calculation.

The QDMTT ETR

If the jurisdiction applies a QDMTT, the design of the domestic minimum tax is generally required to follow the GloBE rules so that the calculation of the ETR and top-up tax is substantially the same. An MNE should be able to use the same data points for calculating its minimum tax liability that it uses for calculating its GloBE tax liability.

One option would be to just apply all of the GloBE rules with changes for the income inclusion rule (IIR) and under-taxed payments rule (UTPR) (as the IIR and UTPR mainly apply to the income of foreign constituent entities, whereas a QDMTT applies to domestic constituent entities).

However, it is beneficial to adapt the design of the QDMTT to reflect the domestic tax regime as otherwise this could exacerbate the complexity of a QDMTT and include provisions that aren’t even relevant to the jurisdiction (eg the stock-based compensation election, that would not be relevant if the jurisdiction did not allow companies to deduct the value of stock-based compensation based on the market value of the stock.)

These types of differences would depend on the specific jurisdiction. See our QDMTT Tracker for information on different approaches to domestic implementation.

However, one key difference for the QDMTT calculation relates to taxes pushed down to controlled foreign company’s (CFCs), hybrids and PEs

Under the Standard GloBE Rules (above) taxes are allocated to the CFC/Hybrid entity (subject to the pushdown limitation) or the PE. However, for the purposes of the QDMTT CFC/Hybrid taxes are not included or allocated to PEs. Similarly a QDMTT must also exclude taxes on dividends (and other distributions) levied on the recipient aside from withholding taxes that are imposed by the QDMTT jurisdiction that would usually be allocated to the distributing company under Article 4.3.2 (e) of the GloBE rules.

This is a significant difference.

Therefore, the ETR for the QDMTT will not, for instance, include CFC/Hybrid taxes pushed down, whereas the GloBE ETR would.

See: Treatment of CFC Taxes: QDMTTs vs GloBE Rules

Blended CFC Tax Allocation ETR

A blended CFC regime arises when the tax charge under the CFC regime is based on a blend of income or of multiple CFCs. It therefore doesn’t blend CFC income on a jurisdictional basis. 

The Administrative Guidance includes a simplified formula to allocate CFC taxes in blended CFC regimes.

The formula allocates CFC tax under a Blended CFC Tax Regime to entities located in jurisdictions in which the Blended CFC Tax Allocation ETR is below the rate for the Blended CFC Tax Regime. 

You can see more on allocation rules for Blended CFC Tax Regimes at:

Pillar Two: GILTI & Blended CFC Regimes

The key point to note is that when calculating the Blended CFC Tax Allocation ETR, any tax under a QDMTT is taken into account only if the Blended CFC tax regime permits a foreign tax credit for it. As for the QDMTT ETR, CFC taxes are also excluded.

If there is no credit for the QDMTT then it is not taken into account when calculating the Blended CFC Tax Allocation ETR.

This only applies for the purposes of calculating the allocation of the Blended CFC Taxes.

Transitional CbCR Safe Harbour ETR

One of the occasions when the Transitional CbCR Safe Harbour can apply is when a simplified ETR Test is met,

The Simplified ETR is simply the income tax expense in the MNE Group’s financial statements (after removing any taxes that are not covered taxes and uncertain tax positions) divided by the profit before income tax in the MNE Group’s CbC Report.

This does not require any GloBE adjustments (eg the allocation of CFC or Main Entity taxes).