GLOBAL MINIMUM TAX SERIES – PART 14 -Jurisdictional Blending for GloBE Rules

[Amit Jalan]

Friends

One primary concept based on which the GloBE Rules have been designed is the Jurisdictional Blending approach. It is a key element of the GloBE Rules. In this edition we have explained this approach.

We hope this bulletin adds Value in your professional Sphere. The OECD had three main approaches to calculating the ETR:

a) Global Blending

b) Jurisdictional Blending

c) Entity Blending

They chose the Jurisdictional blending approach.

A global blending approach would have blended all the profits and losses of an MNE internationally. Whilst, it could have been simpler to comply with and administer, in this case, the risk of a low-tax jurisdiction benefitting at the cost of high-tax jurisdictions exists.

The jurisdictional blending approach just blends the profits and losses on a jurisdictional basis. Under this approach, a GloBE tax liability will arise when the ETR of a particular jurisdiction (including a stateless jurisdiction) in which the MNE Group operates, is below the GloBE Minimum Rate of 15%. This jurisdictional blending is why transactions between constituent entities in the same jurisdiction aren’t required to be on an arms-length basis as well as avoids potential distortions caused by particular features of the domestic tax system, such as loss-surrender and tax consolidation mechanisms.

The granular entity-by-entity approach would calculate the ETR for each individual entity separately. This could have been a nightmare for stakeholders, and also beyond the GloBE policy objectives, which was never to put an entity-wise minimum rate.

Therefore, under jurisdictional blending, just because an MNE has a low taxed entity in a jurisdiction, does not necessarily mean that the ETR for the jurisdiction would be less than 15%. For example, if an MNE has three subsidiaries in a jurisdiction:

SubsCo.1 – Profits of €10 million and tax of €1 million = ETR 10%

SubsCo.2 – Profits of €10 million and tax of €1.25 million = ETR 12.5%

SubsCo.3 – Profits of €10 million and tax of €2.5 million = ETR 25%

The jurisdictional blended ETR for the MNE in this case would be 15.8333% and the MNE group would not be subject to GloBE top-up tax. This is irrespective of the fact that SubsCo.1 & 2 had an ETR below the global minimum rate of 15%.

Whilst jurisdictional blending applies in most cases, there are certain exclusions and exceptions as below:

De minimis exclusion: This exclusion applies when the amount of any top-up tax would not seem to justify the associated compliance and administrative costs. In such cases, there is no need for the MNE Group to compute the ETR of its constituent entities and no need to calculate the amount of top-up tax that would have been due if the exclusion did not apply.

Substance-based income exclusion: This exclusion allows MNEs to exclude a portion of their income from the jurisdictional blending calculation based on their eligible payroll costs and eligible tangible assets. The substance-based income exclusion is aggregated for each constituent entity located in the jurisdiction.

Investment entities: Investment entities are excluded from the standard jurisdictional blending calculation, and their ETR calculation is treated separately. Multiple investment entities in a jurisdiction effectively form a separate investment entity group, which is subject to a separate jurisdictional ETR calculation.

Minority-owned constituent entities: Jurisdictional computations made with respect to members of a minority-owned subgroup are done separately from the rest of the MNE Group. The adjusted covered taxes and GloBE income or loss of members of a minorityowned subgroup are excluded from the determination of the remainder of the MNE Group's ETR.

International shipping income exclusion: International shipping income and qualified ancillary international shipping income can be excluded from the jurisdictional blending calculations. Additionally, tax incentives can have varying impacts on jurisdictional blending, depending on their design, nature and scope. The impact of tax incentives on the ETR under the GloBE Rules depends on whether they reduce covered taxes, increase GloBE income, or otherwise have a neutral effect on the ETR. Below are some key considerations regarding the impact of tax incentives on jurisdictional blending:

Broad-based vs. targeted tax incentives: Broad-based tax incentives, such as reduced corporate income tax rates or tax holidays, are likely to have a more significant impact on an MNE's jurisdictional ETR compared to targeted tax incentives, such as patent boxes that apply to specific income types. This is because broad-based incentives affect a larger portion of the MNE's income in a jurisdiction.

Income-based vs. expenditure-based incentives: Expenditure-based tax incentives, which promote capital- or labor-intensive investments (i.e., in tangible assets and payroll), are more likely to benefit from the substance-based income exclusion under the GloBE Rules. This means that jurisdictions with expenditure-based incentives may be less impacted by the GloBE Rules compared to those with income-based incentives.

Tax credits: Most tax credits reduce covered taxes and could have a significant impact on the GloBE ETR, potentially leading to top-up tax for an MNE. The impact of tax credits on jurisdictional blending depends on the extent to which they reduce covered taxes in a jurisdiction. 

In summary, broad-based incentives and tax credits can have a more significant impact on the jurisdictional ETR, while targeted and expenditure-based incentives may have a lesser impact.