GLOBAL MINIMUM TAX SERIES – PART 21 – Location of Constituent Entities and PEs

[Amit Jalan]

Friends

In the previous editions we have discussed about Constituent Entities and their types as well as Excluded entities and the relevance of identifying them, after it is determined that the MNE Group is in scope of the GloBE Rules. Equally important is to identify the location of the Constituent Entities based on which the GloBE Income or Loss and Covered Tax calculation and allocation mechanisms are designed. We have discussed this aspect in this edition.

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The location of the Constituent Entities is an essential part of the GloBE Rules, because this will determine the jurisdictions that need to be considered for calculating and allocating the GloBE Income or Loss (i.e. jurisdictional blending) and thereby calculate and allocate any top-up tax that is due for that jurisdiction (i.e. where the top-up tax has to be paid).

Article 10.3 of the GloBE Rules includes provisions to determine the location of entities and PEs. In general, the GloBE Rules follow domestic Tax Law, and any Treaty provisions that deals with tax residence and source taxation.

Under Article 10.3.1 of the GloBE Rules, if an Entity (not being a Flow-through Entity) is tax resident in a jurisdiction, its location for GloBE purposes is the jurisdiction in which it is a tax resident, based on its place of management, place of creation or similar criteria.

If an Entity (not being a Flow-through Entity) is not tax resident anywhere, then the place of its incorporation or creation is taken as its location for GloBE purposes. This will generally apply to jurisdictions that don’t have a residence definition in domestic law due to not having a corporate income tax system.

Article 10.3.2 provides that the location of an Entity that is a Flow-through Entity (i.e., Transparent Entities) is the jurisdiction where it was created/incorporated, in case it is the UPE of the MNE Group or it is otherwise required to apply an IIR in accordance with Article 2.1 of the GloBE Rules. In all other cases, they are Stateless Entities and are treated on a standalone basis for the jurisdictional ETR calculation.

Article 10.3.3 of the GloBE Rules provides rules for determining the location of a PE, which, in most cases will be the place of business or the source jurisdiction (as determined by the applicable Tax Treaty (Treaty PE), domestic tax law (Domestic PE) or physical location (Deemed PE)). In limited cases, a PE will be stateless, i.e., where the PE is neither a Treaty, Domestic or a Deemed PE, the operations are conducted from outside the state of residence or location of the Main Entity and such PE income is exempt from tax in the Main Entity. This has been explained in detail in the 16th edition of this series.

Tie-breaker Rules

Article 10.3 also provides special tie-breaker rules in case a Constituent Entity (other than a PE) is treated as located in more than one jurisdiction, i.e., a dual-located Entity (Articles 10.3.4 to 10.3.6 of the GloBE Rules). For example, having its place of effective management in one jurisdiction, and place of incorporation in another, and treated as tax resident in both jurisdictions under the respective domestic laws.

Under Article 10.3.4 of the GloBE Rules, if an Entity is located in two jurisdictions that have an applicable Tax Treaty in force, then it shall be located in the jurisdiction where it is considered as a deemed resident under the Tax Treaty.

If there is no result from the applicable Tax Treaty, then the following rules apply under Article 10.3.4:

i) the Entity shall be located in the jurisdiction where most Covered Taxes for the Fiscal Year are paid, without considering the ones paid in accordance with a CFC Tax Regime; or

ii) if the amount of Covered Taxes paid in both jurisdiction is the same or zero, it shall be located in the jurisdiction with higher Substance (i.e. where it has the largest amount of Substance-based Income Exclusion - calculated on an entity basis, not the usual jurisdictional basis); or

iii) If neither of the above apply then the Constituent Entity is treated as stateless, unless it is the UPE of the MNE Group in which case it shall be located in the jurisdiction where it was created.

Stateless Entities

This has been discussed in detail in the 19th edition of this series.