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Allocation of Covered Taxes between entities

Applies
FY2024 onwards
Reviewed
Rule
P2-CTAL-2024.1
By

How are Covered Taxes allocated between entities?

Tax one entity pays on another's income moves to the entity that earned it: a PE, a CFC, a hybrid or a distributing entity, with passive income capped.

Per GloBE Model Rules (Pillar Two), December 2021, Article 4.3, Allocation of Covered Taxes from one Constituent Entity to another

Covered Taxes are allocated from one Constituent Entity to another as follows: Covered Taxes in the accounts of a Constituent Entity with respect to the GloBE Income or Loss of a Permanent Establishment, to the Permanent Establishment; those of a Tax Transparent Entity with respect to income allocated to a Constituent Entity-owner, to that owner; those of Constituent Entity-owners under a Controlled Foreign Company Tax Regime on their share of the Controlled Foreign Company's income, to that company; those of a Constituent Entity-owner on income of a Hybrid Entity, to the Hybrid Entity; and those accrued by direct Constituent Entity-owners on distributions from a Constituent Entity, to the distributing entity. Covered Taxes allocated under a Controlled Foreign Company Tax Regime or to a Hybrid Entity in respect of Passive Income are included only up to the lesser of those taxes and the Top-up Tax Percentage for the Constituent Entity's jurisdiction, determined without regard to them, multiplied by the Passive Income includible.

Income and the tax on it are counted in the same jurisdiction. The passive income limit stops tax paid in a high-tax parent jurisdiction from sheltering other low-taxed income in the subsidiary's jurisdiction.

Five allocations, and a limit on two of them

Who the tax moves to

  • (a) Tax on a Permanent Establishment's income — to the Permanent Establishment
  • (b) A Tax Transparent Entity's tax on income allocated to an owner — to the owner
  • (c) An owner's Controlled Foreign Company tax — to the Controlled Foreign Company
  • (d) An owner's tax on a Hybrid Entity's income — to the Hybrid Entity
  • (e) An owner's tax on a distribution — to the distributing entity

The passive income limit

For (c) and (d) only. Tax on the subsidiary's dividends, interest, rent, royalties, annuities and gains on such property is pushed down only up to the subsidiary jurisdiction's Top-up Tax Percentage — computed without that tax — times the Passive Income. The rest stays with the owner. Where the subsidiary's jurisdiction is already at the Minimum Rate, nothing is pushed down.

Income that returned to the Main Entity

Where a Permanent Establishment's later income is treated as the Main Entity's under Article 3.4.5, the taxes on it in the Permanent Establishment's location go to the Main Entity, up to that income times the highest corporate tax rate on ordinary income there.

Blended CFC Tax Regimes

A regime that aggregates the income, losses and creditable taxes of all the shareholder's Controlled Foreign Companies is allocated by a time-limited formula across every jurisdiction, using a Blended CFC Allocation Key. It is not computed here.

Deferred taxes too

The allocations apply to deferred as well as current Covered Taxes.

Order of testing

  1. 1

    Inputs requiring your determination

    Every input the computation reaches must be supplied; nil is entered, not left blank.

  2. 2

    A Blended CFC Tax Regime

    Named and not computed.

  3. 3

    The allocation under Article 4.3.2

    Three of the five move the tax in full.

  4. 4

    The passive income limit

    Article 4.3.3 — for Controlled Foreign Company and Hybrid Entity tax.

  5. 5

    The limit at the Main Entity's highest corporate tax rate

    Article 4.3.4.

Examples

Illustrative scenarios — ours, not the authority’s — each computed live by this rule. Change any fact and the outcome is the rule’s, not a hand-written answer.

Controlled Foreign Company tax on passive income

A parent pays EUR 25 million on EUR 100 million of a subsidiary's royalties; the subsidiary's jurisdiction has a Top-up Tax Percentage of 10% without it.

Computed

EUR 10,000,000 of the EUR 25,000,000 of Covered Taxes is allocated to the Controlled Foreign Company as computed (Article 4.3.2(c)). Of the EUR 25,000,000 in respect of Passive Income, EUR 10,000,000 is allocated: Article 4.3.3 limits it to the lesser of that tax and the Top-up Tax Percentage of 10% multiplied by the Passive Income of EUR 100,000,000, which is EUR 10,000,000. The remaining EUR 15,000,000 is not allocated and stays in the owner's Adjusted Covered Taxes. Based on the figures you supplied.

Workings

Covered Taxes on the incomeArticle 4.3.2(c) — as supplied
EUR 25,000,000
Of which on Passive IncomeArticle 4.3.3(a) — as supplied
EUR 25,000,000
Passive Income includibleArticle 4.3.3(b) — as supplied
EUR 100,000,000
Top-up Tax Percentage before the push-downArticle 4.3.3(b) — of the subsidiary's jurisdiction, as supplied
10%
Limit on tax allocated on Passive IncomeArticle 4.3.3(b) — the percentage multiplied by the Passive Income
EUR 10,000,000
Tax on Passive Income allocatedArticle 4.3.3 — the lesser of the tax and the limit
EUR 10,000,000
Other Covered Taxes allocatedArticle 4.3.2(c) — not subject to the limit
EUR 0
Allocated to the Controlled Foreign CompanyArticle 4.3.2(c) with Article 4.3.3
EUR 10,000,000
Remaining with the Constituent Entity-ownerArticle 4.3.3 — not allocated; stays in the owner's Adjusted Covered Taxes
EUR 15,000,000

Decided by the passive income limit

Withholding tax on a dividend from a subsidiary

EUR 3 million of tax accrued by the parent on a distribution from a Constituent Entity.

Computed

The Covered Taxes of EUR 3,000,000 are allocated to the distributing Constituent Entity as computed (Article 4.3.2(e)): they are excluded from the Adjusted Covered Taxes of the entity in whose accounts they sit and included in those of the entity that takes the corresponding income into its GloBE Income or Loss. The passive income limit of Article 4.3.3 does not apply to this kind of allocation. Based on the figures you supplied.

Workings

Covered Taxes on the incomeArticle 4.3.2(e) — as supplied
EUR 3,000,000
Allocated to the distributing Constituent EntityArticle 4.3.2(e) — in full
EUR 3,000,000

Decided by the allocation under article 4.3.2

Head office tax on a branch

EUR 6 million of the Main Entity's tax relates to its Permanent Establishment's income.

Computed

The Covered Taxes of EUR 6,000,000 are allocated to the Permanent Establishment as computed (Article 4.3.2(a)): they are excluded from the Adjusted Covered Taxes of the entity in whose accounts they sit and included in those of the entity that takes the corresponding income into its GloBE Income or Loss. The passive income limit of Article 4.3.3 does not apply to this kind of allocation. Based on the figures you supplied.

Workings

Covered Taxes on the incomeArticle 4.3.2(a) — as supplied
EUR 6,000,000
Allocated to the Permanent EstablishmentArticle 4.3.2(a) — in full
EUR 6,000,000

Decided by the allocation under article 4.3.2

A blended regime

Tax under a regime that pools all the shareholder's Controlled Foreign Companies.

Computed

Not allocated here: the tax arises under a Blended CFC Tax Regime, which the Commentary to Article 4.3.2(c) allocates by a time-limited formula — the Allocable Blended CFC Tax shared among the Entities in proportion to their Blended CFC Allocation Keys, each key being the Entity's attributable income multiplied by the excess of the regime's applicable rate over its jurisdiction's GloBE Effective Tax Rate. That needs the figures of every jurisdiction in which the shareholder has CFCs and is not computed by this rule. Based on what you supplied.

Decided by the a blended cfc tax regime

Try it

Supply the facts and this rule computes the outcome in your browser, live. Leave a determination undecided and it blocks the result — it is never read as a no.

Not computed yet

1 input still need your determination:

  • Which allocation is in question: tax on a Permanent Establishment's income; a Tax Transparent Entity's tax on income allocated to an owner; an owner's tax under a CFC regime; an owner's tax on a Hybrid Entity's income; an owner's tax on a distribution; or tax on Permanent Establishment income treated as the Main Entity's under Article 3.4.5?

Computed in your browser from the figures you supply. Nothing is sent anywhere, and the result is a computation against a rule — reference, not tax advice.

Sources

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Reference, not tax advice.

Pankaj Agarwal — Tax Technology Leader