Eligible Distribution Tax Systems

Three conditions, all required

• The tax is generally payable only on distribution, deemed distribution or certain non-business expenses
• Its rate equals or exceeds the Minimum Rate
• It was in force on or before 1 July 2021

An annual election

Without it nothing is added. It applies to all Constituent Entities located in the jurisdiction.

The lesser of two amounts

• The Adjusted Covered Taxes needed to lift the jurisdiction's Effective Tax Rate to the Minimum Rate: Net GloBE Income times the Minimum Rate, less the taxes already counted, not below nil
• The tax that would have been due had all the income subject to the system been distributed

Why the election exists

Under a distribution tax, little or no tax is charged in the year income is earned, and a deferred tax liability for tax payable on distribution is not counted. Without the election the jurisdiction would look untaxed in years with no distribution and over-taxed in years with a large one. The second limb caps the deemed tax at what the system could have charged had every unit of the year's taxable earnings been distributed, and is worked out without regard to accumulated deficits brought forward.

The recapture account

The amount goes into a Deemed Distribution Tax Recapture Account, run down by tax paid on distributions, then by Net GloBE Loss times the Minimum Rate, then by a loss carry-forward. A balance outstanding on the last day of the fourth following Fiscal Year is treated as a reduction of the Adjusted Covered Taxes for the year it arose, and the Top-up Tax recalculated.

How the recapture account runs

• One account for each year the election is made, kept for the jurisdiction as a whole, in amounts of tax and not of income — so a later cut in the distribution tax rate means more must be distributed to clear it
• Reduced, oldest year first and never below nil: first by distribution tax actually paid; then by a Net GloBE Loss of the jurisdiction multiplied by the Minimum Rate, which works as a carry-back of the loss; then by any Recapture Account Loss Carry-forward
• A loss larger than all the accounts creates a Recapture Account Loss Carry-forward, usable without time limit, with the burden of proof on the Filing Constituent Entity
• An account not cleared by the end of the fourth year after it was set up reduces the Adjusted Covered Taxes of the election year, which is recalculated with that year's own substance exclusion and percentages
• Distribution tax paid while any account is open reduces the accounts and is not also counted as a Covered Tax; only tax paid after all are nil is. Tax on non-business expenses is always a Covered Tax

When an entity leaves

Where a Constituent Entity leaves the group, or substantially all of its assets are moved out of the group or the jurisdiction, every open account is recalculated at once and the resulting Top-up Tax is charged in proportion to the Disposition Recapture Ratio: the departing entity's GloBE Income over the jurisdiction's Net GloBE Income, for the years with open accounts. A year in which the departing entity made a loss is left out. The accounts and that year's income, taxes and exclusion are then scaled down by the same ratio.