P2 applies to MNE groups with annual revenues exceeding € 750M. An MNE group consists of entities that the ultimate parent entity (‘UPE’) includes in its consolidated financial statements on a line-by-line basis. This can include entities that are not 100% owned but nevertheless controlled by the MNE group. Such entities (referred to under P2 as ‘split ownership’) can give rise to surprising P2 outcomes.
P2 distinguishes two types of split ownership in a JV: (i) a JV that is consolidated in the accounts of the UPE (‘Consolidated JV’) and (ii) a JV that is not consolidated. In this Snippet, we solely discuss Consolidated JVs.
Assume that A is the UPE of an MNE group and holds an interest <100% in a JV. A is resident in a country that has adopted P2. The JV and/or one of its subs (‘Sub’) is a low-taxed constituent entity (‘LTCE’) as its effective tax rate (‘ETR’) is <15% for P2 purposes. No ‘qualified domestic op-up tax’ is imposed on the JV or Sub. The P2 consequences will depend on the percentage held by A in JV and Sub whereby three scenarios can be distinguished:
A holds an interest of =>80% in JV (e.g., 90%). In this case, 90% of the profits of JV and/or Sub are subject to top-up tax (‘TT’) at the level of A as UPE under the ‘income inclusion rule’ (‘IIR’). The remaining 10% is uncollected under P2.
A holds an interest of >30% but <80% in JV (e.g., 60%). In this case, it depends on whether (a) the JV itself is an LTCE or (b) the Sub is an LTCE. In situation (a), 60% of the profits are subject to TT at the level of A as UPE under the IIR. In situation (b), 100% of the profits of the Sub will be subject to TT at the level of JV under the IIR. The profits allocable to the 40% investor(s) in JV, are uncollected in situation (a) but are subject to TT in situation (b).
A holds an interest =<30% in JV (e.g., 25%). A consolidates its interest in JV as it has legal or operational control. The allocation mechanism as under 2) above applies in this situation. The allocation is therefore dependent on the question whether the JV is an LTCE (25% of profits taxed at the level of A as UPE under the IIR) or the Sub (100% taxed at the level of JV under the IIR).
The general rule under P2 is that the results of all consolidated group entities located in a particular country are aggregated to determine the ETR in that country (‘jurisdictional blending’). P2 provides an exception thereto for situation 3 (i.e., ownership =<30%). In that case, jurisdictional blending occurs solely between JV and Sub(s), assuming they are located in the same country. Any other consolidated group companies located in that country are thus excluded.
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