P2 seeks to enforce a global minimum income tax at an effective rate (‘ETR’) of 15% for each country in which the MNE operates. Under P2, the results of all consolidated group entities located in a particular country are generally aggregated to determine the ETR in that country (‘jurisdictional blending’). This means that an entity with a stand-alone ETR of less than 15% is not subject to P2 top-up tax (‘TT’) if its results can be blended with other consolidated group entities located in the same country and such blending leads to a jurisdictional ETR for that country of at least 15%.
Illustrative example: An in-scope MNE group has two subsidiaries (Sub 1 and Sub 2) in country X: Sub 1 has P2 income of 100 and pays corporate income tax (‘CIT’) of 5 on that income (e.g., because it benefits from a preferential IP regime). Sub 2 has P2 income of 200 and pays 40 of CIT. No deferred taxes are recorded. On a stand-alone basis, the P2 ETR for Sub 1 is 5%. However, after blending the results of Sub 1 and Sub 2, the P2 ETR in country X equals 15% ((5+40) / (100+200) x 100%). As a result, no TT is due with respect to country X.
Jurisdictional blending under P2 is a point of attention in M&A transactions. It can affect the price a purchaser in-scope of P2 (a ’Purchaser’) is willing to pay. E.g., if a Purchaser wants to buy Sub 1 in the example above and such Purchaser does not have any operations, or only low-taxed operations, in country X, it may want to pay a lower price because TT will need to be paid with respect to country X (i.e., the results of Sub 1) post-acquisition. However, a Purchaser with existing high-tax operations in country X may not be subject to TT with respect to the low-taxed profits of Sub 1 as a result of jurisdictional blending. Such Purchaser does not need to take into account the negative impact of TT when determining the purchase price.
Another point of attention in an M&A context is that the target company (“Target’) itself may be subject to an ETR < 15% on a stand-alone basis, but its profits may not be subject to TT at the level of a seller in scope of P2 (a ’Seller’) because of jurisdictional blending with other consolidated group companies of the Seller in the Target country. It is therefore important in a due diligence process to focus on the standalone P2 ETR of the Target in case the Seller has (high-taxed) consolidated group companies in the Target country. See for instance the example above where Sub 1 has a P2 ETR of 5% on a stand-alone basis, but no TT is due at level of the Seller because Sub 1’s results are blended with the results of Sub 2.
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