The Guidance provides welcome relief for US MNEs as it clarifies the treatment of transferable tax credits (‘TTC’) and introduces a temporary UTPR safe harbour (‘UTPR SH’). Both topics are discussed below.
In our previous Snippet about the treatment of tax credits (‘TC’) for P2 purposes, we discussed that a distinction is made between QRTC (a TC that is refundable in cash within four years) and NQRTC (a TC refundable after four years) and that a QRTC generally leads to a more beneficial outcome under P2. The Guidance introduces TTC as one of the new categories of tax credits. TTC are treated similarly to QRTC and, hence, as income for P2 purposes (‘P2 Income’) for the taxpayer generating the TTC (the ‘Originator‘) if the following two conditions are met:
- The TTC is transferable to a third party ultimately within 15 months after the fiscal year of origination; and
- The TTC is actually transferred, or is transferable, to a third party in said period for a price of at least 80% of the net present value of the TTC. If the TTC is not actually transferred to a third party in that period, this condition is assessed based on market prices of similar credits.
If a TTC meets only one of these conditions, the TTC reduces the tax liability for P2 purposes. Both conditions are tested at the level of the Originator and the purchaser separately.
The treatment of a qualifying TTC as P2 Income is good news for US MNEs that benefit from renewable energy TTC introduced by the Inflation Reduction Act.
The Guidance also introduces the UTPR SH. Under the UTPR, group companies located in countries that have implemented P2 can levy top-up tax on a pro-rata share of the undertaxed profits of – for example - a US parent company (‘USCo’). This is relevant for a USCo with an ETR in the US of less than 15% (e.g., because of US tax incentives such as FDII and/or R&D TC). The UTPR will enter into force for book years starting as from Dec. 31, 2024.
The UTPR SH temporarily eliminates top-up tax under the UTPR in relation to ultimate parent entity jurisdictions with a statutory corporate income tax (‘CIT”) rate of at least 20%. The UTPR SH applies to book years starting on or before Dec. 31, 2025 and ending before Dec. 31, 2026. The UTPR SH can be applied to a USCo as the US has a CIT rate of 21%. It means that a USCo with a calendar book year can benefit from the UTPR SH in the year 2025 (i.e., one additional year when compared to the date of entry into force of the UTPR).
If a USCo qualifies for both the UTPR SH and the Transitional CbC Safe Harbour, the choice of a safe harbour should be carefully analyzed.
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