Recent OECD guidance clarifies that the US global intangible low-taxed income (‘GILTI’) regime is a CFC regime for P2 purposes. This means that GILTI will generally be allocated to low-taxed constituent entities (‘LTCE’) with a P2 effective tax rate (‘ETR’) of less than 15%. This will be done pursuant to a simplified allocation formula on a temporary basis (for financial years ending prior to or on June 30, 2027). Such GILTI allocation results in an increase in the ETR of the relevant LTCE and reduces the top-up tax (‘TT’) levied in another country in respect of the LTCE’s low-taxed profits.
A US parent company (‘USCo’) holds a subsidiary (‘HoldCo’) in country X, which holds subsidiaries in countries Y (‘Sub Y’) and Z (‘Sub Z’). HoldCo has an ETR of at least 15%. Sub Y has an income of 160 and a tax liability of 8 (5% ETR). For Sub Z, the income is 80 and the tax liability is 8 (10% ETR). The net GILTI amount at the level of USCo is 20. The entire income of Sub Y and Sub Z is subject to GILTI at the level of USCo and is therefore ‘attributable income’. Countries Y and Z did not introduce a Qualified Domestic Minimum Top-Up Tax (‘QDMTT’).
First, the ‘blended CFC allocation key’ will be determined. This is 13.125% (‘applicable rate’ for GILTI) minus the ETR. This is multiplied by the attributable income of the LTCE. For Sub Y, this equals (13.125% - 5%) x 160 = 13. For Sub Z this equals (13.125% - 10%) x 80 = 2.5. The sum of both amounts is 15.5. Thereafter, GILTI will be allocated based on the pro-rata part of the allocation key. This results in a GILTI allocation of [(13 / 15.5) x 20 =] 16.77 to Sub Y and [(2.5 / 15.5) x 20 =] 3.23 to Sub Z.
The allocation of GILTI increases the P2 tax of Sub Y to (8 + 16.77) = 24.77. Its ETR now equals (24.77 / 160) = 15.48%. For Sub Z, its P2 tax increases to (8 + 3.23) = 11.23 and its ETR to (13.23 / 80) = 16.53%. As a result of the GILTI allocation, the income of Sub Y and Sub Z is no longer subject to TT. It can be derived from this example that both a low jurisdictional ETR and a high amount of attributable income increase the GILTI allocation for P2 purposes.
If a country implemented a QDMTT, the GILTI allocation depends on whether the QDMTT will be creditable against GILTI for US tax purposes. If so, no GILTI will be allocated to a subsidiary in that country, and all GILTI will be allocated to LTCEs in other countries with an ETR below 15%. If not, GILTI would still be allocated to such a subsidiary even though it already has an ETR of at least 15% because of the QDMTT. As a result, less GILTI can be allocated to (actual) LTCEs, which can lead to TT being due.
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