GloBE and GILTI: A tale of two minimum taxes
For groups subject to GloBE and GILTI, the interaction between these minimum taxes will be complex and brings the risk of double taxation.
For groups subject to GloBE and GILTI, the interaction between these minimum taxes
Pillar Two was meant to be a ’common approach’, providing countries with a common framework to implement minimum effective tax rules. Though not certain, it seems increasingly unlikely that the US will amend its Global Intangible Low-Taxed Income (GILTI) rules to align with the OECD’s Global Anti-Base Erosion (GloBE) rules. This could leave US-headed groups with UK intermediate parents and UK-headed groups with US intermediate parents being subject simultaneously to an unamended GILTI, GloBE, domestic minimum top-up taxes and a potential US book-minimum tax. The interaction between these different minimum tax rules creates complexity and brings the risk of double taxation.
For affected groups this means:
- The calculation of GloBE should take GILTI into account - If GILTI is treated as a controlled foreign company (CFC) rule by GloBE, then the associated GILTI taxes should be pushed down to the relevant country when determining whether that country is ‘low-tax’ and hence whether top-up tax is due under the GloBE rues. This would ensure that any low-taxed income is not taxed twice – once through GILTI and again through GloBE. The UK Government’s recently released consultation response, which accompanied draft UK legislation, recognises that this is how GILTI will be treated in the UK;
- There will need to be a methodology for allocating GILTI tax - Because GILTI is calculated on a global-blended basis (with foreign tax credits also allowed on such basis) it is not immediately apparent where the residual US GILTI tax (US pre-credit GILTI tax, less applicable foreign tax credits) should be allocated. Hence, there will need to be some type of accepted methodology to allocate residual US GILTI tax to the relevant country, so it can be accounted for in the GloBE calculation. The allocation will likely account for both the amount of GILTI arising in a jurisdiction and the rate of foreign taxes allowed as foreign tax credits. In situations where US groups’ foreign subsidiaries on an aggregate basis have a high global tax rate, there may be no residual US GILTI tax because sufficient foreign tax credits arise to bring pre-credit US GILTI tax down to zero; in such cases there will be no GILTI tax to allocate;
- Some countries will think Qualifying Domestic Minimum Top-up Taxes (QDMTTs) should come before GILTI - Though countries may be willing to take GILTI into account when determining the additional tax to be collected under the GloBE rules, they may think a QDMTT should come before GILTI. Their argument will be that since these jurisdictions are the source of the low-taxed profits if they choose to tax them, their claim should come first. Though, the counter-argument is that a QDMTT is supposed to be consistent with the GloBE calculations which would treat GILTI as a CFC tax. A follow-on question, is if QDMTTs do not take GILTI into account, whether QDMTTs would be creditable in the US?;
- Low taxed US profit could be subject to GloBE - Despite the 21 percent federal rate and state taxes on top, there are situations where due to a combination of factors, groups are finding that their US effective tax rate, as computed for GloBE purposes, drops below 15 percent. This could leave US-parented groups exposed to top-up tax in other countries, unless the US adopts its own domestic minimum tax; and
- More compliance - Groups would be subject to both the GloBE and GILTI rules, with their different calculations. Groups would need to do the maths for both and (at an absolute minimum) file two returns. If countries start to introduce QDMTTs, this could get even more complicated. The OECD commentary holds open the possibility that QDMTTs could be based on local statutory books, in effect opening the door to the global introduction of country-specific book minimum taxes.
What should groups be thinking about now?
Modelling and scenario planning are really the only way to understand the counter-intuitive outcomes that the interaction between GloBE and GIILTI may deliver. This is undoubtedly the best place to start and could shape responses to the UK’s consultation on its draft rules, which are due by 14 September 2022.