Article 2.4.1

43. Article 2.4.1 provides that the Constituent Entities of an MNE Group shall be denied a deduction for otherwise deductible expenses (or be subject to an equivalent adjustment under domestic law) in an amount sufficient to result in the Constituent Entities located in the UTPR Jurisdiction having an additional cash tax expense equal to the UTPR Top-up Tax Amount allocated to that jurisdiction. The timing of the UTPR adjustment is addressed in Article 2.4.2.

Denial of a deduction

44. Denying a taxpayer a deduction generally increases the cash tax expense for that taxpayer by increasing the net income subject to tax in that jurisdiction. The increase in the tax payable as a result of the denial of a deduction is an amount equal to the taxpayer’s rate of tax multiplied by the amount of the payment (or other expense) for which the deduction was denied. If the UTPR in a jurisdiction relies on a denial of deduction mechanism, then the amount of deductions that need to be denied under the rule can be determined by dividing the UTPR Top-up Tax Amount allocated to the jurisdiction under Article 2.6 by the taxpayer’s applicable rate of tax on such income. For instance, if a Constituent Entity located in a UTPR Jurisdiction is allocated UTPR Top-up Tax Amount of 10 and the CIT rate is 25%, then denying the deduction for an otherwise deductible payment of 40 (= 10 / 25%) results in an incremental cost equal to the UTPR Top-up Tax Amount allocated under the rule (40 x 25% = 10).

45. Denial of a deduction under Article 2.4.1 means the denial of a deduction for local tax purposes in respect of expenditure or similar items that are taken into account in calculating ordinary net income for tax purposes in that jurisdiction. The denied deduction need not be attributable to a transaction with another Constituent Entity. It includes the denial of an allowance for depreciation or amortisation and extends to a denial of a deduction for a purely notional expense or non-economic loss (such as a deemed interest expense). Deemed or notional expenses incurred by a PE or Main Entity in respect of the application of the arm’s length principle may also be taken into account for the purposes of the UTPR provided such amounts are taken into account in calculating ordinary net income for tax purposes in that jurisdiction. A denial of a deduction does not include an item to the extent that it is already subject to separate limitation under another rule (such as an interest limitation rule). An adjustment that took the form of a denial of a deduction recorded against non-taxable income, and that therefore does not result in an additional amount of cash tax expense payable by the Constituent Entities, would not constitute a valid denial of a deduction for the purposes of a UTPR adjustment.

Equivalent adjustment

46. Article 2.4.1 further provides that the UTPR may take the form of an adjustment that is equivalent to a denial of a deduction. The UTPR does not prescribe the mechanism by which the adjustment must be made. This is a matter of domestic law implementation that is left to the UTPR Jurisdictions. 47. The adjustment under the UTPR will depend on the existing design of the domestic tax system and should be coordinated with other domestic law provisions and a jurisdiction’s international obligations, including those under Tax Treaties. For example, the adjustment under the UTPR could take the form of an additional Tax levied directly on a resident taxpayer in an amount equal to the allocated UTPR Top-up Tax Amount. Alternatively, a jurisdiction could include an additional amount of deemed income representing a reversal of deductible expenses incurred in current or prior period or a jurisdiction could choose to reduce an allowance or deemed deduction to reflect an allocation of Top-up Tax.

Additional cash tax expense

48. Whichever form the UTPR adjustment may take, Article 2.4.1 provides that the adjustment should result in an additional cash tax expense (either in the current year or, under a carry-forward mechanism, in a future year) for the Constituent Entities of the MNE Group in the jurisdiction that equals the UTPR Topup Tax Amount allocated to this jurisdiction for each Fiscal Year. For this purpose, the additional cash tax expense is in addition to the amount that would otherwise have been paid under the ordinary domestic rules for calculating a Constituent Entity’s tax liability. The resulting additional cash tax expense should be determined in respect of the taxable year in which the Fiscal Year ends, and should be due in addition to the amount of tax that would otherwise be payable for such taxable year under the normal tax rules in the jurisdiction applicable to the Constituent Entity. The additional cash tax expense increases the amount of tax that the Constituent Entity or Entities would otherwise have paid under the ordinary domestic rules for calculating their taxable income. This means that the UTPR applies after any provisions of domestic law that affect the deductibility of expenses incurred by Constituent Entities. The filing requirements associated with the tracking of the payment of the additional cash tax expense over time are addressed in Article 8.1.4(c).

49. For purposes of Article 2.4.1, an additional cash tax expense for a taxable year does not cover an amount of tax that will be payable by the Constituent Entities in respect of a future period. This means that a reduction of the amount of losses, which could otherwise be carried forward for CIT purposes, will not give rise to an additional cash tax expense for the taxable year within the meaning of this Article until a corresponding amount of income has arisen in the subsequent period. 6 Constituent Entities located in the Jurisdiction

50. Article 2.4.1 provides that the Constituent Entities of an MNE Group shall be denied a deduction for otherwise deductible expenses (or be subject to an equivalent adjustment under domestic law) in an amount sufficient to result in the Constituent Entities located in the UTPR Jurisdiction having an additional cash tax expense equal to the UTPR Top-up Tax Amount allocated to that jurisdiction.

51. Article 2.4.1 does not prescribe how the UTPR Top-up Tax Amount is allocated among the Constituent Entities that are located in the UTPR Jurisdiction. The allocation among the Constituent Entities within a UTPR Jurisdiction should be addressed under that UTPR Jurisdiction’s domestic law, which would ensure that such allocation mechanism is best coordinated with other existing domestic tax rules. The UTPR Jurisdiction may provide in its domestic law that the UTPR adjustment is imposed on only one Constituent Entity or several Constituent Entities that are located in the jurisdiction. For instance, several Constituent Entities may, for domestic tax purposes, belong to the same tax consolidated group such that the most straightforward way of making the adjustment required under the UTPR is at the level of the local tax consolidated group rather than on an entity-by-entity basis.

52. Constituent Entities may also be treated differently for this purpose, depending on whether they are wholly-owned or almost wholly-owned by the MNE Group, or whether they are partially-owned Constituent Entities. Allocating Top-up Tax to a partially-owned Constituent Entity would result in the minority interest holders of such Constituent Entity bearing indirectly a portion of the tax cost incurred by the application of the UTPR. A UTPR Jurisdiction may therefore provide that the Top-up Tax is allocated first to those Constituent Entities that are wholly-owned or almost wholly-owned by the MNE Group, in order to minimise the extent to which those minority interest holders share the burden of Top-up Tax allocated from LTCEs in which they do not have an economic interest.

53. Article 2.4.1 does not require that the additional cash tax expense is paid by the same Constituent Entities as those that were denied a deduction (or required to make an equivalent adjustment). For instance, the UTPR Jurisdiction may deny a deduction to (or impose an equivalent adjustment on) a Tax Transparent Entity, the effect of which flows through to the owners. In this case, the additional cash tax expense collected by the UTPR Jurisdiction may be levied or borne by the owners of the Tax Transparent Entity itself. As such, this additional cash tax expense may be taken into account for the purposes of assessing whether the adjustment has resulted in an additional cash tax expense that is equal to the UTPR Top-up Tax Amount.

Article 2.4.2

54. Article 2.4.2 requires that the UTPR adjustment is imposed as soon as possible and sets out a carry-forward mechanism to address the situation where the UTPR adjustment is subject to some limitations. The filing requirements associated with the carry-forward mechanism are discussed in the Commentary to Article 8.1.4(c). The taxable year in which the Fiscal Year ends

55. The UTPR Top-up Tax Amount is calculated based on the Low-Tax profits arising during a given Fiscal Year. The earliest taxable period a UTPR adjustment can be made is the Constituent Entities’ taxable year which commences during that Fiscal Year and that ends on the same day or after the Fiscal Year ends.

56. It may not be possible for a taxpayer or tax administration to know the UTPR Top-up Tax Amount that has been allocated to a jurisdiction until the GloBE Information Return is actually filed. While the GloBE Information Return is required to be filed no later than 15 months after the last day of the MNE’s Fiscal Year this date may be after the due date for the tax return of the relevant taxable year. When the UTPR adjustment takes the form of a denial of a deduction, jurisdictions may require the Constituent Entities to file an amended tax return with respect to the relevant taxable year, in order to affect the relevant deductions for that year. When the adjustment requires the submission of an amended tax return, the Constituent Entities located in the UTPR Jurisdiction should not suffer any penalties for late filing or payment that results from any increase in tax payable due solely to the application of the UTPR. If it is not possible to make a full adjustment in that period, then the adjustment should be made in the following period or as soon as reasonably practicable (see also paragraphs under the carry-forward mechanism).

To the extent possible

57. Article 2.4.2 further provides that the adjustment provided under Article 2.4.1 shall apply to the extent possible with respect to the taxable year in which the Fiscal Year ends. There may be situations, however, where the UTPR adjustment will be limited in its amount for a given taxable year, for instance because there is only a limited amount of deductible expenses. Nevertheless, the UTPR adjustment shall ensure that the maximum amount is collected from the Constituent Entities as early as possible.

58. There may also be situations where the additional cash tax expense of the Constituent Entities in an MNE Group will depend on the facts and circumstances of the particular Constituent Entities on which the UTPR adjustment will be imposed. As mentioned previously, denying a deduction to a Constituent Entity that is in a loss-position may not result in an immediate additional cash tax expense for that Constituent Entity. Therefore, in order to impose the adjustment to the extent possible with respect to a given taxable year, the UTPR Jurisdiction should, to the extent possible taking into account the limitations under applicable laws, impose the adjustment in priority on those Constituent Entities that will have an immediate additional cash tax expense in that year.

Carry-forward mechanism

59. Article 2.4.2 provides a carry-forward mechanism to address the situation where the UTPR adjustment made with respect to the taxable year in which the Fiscal Year ends did not result in enough additional cash tax expense to equal the UTPR Top-up Tax Amount allocated to the jurisdiction for that Fiscal Year and will not (in the current or a future taxable year due, for example, to a reduction in net operating losses), result in enough additional cash tax expense without a further adjustment being made. In other words, the carry-forward mechanism provided under Article 2.4.2 applies if the UTPR Top-up Tax Amount allocated to a UTPR Jurisdiction exceeds the additional cash tax expense that will be incurred (in the current or a future taxable year)by Constituent Entities located in such jurisdiction as a result of the UTPR.

60. Article 2.4.2 provides that under such circumstances, it may be necessary for the difference between the UTPR Top-up Tax Amount and the amount of the additional cash tax expense of the Constituent Entities that resulted from the application of the UTPR to be carried over to the following Fiscal Year and imposed in the taxable year in which the following Fiscal Year ends, which is expected to be the immediately subsequent taxable year. This difference shall be subject to an adjustment provided in Article 2.4.1 in the next year, but remains with the jurisdiction where it was first allocated and is not subject again to the general allocation mechanism in Article 2.6 in a later year. See also below the situation where the MNE Group falls outside of the scope of the GloBE Rules or where the Constituent Entity that was allocated Top-up Tax under domestic law leaves the MNE Group.

61. When the carry-forward mechanism applies, the Constituent Entities located in the UTPR Jurisdiction should not suffer any penalties for late payment that results from the UTPR being limited in its operation in the previous years (for instance, as a result of not having sufficient deductible payments to disallow or as a result of a loss-position).

62. Article 2.4.2 also provides that the carry-forward mechanism is only applied to the extent it is necessary to impose another adjustment to ensure that the Constituent Entities will have an additional cash tax expense that equals the UTPR Top-up Tax Amount allocated to the jurisdiction. There may be situations where it is not necessary to impose another adjustment, for instance because the first adjustment will result in the Constituent Entities having – over time – an additional cash tax expense that equals the UTPR Top-up Tax Amount allocated to the jurisdiction. This may be the case when the adjustment consists of a reduction of the amount of losses and those losses can be carried forward indefinitely under the laws of the UTPR jurisdiction. However, if the losses cannot be carried forward indefinitely, the UTPR adjustment may need to be carried forward because the first adjustment will not necessarily result in an additional cash tax expense in the period during which the losses can be carried forward and a further adjustment would be necessary at the end of this period.

63. Article 2.4.2 is not limited to the first taxable year that follows the one when the allocated UTPR Top-up Tax Amount could not result in an additional cash tax expense. The design of the carry-forward mechanism in Article 2.4.2 should subject the untaxed portion of the UTPR Top-up Tax Amount to the adjustment provided in Article 2.4.1 in the next year and each following year, to the extent necessary to achieve the full adjustment under Article 2.4.1. If the Top-up Tax that has been pushed-back into Article 2.4.1 does not result in an additional cash tax expense in that year then Article 2.4.2 would apply again in the following year thereby providing an indefinite carry-forward mechanism for any portion that further remains untaxed in the second and subsequent years. Article 2.4.2 also applies to the carried forward portion of the UTPR adjustment and provides that this adjustment shall apply “to the extent possible” to that following taxable year. While Article 2.4.2 provides for an indefinite carry-forward mechanism, domestic law in certain circumstances may limit the practical application of the carry-forward after a certain period of time. For example, a jurisdiction may have a domestic statute of limitation that prevents its tax administration from applying the carry-forward mechanism to its full extent. In such a situation, the Top-up Tax Amount that has not yet been collected is not allocated to another jurisdiction.

64. Article 2.4.2 is also not limited to the Fiscal Years in which the MNE Group is within the scope of the GloBE Rules or the Fiscal Years when the Constituent Entity that is allocated UTPR Top-up Tax Amount under the UTPR is part of the MNE Group. If the MNE Group’s revenues fall below the threshold of Article 1.1, the Constituent Entities that were allocated UTPR Top-up Tax Amounts that did not give rise to an additional cash tax expense would still be liable for the UTPR Top-up Tax Amounts they were allocated.

65. As provided above, Article 2.4.1 does not prescribe how the UTPR Top-up Tax Amount is allocated among the Constituent Entities that are located in the UTPR Jurisdiction. Therefore, a UTPR Jurisdiction may reallocate the UTPR Top-up Tax Amount among the Constituent Entities located in that jurisdiction, in subsequent years, in order to ensure that the UTPR Top-up Tax Amount is collected as soon as possible. In such a case, the adjustment provided in Article 2.4.1 in that later year does not need to be imposed on the Constituent Entities located in that jurisdiction that were initially allocated Top-up Tax under domestic law. It may be applied against any Constituent Entities of the same MNE Group that are located in that jurisdiction, subject to the requirement in Article 2.4.2 that the adjustment shall be made to the extent possible with respect to the taxable year in which that Fiscal Year ends. Similarly, a jurisdiction may adopt a mechanism to re-allocate the UTPR Top-up Tax Amount to other Constituent Entities in the jurisdiction that remain with the MNE Group to address the situation where a Constituent Entity would be separated from the MNE Group after being allocated Top-up Tax that did not give rise to an additional cash tax expense. A UTPR jurisdiction may also provide that this Constituent Entity is still liable for the Top-up Tax that it was allocated under a jurisdiction’s Qualified UTPR even if it has been separated from the MNE Group. A UTPR jurisdiction may also consider the possibility of imposing a final tax charge under the UTPR in respect of a liquidation or similar transaction that will result in there being no remaining Constituent Entities in the UTPR jurisdiction for the MNE Group.

Article 2.4.3

66. Article 2.4.3 excludes a controlled Investment Entity from the application of the UTPR. This exclusion is to avoid interfering with the intended tax neutrality of these Entities with respect to owners that are not Group Entities. Note that Investment Entities that are the UPE of the MNE Group are Excluded Entities and are therefore already outside the scope of the GloBE Rules (see Commentary to Article 1.5).