Article 2.6.1

Purpose of the UTPR Percentage

80. Article 2.6.1 provides that the UTPR Top-up Tax Amount determined under Article 2.5.1 is allocated among UTPR Jurisdictions by applying their respective UTPR Percentages. Article 2.6.1 then sets out the formula for computing the UTPR Percentage of each UTPR Jurisdiction, and is drafted from the perspective of the implementing UTPR Jurisdiction. In other words, the formula determines the amount allocable to the implementing UTPR Jurisdiction.

81. The UTPR Percentage is determined on the basis of factors that reflect the relative substance of the MNE Group in each UTPR Jurisdiction. Relying on substance factors provides for a simple and transparent allocation key which facilitates the co-ordination among tax administrations. It is also expected that the jurisdictions where the MNE Group has more substance on a relative basis will be those where there is more tax capacity (such as deductible expenditure) to absorb adjustments under the UTPR. This approach, together with the exclusion mechanism in Article 2.6.3, is intended to reduce the risk of allocating Top-up Tax to a jurisdiction that does not have enough capacity to impose the UTPR adjustment.

Components of the UTPR Percentage

82. Article 2.6.1 provides that the UTPR Percentage is determined on the basis of quantitative factors that are aggregated at the jurisdictional level. These factors are based on information required in the MNE Group’s CbC Reports. More specifically, Article 2.6.1 provides that the substance of UTPR jurisdictions is determined on the basis of a ratio based on the Number of Employees and the Net Book Value of Tangible Assets of the Constituent Entities that are located in those respective jurisdictions. The Number of Employees and the Net Book Value of Tangible Assets were determined to be the most appropriate for reflecting a consistent measure of substance in jurisdictions. In addition, the factors used under the UTPR provide both MNE Groups and tax administrations with bright-line measures based on existing compliance mechanisms. Using quantitative factors that can be available in CbC Reports facilitates co-ordination between UTPR Jurisdictions and minimises the risk of disputes. Other factors (such as payroll) were considered and rejected by the Inclusive Framework.

83. The Number of Employees and the Net Book Value of Tangible Assets each account for half of the UTPR percentage of the UTPR Jurisdiction. This is to reflect that substance can be measured both on the basis of the Number of Employees and the Net Book Value of Tangible Assets across jurisdictions, recognising that substance may take various forms, depending on the industry and the business model of the MNE Group. Using a 50% weight for each factor avoids favouring one of the two factors over the other in the formula.

84. The Number of Employees and the Net Book Value of Tangible Assets are defined in Article 10.1. See the Commentary on those definitions for further details. 85. The definitions provided in Article 10.1 are similar to those provided in the report on BEPS Action 13 for purposes of CbCR. Relying on similar definitions as those provided for purposes of CbC Reports minimises potential compliance costs associated with the computation of each UTPR Jurisdiction’s UTPR Percentage. Article 2.6.1 does not refer to the information available in the MNE Group’s CbCR and provides its own definitions to avoid the situation where there would be no basis to compute the UTPR Percentage if the MNE had not filed a CbCR. However, as a matter of simplification, an MNE Group could prepare its CbC Reports using information from the Constituent Entities’ financial accounts and the Number of Employees and Tangible Assets for each Constituent Entity located in the jurisdiction in accordance with the definition for such indicators provided under Article 10.1. A CbC Report prepared in this manner could be used for purposes of identifying the relevant amounts used to compute the UTPR Percentage.

Scope and timing of the determination of the UTPR Percentage

86. The UTPR Percentage is only computed for purposes of allocating the UTPR Top-up Tax Amount and for jurisdictions that introduced a Qualified UTPR (“UTPR Jurisdictions”). The UTPR Percentage is determined for all UTPR Jurisdictions where the MNE Group is operating, even if those UTPR Jurisdictions are Low-Tax Jurisdictions under the GloBE Rules for that MNE Group. This means that a Low-Tax Jurisdiction that is also a UTPR Jurisdiction is allocated a portion of the UTPR Top-up Tax Amount, if its UTPR Percentage is not zero (it could be zero, for instance, as a result of the provisions in Article 2.6.3). Equally, the UPE Jurisdiction itself could be a Low-Tax Jurisdiction under the GloBE Rules and be allocated a portion of the UTPR Top-up Tax Amount that arises in respect of the Constituent Entities that are located in the UPE Jurisdiction. In addition, the UPE Jurisdiction may apply a Qualified IIR with respect to the Constituent Entities of the MNE Group that are not located in the UPE Jurisdiction (in accordance with Article 2.1.6), but this would not be relevant for purposes of determining the UTPR Top-up Tax Amount that arises in respect of the Constituent Entities located in the UPE Jurisdiction.

87. Article 2.6.1 further provides that only the substance factors of Constituent Entities of the Group located in a UTPR Jurisdiction (including those of the implementing jurisdiction) are taken into account in the denominator of the fraction. Therefore, the Top-up Tax is allocated only among UTPR Jurisdictions. The substance factors of Constituent Entities that are not located in a UTPR Jurisdiction are not taken into account for purposes of the allocation key because doing so would have the effect of allocating some of the UTPR Top-up Tax Amount to jurisdictions without a Qualified UTPR. Allocating any of the UTPR Topup Tax Amount to jurisdictions that do not have a UTPR would significantly reduce the effectiveness of the rule, because the Top-up Tax allocated to those jurisdictions would not be collected. The UTPR Percentage is determined on an annual basis, for each Fiscal Year. However, it is not expected to be significantly different from one year to the next, unless the MNE Group undertakes a significant acquisition, disposal or restructuring of its operations.

Article 2.6.2

88. Article 2.6.2 provides two types of exclusions in computing a jurisdiction’s UTPR Percentage.

Paragraph (a)

89. Paragraph (a) provides for the first exclusion. The first exclusion relates to the employees of, and Tangible Assets that are held by, Investment Entities. This exclusion only matters to Investment Funds that are not the UPE. As already noted above in the Commentary to Article 2.4.3, Investment Funds and Real Estate Investment Vehicles that are the UPE are Excluded Entities and therefore, their employees and Tangible Assets are not taken into account for purposes of computing the UTPR percentage of a jurisdiction. The exclusion provided in Paragraph (a) of Article 2.6.2 relates to other controlled Investment Entities, i.e. Investment Entities that are not Excluded Entities. Paragraph (a) provides that the employees of, and Tangible Assets that are held by, controlled Investment Entities are excluded for purposes of computing a jurisdiction’s UTPR percentage. The employees and assets of controlled Investment Entities are not taken into account in the allocation formula because such Entities are excluded from the scope of application of the UTPR under Article 2.4.3. Allocating some of the UTPR Top-up Tax Amount to a jurisdiction that has only Investment Entities would reduce the effectiveness of the UTPR.

Paragraph (b)

90. Paragraph (b) provides for the second exclusion. The second exclusion relates to the employees and Tangible Assets of Flow-through Entities. In practice, the substance of Flow-through Entities could give rise to the existence of a PE. As a first step, the assets and employees of the Flow-through Entity would be attributed to the PE. The assets and employees allocated to a PE are then taken into account for computing the UTPR Percentage of the jurisdiction where that PE is located.

91. However, a Flow-through Entity may not give rise to the existence of a PE, for instance because the activity or place through which the activity is carried out is not sufficient to create a PE in the jurisdiction. Some assets and employees of that Flow-through Entity may therefore remain unallocated after the assets and employees are attributed to the relevant PEs. In such a case, Paragraph (b) of Article 2.6.2 provides that the Flow-through Entity’s employees and Tangible Assets that are not allocated to PEs are allocated to any Constituent Entities that are located in the jurisdiction where the Flow-through Entity was created irrespective of whether they are the Constituent Entity-owners of the Entity. This approach to allocate the employees and Tangible Assets of Flow-through Entities differs from the approach provided under Article 3.5 to allocate the Income or Loss of a Flow-Through Entity. If no Constituent Entities are located in the jurisdiction where the Flow-through Entity was created, then the employees and Tangible Assets that are not allocated to a PE are excluded from the formula.

Article 2.6.3

92. Article 2.6.3 provides that a UTPR Jurisdiction shall be excluded from the allocation mechanism provided under Article 2.6.1 when the UTPR Top-up Tax Amount allocated to that jurisdiction in a prior year has not yet resulted in an equivalent additional cash tax expense for the Constituent Entities located in that jurisdiction. Article 2.6.3 provides that, when that is the case, the UTPR Percentage for the jurisdiction is zero. This mechanism ensures that no more Top-up Tax is allocated to such a jurisdiction until it has been able to impose the requisite amount of tax. Article 2.6.3 further provides that the Number of Employees and Tangible Assets of the Constituent Entities located in such a jurisdiction are excluded from the denominator of the formula for purposes of the allocation key. This ensures that the Top-up Tax that would have been allocated to the UTPR Jurisdiction with a UTPR Percentage of zero is actually allocated to the other UTPR Jurisdictions.

93. Article 2.6.3 applies on an annual basis for each Fiscal Year when the UTPR applies. Article 2.6.3 further provides that the exclusion mechanism is specific to a particular MNE Group. This is because the capacity to impose an adjustment under the UTPR may depend on the specificities of the Constituent Entities of that MNE Group in the UTPR Jurisdiction. For instance, the capacity to impose the adjustment may be limited in the situation where the MNE Group has losses in the UTPR Jurisdiction. For the avoidance of doubt, when the rule applies to an MNE Group, it does not preclude the UTPR Jurisdiction from being allocated UTPR Top-up Tax Amount computed in respect of other MNE Groups with employees and Tangible Assets in the jurisdiction.

Article 2.6.4

94. Article 2.6.4 provides that Article 2.6.3 does not apply in circumstances where the UTPR Percentage for all UTPR Jurisdictions in which Constituent Entities of an MNE Group are located would be zero for a given Fiscal Year. This exception ensures that in such circumstances the UTPR Top-up Tax Amount is still allocated to the UTPR Jurisdictions. Because it applies in situations where all UTPR Jurisdictions may have limited capacity to impose an additional Top-up Tax, this exception acknowledges that the UTPR Top-up Tax Amount allocated in that year may also need to be carried forward as provided in Article 2.4.2 and be collected in a future year. Similarly to Article 2.6.3, Article 2.6.4 applies on an annual basis for each Fiscal Year when the UTPR applies and on an MNE Group-by-MNE Group basis.