Article 4.2.1

24. The definition of Tax as set out in Article 10.1 of the GloBE Rules is a compulsory unrequited payment to General Government. This is based on the OECD’s longstanding definition of Taxes used for statistical purposes, with the same definition equally used by many International Organisations (IMF, World Bank, United Nations, European Union). General Government is a defined term in the UNOECD National Accounts that includes the central administration, agencies whose operations are under its effective control, state and local governments and their administrations. The definition of General Government in Article 10.1 is consistent with the definition in the UN-OECD National Accounts. Taxes are unrequited in the sense that any benefits provided by government to the taxpayer are not in proportion to their payments. Thus, fees and payments for privileges, services, property, or other benefits provided by government do not qualify as Taxes. Similarly, Taxes do not include fines and penalties nor do they include interest or similar charges with respect to payments of tax liabilities after the applicable due date. The definition of Covered Taxes includes four types of Taxes described in paragraphs (a) to (d).

Paragraph (a)

25. Paragraph (a) provides that any Taxes recorded in the financial accounts of a Constituent Entity with respect to its income or profits are Covered Taxes. While there is no internationally agreed definition of an income tax, income taxes are generally levied on a flow of money or money’s worth that accrues to a taxpayer during a period of time. Income taxes take into account related expenses of producing the flow of money to measure the taxpayer’s net increase in wealth for the period. A definition of Covered Taxes that applies to income calculated on a net (rather than gross) basis is in line with the definition of income tax used for financial accounting purposes and therefore it is expected that a Tax recognised as an income tax for financial accounting purposes should generally qualify as a Covered Tax under the GloBE Rules. However, certain income taxes are specifically excluded from the definition of Covered Taxes under Article 4.2.2.

26. The definition encompasses not only Taxes imposed on income at the time such income is derived but also to Taxes that are imposed on a subsequent distribution of profits. Moreover, the definition includes Taxes on the income of the Constituent Entity as well as its share of income of another Constituent Entity in which it owns an Ownership Interest. Thus, Taxes imposed on the Constituent Entity’s share of undistributed profits from a Tax Transparent Entity such as a partnership, Taxes imposed under a CFC Tax Regime, as well as Taxes imposed on distributions from another Constituent Entity are treated as Covered Taxes under paragraph (a). The amount of such taxes allocated in respect of an Ownership Interest in another Constituent Entity are set out in Article 4.3.

27. A Tax need not determine the taxpayer’s precise change in wealth to qualify as an income tax. A definition of Covered Taxes that required taxpayers and administrators to undertake further technical analysis of the precise terms of each type of Tax in order to determine whether a particular Tax took into account an appropriate amount of relevant expenses incurred in the generation of that income would be cumbersome to apply and lead to uncertainty in the determination of the ETR. Accordingly, the definition of Covered Taxes includes Taxes that allow for a simplified estimate of net profit. For example, a Tax that allows deductions for some but not all expenses related to the relevant income would be considered an income tax, provided the deductible expenses can reasonably be considered to have been incurred in connection with deriving that income. Similarly, a Tax on income that allows a standardised deduction in place of actual expenses is generally considered an income tax if such standardised deduction is based on a reasonable method for estimating such expenses. A Tax imposed on gross income or revenue without any deductions (i.e. a tax on turnover) would not be considered an income tax. The design and substantive character of such turnover taxes generally have more similarities to consumption or sales taxes. The definition of Covered Taxes therefore does not include a Tax on a gross amount unless such a Tax is in lieu of an income tax, as discussed below in connection with Article 4.2.1(c).

28. Taxes or surcharges imposed on the net income from specific activities, such as banking, or the exploration and production of oil and gas, irrespective of whether or not they apply in addition to a generally applicable income tax, would also fall within the general definition of a Covered Tax. The definition would include a separate levy that is imposed on the net income or profits from natural resource extraction activity (or a part of a multi-component levy that is imposed on net income or profits). However, natural resource levies closely linked to extractions, for example, those that are imposed on a fixed basis or on the quantity, volume or value of the resources extracted rather than on net income or profits, would not be treated as Covered Taxes except where these levies satisfy the “in lieu of” test described below in connection with paragraph (c) of Article 4.2.1.

29. Tax on net income of a Constituent Entity under Pillar One would be treated as a Covered Tax under the GloBE Rules as a tax with respect to income or profits. Because Pillar One applies before the GloBE Rules, any income tax with respect to Pillar One adjustments will be taken into account by the Constituent Entity that takes into account the income associated with such Tax for purposes of calculating its GloBE Income or Loss. The treatment of Pillar One taxation will be further addressed through Administrative Guidance to be developed as part of the Implementation Framework.

Paragraph (b)

30. Paragraph (b) provides that any Taxes on distributed profits imposed under an Eligible Distribution Tax System are Covered Taxes. These Taxes are discussed further in the Commentary to Article 3.2.8.

Paragraph (c)

31. Paragraph (c) provides that Taxes imposed in lieu of a generally applicable CIT are Covered Taxes. A generally applicable CIT could be one that applies to all resident corporations or one that typically applies to those resident corporations that are members of a large multinational group. A generally applicable CIT would also include an income tax imposed on a corporation but which also applies to other taxable persons such as individuals. The “in lieu of” test includes Taxes that are not described in the generally applicable income tax definition but which operate as substitutes for such taxes. This test, which is used in some jurisdictions in the context of their foreign tax credit rules, would generally include withholding taxes on interest, rents and royalties, and other taxes on other categories of gross payments such as insurance premiums, provided such taxes are imposed in substitution for a generally applicable income tax. Taxes imposed in lieu of a generally applicable CIT would also include taxes arising from the Subject to Tax Rule.

32. The “in lieu of” concept also covers Taxes that are imposed on an alternative basis (i.e. other than net income), such as Taxes based on the number of units produced or commercial surface area, and which are used as substitutes for a generally applicable income tax under the laws of the jurisdiction. Where, for example, a jurisdiction imposes a simplified methodology for calculating the income on a particular category of business or investment and this Tax is imposed in substitution for a generally applicable income tax, then that Tax falls within the definition of a Covered Tax. A Tax imposed on an alternative basis levied at state or local government level, which is creditable against a generally applicable income tax levied at the national government level, would also qualify as a Covered Tax under the “in lieu of” test to the extent that it is credited against income tax in the same jurisdiction. Such local taxes can be considered as being in substitution (partially or fully) for a generally applicable income tax and an administratively efficient way of transferring resources from national to local government within the same jurisdiction. A Tax that is imposed on an alternative basis that applies in addition to, and not as a substitute for, a generally applicable income tax under the laws of the jurisdiction would not fall under the “in lieu of” test for Covered Taxes.

Paragraph (d)

33. Paragraph (d) provides that Taxes levied by reference to retained earnings and corporate equity, including a Tax on multiple components based on income and equity, are Covered Taxes. Some jurisdictions impose Taxes on the net equity of a corporation in addition to CIT. The equity or capital of a corporation is composed of its retained earnings (i.e. the undistributed portion of the after-tax income in the Profit and Loss statement) and the contributions made by shareholders. Taxes on corporate equity may be inherently interlinked with the design of the CIT systems. For example, it may be possible under the laws of a jurisdiction to credit CIT against a corporate equity tax so that a company is allowed to reduce the corporate equity tax up to the amount of CIT that it pays in that jurisdiction. Taxes on corporate equity may also act as a supplement to CIT as part of a jurisdiction’s overall approach to the taxation of a corporation’s activities in that jurisdiction. For example, some Taxes on corporate equity may incorporate a minimum tax element to their design. Such Taxes on corporate equity are therefore an integral part of the overall system of corporate taxation in those jurisdictions.

34. Some jurisdictions impose Taxes that have multiple components to the base. Where all the components of the tax base fall within the definition of income or profit covered by the GloBE Rules, then the tax, as a whole, is included within the definition of Covered Taxes. Other taxes may be levied in respect of a corporation’s activities in a jurisdiction, and are administratively and conceptually part of the system of corporate taxation in these jurisdictions but may include both an income and a non-income element. Where such taxes are predominately a tax on an entity’s income and it would be administratively burdensome to split the Tax into separate income and non-income components then such Taxes should be treated, in full, as Covered Taxes under the GloBE Rules.

35. An example of a Covered Tax with multiple components is the corporate Zakat levied by the Kingdom of Saudi Arabia. The Zakat operates as a tax on income or equity or both and is therefore properly considered a Covered Tax for the purposes of the GloBE Rules.

36. Although the definition of Covered Taxes is broader than simply income taxes, a number of commonly encountered taxes are not included in the definition. The following types of tax will generally not fall within the definition of covered taxes.

(a.) Consumption taxes, such as sales taxes and value-added taxes (VATs), are not Covered Taxes under the GloBE Rules. Such taxes are calculated by reference to the consideration for a defined supply and are not Taxes on the net income or equity of a taxpayer.

(b.) Excise and other taxes on inputs are not Covered Taxes under the GloBE Rules. Such Taxes arise in relation to a specific input which do not represent an accretion of income.

(c.) Digital services taxes are generally designed to apply to the gross revenues from the provision of certain digital services and so would not be considered an income tax. Digital services taxes are generally designed to apply in addition to, and not as substitutes for, a generally applicable income tax under the laws of a jurisdiction, and so would not fall under the “in lieu of” test for Covered Taxes either.

(d.) Stamp duty, ad valorem taxes and other taxes that are imposed on a particular transaction are not taxes on income, equity, or taxes in lieu of an income tax. They are therefore outside the scope of the Covered Taxes definition.

(e.) Payroll taxes and other employment-based taxes, as well as social security contributions, are not Covered Taxes under the GloBE Rules. Payroll taxes and social security contributions are not imposed on the employer in respect of its income (or equity). This follows the well-established view of payroll taxes and social security contributions as being levied on labour income (i.e. wages and in some cases personal income) as opposed to business profits. Rather, payroll taxes and social security contributions are typically deductible from business profits in the same way that wages are deducted from taxable business profits.

(f.) Property taxes based on ownership of specified items or categories of property are not Covered Taxes. Property taxes are based on the assessed value of the property, often without regard to whether the property is subject to a liability. Even where adjustments to the assessed value of property is made for liabilities against the property, this is more akin to a valuation method under a property tax than a tax that is predominantly on previous income. Property taxes are not based on income, retained earnings, or corporate equity. Neither are they Taxes imposed in lieu of a generally applicable income tax. Property taxes are therefore distinguishable from taxes based on a corporation’s equity and should not be Covered Taxes under the GloBE Rules.

Article 4.2.2

37. Although Covered Taxes are defined broadly, certain Taxes are specifically excluded from the definition. These excluded Taxes generally fall into two categories – Top-up Taxes and refundable taxes.

38. Paragraphs (a) through (c) exclude Top-up Taxes under the GloBE Rules from the definition of Covered Taxes. Covered Taxes are an essential element in determining the Top-up Tax, if any, under the GloBE Rules. Including GloBE Top-up Taxes in Covered Taxes would result in a circular computation in the Fiscal Year that the Top-up Taxes arise. Including them in Covered Taxes for subsequent Fiscal Years would undermine the agreed Minimum Rate because it would effectively include them in the numerator of the ETR computation which would effectively reduce the amount of Top-up Tax that would need to be paid for the jurisdiction in the subsequent year. Qualified Domestic Minimum Top-up Taxes are excluded from the definition of Covered Taxes for the same reasons. However, such taxes are creditable against GloBE Top-up Tax under Article 5.2.3. On the other hand, an ordinary domestic minimum tax that is not a Qualified Domestic Minimum Top-up Tax is a Covered Tax if it otherwise meets the definition of a Covered Tax.

39. Paragraph (d) excludes Disqualified Refundable Imputation Taxes from the definition of Covered Taxes. Because the timing of the refund of these Taxes is within the MNE Group’s control, they are similar to a deposit and therefore are not properly taken into account in the ETR computation. For example, a taxpayer can make a deposit by prepaying the tax liability in a jurisdiction for a subsequent Fiscal Year, such a prepayment will not increase Covered Taxes in the Current Fiscal Year.

40. Lastly, paragraph (e) excludes tax expense incurred by an insurance company in respect of returns to a policyholder from the definition of Covered Taxes. This paragraph (e) applies to the extent there is an adjustment under Article 3.2.9. Pursuant to Article 3.2.9, amounts charged to policy holders for tax expense incurred by an insurance company in respect of returns to a policy holder are excluded from the computation of GloBE Income or Loss. Returns to the policy holders are treated as income of an insurance company under financial accounting standards and the insurance company effectively eliminates that income with a corresponding liability to the policyholder. The liability is typically reduced by the amount of any taxes incurred by the insurance company in respect of that income such that the insurance company is effectively reimbursed by the policy holder for the taxes incurred. Tax expense incurred in respect of returns to a policy holder should not be included in the insurance company’s Covered Taxes.