Article 4.3.1

42. In many cases, Covered Taxes will be paid by the Constituent Entity with respect to its own income and to a tax authority in the jurisdiction in which it is located and no allocation is required. However, in some more complicated cases, Covered Taxes may be imposed on the Constituent Entity in respect of income included in another Constituent Entity’s GloBE Income or Loss computation or by a jurisdiction other than the one in which the Constituent Entity is located. This is the case with respect to CFC taxes and withholding taxes, for example. In those cases, it is necessary to allocate the Covered Taxes to the relevant Constituent Entity that earned the income, subject to the limitations of Article 4.3.3. Similarly, rules are needed to properly allocate Covered Taxes of Main Entities in the case of PEs and Constituent Entityowners in the case of Tax Transparent Entities. Finally, rules are needed to properly allocate Covered Taxes on distributions. Article 4.3.1 provides for the allocation of these Covered Taxes. The allocation of Covered Taxes under Article 4.3.1 is not limited to the current Taxes paid or accrued; it applies also to deferred Taxes under Article 4.4.

Article 4.3.2

43. Article 4.3.2 provides special allocation rules for certain cross-border taxes. These allocation rules are necessary to align the Covered Taxes with the GloBE Income to which the taxes relate, subject to certain limitations. The rules in Article 4.3.2, discussed in greater detail below, provide allocation rules for Permanent Establishments, Tax Transparent Entities, Hybrid Entities, CFC taxes, and distribution taxes.

44. The paragraphs below set out the general approach to be followed in allocating Covered Taxes for each category of cross-border taxes to which Article 4.3.2 applies. These general approaches are expected to be sufficient to allocate Covered Taxes imposed under many countries’ tax regimes. However, some Covered Taxes may, due to unique features of particular countries’ tax regimes, require further guidance on how to apply the rules in Article 4.3.2. The GloBE Implementation Framework provides for guidance and processes agreed by the Inclusive Framework to facilitate the co-ordinated implementation of the GloBE Rules, including the further development of the common methodology for allocating the Covered Taxes of those specific country tax regimes for which more detailed or distinct allocation rules are needed. In order to facilitate compliance by MNEs and administration by tax authorities, and to ensure consistent and co-ordinated application of Article 4.3.2 across implementing jurisdictions, the results of the further work carried out as part of the GloBE Implementation Framework would be released and made publicly available.

45. It is intended that the GloBE Rules apply after the application of the Subject to Tax Rule and domestic tax regimes, including regimes for the taxation of PEs or CFCs. Therefore, to preserve the intended rule order, domestic tax regimes should not provide a foreign tax credit for any tax imposed under a Qualified UTPR or IIR which is implemented in a foreign jurisdiction, otherwise the application of that domestic tax regime would create circularity issues since those Taxes have already been determined prior to applying the Qualified UTPR or IIR.

Paragraph (a) – Allocation to a Permanent Establishment

46. Paragraph (a) allocates Covered Taxes from a Constituent Entity to a PE. The rule applies to Covered Taxes incurred by a Main Entity or another Constituent Entity in respect of the income of a PE. The Covered Taxes are excluded from the Adjusted Covered Taxes of the Constituent Entity that incurred them and included in the Adjusted Covered Taxes of the PE.

47. The Covered Taxes arising in the Main Entity in respect of the PE income can be computed using a three-step process. The first step is to determine the amount of the PE income that is included in the Main Entity’s local taxable income. The amount of PE income included may be readily available from the Main Entity’s tax return or the work-papers used to prepare that return. The amount included in the Main Entity’s return may be more or less than the GloBE Income allocated to the PE under Article 3.4 because it is determined under the rules for computing taxable income in the Main Entity’s jurisdiction. However, the amount of PE income included in the local taxable income is the relevant figure for measuring how much local tax was paid in respect of the PE’s GloBE Income.

48. The second step is to determine the Main Entity’s tax liability arising from inclusion of the PE income. If the PE income inclusion is subject to Tax separate and apart from the other income of the Main Entity, the tax rate applicable to the included income can simply be multiplied by the amount of the income inclusion. If, on the other hand, the PE income inclusion is mixed with the Main Entity’s other income, the Main Entity’s pre-foreign tax credit tax liability on all the income needs to be determined and allocated between the PE income inclusion and the rest of the Main Entity’s taxable income. In many cases, a pro rata allocation will be appropriate. In cases where the PE income is mixed with other income, if the Main Entity’s total taxable income is less than the PE income inclusion, all of the pre-foreign tax credit liability is attributed to the inclusion. In other words, domestic losses and losses of other PEs allowed in the Main Entity’s taxable income computation under a credit method are first used against domestic income and then applied to PE income inclusions.

49. The third step is to determine the tax credit, if any, allowed in respect of Taxes paid by the PE. In many cases, the total credit allowed in respect of these income inclusions will be easily determinable from the Main Entity’s tax returns. In some cases, however, the creditable Taxes of PEs may be included in a broader base of foreign income that includes other foreign income of the Main Entity. In these cases, the amount of the foreign tax credit attributable to the PE income has to be determined based on the rules of the jurisdiction and using reasonable assumptions where necessary.

50. The amount of Covered Taxes paid on PE income inclusions is the excess of the tax liability arising from the PE income inclusions over any credit allowed for the PE’s Taxes on its income. For example, Company A incurs Tax in its residence jurisdiction on its income and the income of its PE at 20%. PE incurs tax at 12% in its jurisdiction. PE earns 100 of income and incurs 12 of tax in Year 1. Company A includes all 100 of PE income and the pre-credit tax liability in its jurisdiction is 20. However, a foreign tax credit is applied to reduce the tax charge on the PE income to 8. In this example, the 8 of tax would be excluded from Company A’s Adjusted Covered Taxes and allocated to the PE because that is the actual liability with respect to the PE income.

51. The foregoing three-step process determines the amount of Tax to exclude from the Main Entity’s Covered Taxes. Once that amount is determined, however, those Taxes have to be allocated to the jurisdiction of the relevant PEs if the Main Entity was subject to tax on the income of more than one PE. Generally, this will require the MNE to determine the pre-credit tax liability for each PE income inclusion and subtract the allowed credit for foreign taxes on each inclusion from the pre-credit tax liability. The rules of the Main Entity jurisdiction, including tax credit limitations, apply in making these determinations. For example, in many cases, Tax paid by the PE will be creditable only to the extent of tax liability arising from the income inclusion of that PE. In other words, cross-crediting of Taxes is not allowed. Under those circumstances, the amount of residual Tax (i.e. Tax in excess of the allowed credit for foreign taxes) on a particular PE income inclusion is easily determined by subtracting the allowed credit from the pre-credit tax liability on the income inclusion. In other cases, the creditable Taxes may be subject to limitations or cross-crediting may be allowed. In the case of credit limitations, the MNE Group will need to determine the allowed credit for foreign taxes on each PE income inclusion based on the rules of the jurisdiction, and where necessary make reasonable assumptions.

52. Determining the amount of Tax paid on a PE income inclusion is more complicated when crosscrediting is allowed because Taxes paid by one PE are allowed to reduce the tax liability arising in respect of other PE income inclusions. Cross-crediting means that the Tax paid with respect to an income inclusion from a low-taxed PE may not equal the pre-credit tax liability on the inclusion less the tax credit allowed for Taxes paid by that PE. Where cross-crediting is allowed, the Taxes paid in respect of an inclusion should be determined by subtracting the credit allowed for Taxes paid by the particular PE, and then further subtracting an appropriate amount of excess creditable Taxes paid by other PEs from the pre-credit tax liability of the PE. The appropriate amount of excess creditable taxes should be determined by allocating the total amount of excess creditable taxes among PE inclusions based on the relative residual tax liability due to each PE inclusion taking into account only creditable taxes paid by that PE (i.e. the liability after the credit for taxes paid by the PE but before excess credits are allocated). Allocating the excess creditable taxes based on relative residual tax liability determined based solely on the PE’s creditable taxes will ensure that the amount of the Main Entity’s Covered Taxes allocated to PEs does not exceed the amount of Taxes actually arising on the related income inclusions. Deferred tax liabilities with respect to PE income are allocated in the same manner. The rules with respect to the recognition of deferred tax liabilities are set forth in Article 4.4.

53. In the case of a Flow-through Entity Article 4.3.2(a) allocates, in accordance with the allocation of GloBE Income or Loss pursuant to Article 3.5.1(a), the underlying taxes to the PE. If for instance the Constituent Entity-owner of a Flow-through Entity (such as a partner of Tax Transparent Entity that is a partnership which is itself also a Constituent Entity) is required to pay the tax with respect to the income attributable to the PE due to the activities undertaken through a Tax Transparent Entity that tax is allocated pursuant to Article 4.3.2 (a) from the Partner to that PE.

54. Recognizing that there is significant variation in how countries impose tax on PEs (including variation in the treatment of losses and foreign tax credits), as discussed in the first paragraph of the Commentary to this Article, the GloBE Implementation Framework includes the development of a common methodology to determine the amount of Covered Taxes allocated from a Constituent Entity to a PE in connection with specific country regimes.

Paragraph (b) – Allocation from a Tax Transparent Entity to its Constituent Entity-owner

55. Paragraph (b) allocates taxes in connection with the income of a Tax Transparent Entity that is allocated to a Constituent Entity-owner. Generally, Tax Transparent Entities are not subject to CIT in the jurisdiction where they are created. However, some Covered Taxes could be imposed at the sub-national level or local level on Tax Transparent Entities without causing them to be considered a tax resident of that jurisdiction. In other cases, the operations carried out through the Tax Transparent Entity could give rise to source taxation that could be borne by the Tax Transparent Entity.

56. In most cases, where the Tax Transparent Entity is liable to Tax on net income in a jurisdiction it will be because the activities and operations of that Entity give rise to a PE in that jurisdiction (see paragraph (b) of the definition of PE in Article 10.1). In those cases, the appropriate portion of the income of the Tax Transparent Entity that is attributable to the PE is first allocated to the PE under Article 3.5.1(a).

57. Consistent with Article 3.5.1(b), Covered Taxes that are not allocated to a PE will be assigned to the Constituent Entity-owners of the Tax Transparent Entity. Typically, this will mean that Covered Taxes imposed on a Tax Transparent Entity’s income (and not attributable to any PE) will be assigned to each Constituent Entity-owner in proportion to its share of the Tax Transparent Entity’s income. In the case of a Reverse Hybrid Entity, the income and Taxes would remain with the Entity itself and therefore, no allocation of Covered Taxes is needed in accordance with this paragraph.

Paragraph (c) – CFCs

58. Similar to the allocation to Permanent Establishments in paragraph (a), paragraph (c) allocates taxes imposed pursuant to a CFC Tax Regime. The same general process described in paragraph (a) above for allocating Covered Taxes imposed on the Main Entity in respect of a PE can also be applied by a Constituent Entity-owner in respect of a taxes arising under a CFC Tax Regime with the amount of any CFC Taxes included in the financial accounts of an direct or indirect Constituent Entity-owner on its share of the CFC’s income being allocated to such CFC, subject to the limitations of Article 4.3.3.

58.1 To improve tax certainty and administrability of the GloBE Rules in the first years of application, a special allocation methodology has been developed for Blended CFC Tax Regimes on a time-limited basis. This methodology allocates Allocable Blended CFC Taxes to low-tax jurisdictions.

58.2 A Blended CFC Tax Regime is a CFC Tax Regime that aggregates income, losses, and creditable taxes of all the CFCs for the purposes of calculating the shareholder’s tax liability under the regime and that has an Applicable Rate of less than 15%. For the purposes of this special allocation methodology, a Blended CFC Tax Regime does not include a regime that takes into account a group’s domestic income (although a Blended CFC Tax Regime may allow losses incurred by the domestic shareholder of the CFC to reduce the CFC income inclusion).

58.3 Allocable Blended CFC Tax shall be allocated from a Constituent Entity-owner to a Constituent Entity under Article 4.3.2(c) in accordance with the formula set out below for Fiscal Years that begin on or before 31 December 2025 but not including a Fiscal Year that ends after 30 June 2027. Allocable Blended CFC Tax is the amount of tax charge incurred by the Constituent Entity-owner under the Blended CFC Tax Regime. For instance, in the case of GILTI, the Allocable Blended CFC Tax can be determined from the US shareholder’s US federal income tax return and in the absence of a domestic loss is equal to the amount of GILTI (reduced by the GILTI deduction) multiplied by 21%, less the foreign tax credit allowed in the GILTI basket.

58.4 Attributable Income of the Entity means the Constituent Entity-owner’s proportionate share of the income, of the CFC (or relevant part of the income of a CFC that is comprised of more than one Constituent Entity) in the jurisdiction in which the Entity is located as determined under the Blended CFC Tax Regime. For instance, in the case of GILTI the Attributable Income of the Entity can be determined from the US shareholder’s US federal income tax return and is equal to the US shareholder’s share of the tested income (without reduction for foreign income taxes) of the Constituent Entity (which may be a CFC or a tested unit of the CFC).

58.5 Applicable Rate means the threshold for low taxation under the Blended CFC Tax Regime (i.e. the minimum rate at which foreign taxes on CFC income generally fully offsets the CFC tax). For instance, in the case of GILTI the Applicable Rate is 13.125%.

58.6 GloBE Jurisdictional ETR means the Effective Tax Rate for a jurisdiction as computed under Article 5.1 without regard to any Covered Taxes under a CFC Tax Regime. If the GloBE Jurisdictional ETR equals or exceeds the Applicable Rate or the Minimum Rate, the Blended CFC Allocation Key for the Constituent Entity will be treated as zero. Further, income tax expense attributable to the Qualified Domestic Minimum Top-up Tax of a jurisdiction will be included in the computation of the GloBE Jurisdictional ETR for that jurisdiction under this paragraph. A Qualified Domestic Minimum Top-up Tax is taken into account in determining the GloBE Jurisdictional ETR only if the Blended CFC Tax Regime allows a foreign tax credit for the QDMTT on the same terms as any other creditable Covered Tax.

58.7 To the extent the income of non-Constituent Entities is subject to the Blended CFC Tax Regime, an amount of CFC tax imposed under the Blended CFC Tax Regime must be allocated to such non-Constituent Entities to ensure such tax is properly excluded from Covered Taxes for GloBE purposes. Accordingly, such non-Constituent Entities should also be included in the allocation formula set out in paragraph 58.3. Any Blended CFC Tax Regime tax allocated to such nonConstituent Entities shall be excluded from Covered Taxes. If the non-Constituent Entity is located in a jurisdiction in which the MNE Group does not compute a jurisdictional ETR under Article 5.1 (for instance, because the MNE Group has no Constituent Entities in the jurisdiction), the GloBE Jurisdictional ETR will be computed based on the aggregate income and taxes shown in the financial accounts of all non-Constituent Entities in the jurisdiction.

Paragraph (d) – Hybrid Entities

59. Paragraph (d) allocates Taxes of Constituent Entity-owners arising in connection with the income of Hybrid Entities. If a Constituent Entity-owner of a Hybrid Entity is located in a tax jurisdiction that imposes Tax on the owner’s share of the Hybrid Entity’s income under a fiscal transparency regime (see discussion in Commentary to Article 10.2), the Covered Taxes included in the financial accounts of the Constituent Entity-owner should be assigned to the Hybrid Entity. The same general process described in paragraph (a) above for allocating Covered Taxes imposed on the Main Entity in respect of a PE can be used to determine the amount of taxes allocated by a Constituent Entity owner to a Hybrid Entity, however any taxes allocated to a Hybrid Entity by a Constituent Entity-owner in respect of Passive Income are subject to limitation under Article 4.3.3, which is discussed further below. If the Constituent Entity-owner is subject to a withholding tax or net basis taxes on distributions from the Hybrid Entity, such Taxes would also be allocated to the Hybrid Entity pursuant to paragraph (e).

Paragraph (e) – Taxes on dividends and other distributions

60.1 Paragraph (e) allocates taxes arising in connection with distributions in respect of Ownership Interests between Constituent Entities. This includes withholding tax and net basis taxes incurred by direct Constituent Entity-owners on distributions by Constituent Entities in respect of their stock which are allocated to the distributing Constituent Entity. Withholding taxes are imposed under the laws of the distributing Constituent Entity and are collected at the source, but the income tax is the legal liability of the Constituent Entity-owner. The rule applies to Taxes with respect to any type of distribution with respect to an Ownership Interest in the distributing Constituent Entity. Thus, the rule also applies to Taxes in respect of a distribution that does not meet the definition of a dividend for tax purposes in the recipient jurisdiction but is made in respect of an Ownership Interest in a Constituent Entity under the financial accounting standard used in the preparation of the Consolidated Financial Statements.

60.2 Paragraph (e) also applies to Covered Taxes incurred by a Constituent Entity-owner in respect of deemed distributions where the underlying interest is treated as an equity interest for tax purposes in the jurisdiction imposing the tax and for financial accounting purposes. Covered Taxes incurred in respect of deemed distributions include taxes (other than CFC taxes) that a jurisdiction imposes on a shareholder in connection with undistributed earnings or capital of an Entity in which it holds an Ownership Interest, such as consent dividends.

61. In many cases, the distributing Constituent Entity is the Constituent Entity that originally earned the income. In other cases, the distributing Constituent Entity will be a direct or indirect shareholder of the Constituent Entity that originally earned the income. Ideally, Covered Taxes incurred by Constituent Entities with respect to distributions should be assigned to the tax jurisdiction of the Constituent Entity that originally earned the underlying income. However, tracking and tracing distributions through the ownership chain would be extremely complex and burdensome, particularly where an entity controls multiple Constituent Entities. Accordingly, paragraph (e) provides that such Taxes should be assigned to the jurisdiction of the immediate Constituent Entity that distributed the dividend that triggered the tax liability.

Article 4.3.3

62. Article 4.3.3 imposes a limitation on the “push-down” of Taxes from a Constituent Entity-owner that are attributable to Passive Income of the subsidiary Constituent Entity. This rule is designed to maintain the integrity of the jurisdictional blending rules in relation to mobile income. In the absence of Article 4.3.3, the rules in Article 4.3.2(c) and (d), which allocate Taxes paid by a Constituent Entity-owner under a CFC Tax Regime or in respect of a Hybrid Entity, would effectively blend the Taxes paid on that mobile income in the Constituent Entity-owner’s high tax jurisdiction with other income arising in the LowTax Jurisdiction. Without the rule of Article 4.3.3, an MNE Group could shift mobile income from high-tax jurisdictions to Low-Tax Jurisdictions to reduce overall tax liability (including Top-up Tax liability) in the MNE Group.

63. Under Article 4.3.3 the amount of Covered Taxes allocated pursuant to Articles 4.3.2(c) and (d) from a Constituent Entity-owner to a subsidiary in respect of Passive Income is limited to the lesser of the actual amount of Covered Taxes in respect of such Passive Income or the Top-up Tax Percentage that applies in the subsidiary jurisdiction, (determined without regard to the taxes to be pushed down to the subsidiary under the CFC Tax Regime or fiscal transparency rule), multiplied by the amount of the subsidiary’s Passive Income that is includible under the CFC Tax Regime or fiscal transparency rule. Any remaining Covered Taxes of the subsidiary Constituent Entity-owner incurred with respect to such Passive Income after the application of this Article are included in the Constituent Entity-owner’s Adjusted Covered Taxes. The practical effect of this rule is therefore to cap the total Covered Taxes on such passive income (including the taxes allocated to the subsidiary under the CFC or tax transparency regime) to the minimum rate.

Article 4.3.4

64. Article 4.3.4 ensures that in cases where the GloBE Income of a PE is treated as GloBE Income of the Main Entity pursuant to Article 3.4.5, any Adjusted Covered Taxes associated with such income are treated as Adjusted Covered Taxes of the Main Entity, in an amount not exceeding such income multiplied by the highest corporate tax rate on ordinary income in the jurisdiction. The highest corporate tax rate on ordinary income means the full marginal rate which a jurisdiction generally applies to categories of income which do not benefit from any exemption, exclusion, credit or other tax relief applicable to particular types of payments. This concept is further considered in paragraph 32 of the OECD’s 2015 Final Report on Action 2: Neutralising the Effects of Hybrid Mismatch Arrangements. This also does not include rates which are only applied to particular business sectors.

65. This situation arises after a loss of a PE has been treated as a loss of a Main Entity under Article 3.4.5. In most cases, there will not be Taxes in the location of the PE, either because the jurisdiction allows the PE to carry-forward its loss or, more rarely, because the PE is not subject to Tax in the jurisdiction.

66. When a GloBE Loss of a PE is treated as an expense of a Main Entity under Article 3.4.5, any deferred tax asset established with respect to a tax loss of the PE jurisdiction shall not reduce the Adjusted Covered Taxes of the PE jurisdiction or the Main Entity jurisdiction. Conversely, when the deferred tax asset established by the PE reverses in the PE jurisdiction, the Adjusted Covered Taxes of the PE jurisdiction or Main Entity jurisdiction shall not be increased. Deferred tax attributes generated or used in the Main Entity jurisdiction with respect to a loss of the PE are available for use and remain subject to the other provisions of Chapter 4.