Article 5.1.1

3. Article 5.1.1 sets out the formula for computing the jurisdictional ETR. The ETR for a jurisdiction is equal to the sum of the Adjusted Covered Taxes of each Constituent Entity located in the jurisdiction for the Fiscal Year divided by the Net GloBE Income of the jurisdiction. The result is expressed as a percentage rounded to the fourth decimal place (e.g. 14.12346% = 14.1235%) for purposes of the GloBE Rules. An ETR is not computed for a jurisdiction that has a Net GloBE Loss for the Fiscal Year. The sum of the Adjusted Covered Taxes of each Constituent Entity means the sum of all of the Adjusted Covered Taxes determined under the rules of Chapter 4 for the Constituent Entities that are located in the same jurisdiction. Likewise, the Net GloBE Income or Loss of a jurisdiction is determined by aggregating all of the GloBE Income or Loss of all Constituent Entities located in the same jurisdiction. Consequently, the taxes and income attributable to Ownership Interests held by persons that are not Group Entities are taken into account in the ETR calculation.

4. A jurisdictional blending calculation based on the aggregate income and taxes of all Constituent Entities in the same MNE Group means that when the Parent Entity applying the IIR is not the UPE, the ETR of a jurisdiction is not computed solely by reference to the Constituent Entities owned by that Parent Entity. Rather the ETR is computed by reference to all the Constituent Entities of the MNE Group located in that jurisdiction. The implication of determining the ETR based on a group-wide average ETR for the jurisdiction is that there may be cases where allocable Top-up Tax arises in respect of an Entity that would not be an LTCE if the ETR for the jurisdiction were computed on a single-entity basis or solely on the basis of taxes and income attributable to a Parent Entity’s Ownership Interests in the Constituent Entities located in the jurisdiction. On the other hand, an Entity that would have been an LTCE on a stand-alone basis may not be an LTCE due to taxes paid or losses incurred by other Constituent Entities located in the jurisdiction. This approach to jurisdictional blending avoids risks that would otherwise arise to the integrity of the rules from shifting income and taxes between Constituent Entities located in the same jurisdiction and avoids potential distortions caused by particular features of the domestic tax system (such as loss-surrender and tax consolidation mechanisms). It also simplifies the mechanic for the attribution and allocation of Top-up Taxes under the IIR and UTPR.

5. There are three specific exceptions to this jurisdictional ETR computation.

6. The first exception is for Investment Entities and Insurance Investment Entities. Pursuant to Article 5.1.3, discussed below, income and taxes of Investment Entities and Insurance Investment Entities located in a jurisdiction are excluded from the ETR computation for that jurisdiction. Special ETR computation rules are provided in Article 7.4 for such Investment Entities and Insurance Investment Entities.

7. The second exception applies to Constituent Entities in which the UPE holds 30% or less of the Ownership Interests but nonetheless has a Controlling Interest in the Entity. In those cases, the rules in Article 5.6 require separate ETR computations for those Constituent Entities if they are located in a jurisdiction with ordinary Constituent Entities and the ETR computations for the Minority-Owned Constituent Entities make certain adjustments for income and taxes attributable to non-controlling interests. Those rules are further discussed in the Commentary to Article 5.6.

8. Finally, the last sentence of Article 5.1.1 provides a special rule under which each Stateless Constituent Entity is treated as a single Constituent Entity located in a separate jurisdiction for purposes of Chapter 5. This rule adapts the general rules for computing the jurisdictional ETR to Stateless Constituent Entities. The GloBE Income or Loss and Adjusted Covered Taxes of a Stateless Constituent Entity, which go into the ETR computation, are determined in accordance with Chapters 3 and 4

9. Because these exceptions arise only in a minority of cases, they are not specifically mentioned in the Commentary to each Article in Chapter 5 where they may apply. However, when the exception applies the Commentary should be interpreted in light of and consistent with the exception.

Article 5.1.2

10. Article 5.1.2 sets out the formula for computing the Net GloBE Income of a jurisdiction. The formula defines the Net GloBE Income of a jurisdiction as the positive amount, if any, obtained by subtracting GloBE Losses for the Fiscal Year of all Constituent Entities located in a jurisdiction from the GloBE Income for the Fiscal Year of all those Constituent Entities. The calculation does not include the GloBE Income or Losses of an Investment Entity, as noted in Article 5.1.3.

11. If the GloBE Losses of the Constituent Entities equal or exceed GloBE Income of the Constituent Entities located in that jurisdiction, there is no Net GloBE Income under Article 5.1.2, and therefore, there can be no Top-up Tax computed under Article 5.2 with respect to the jurisdiction. Consequently, the ETR for the jurisdiction need not be computed. Note, however, there may be cases in which Top-up Tax is determined under Article 4.1.5 for a jurisdiction that has a Net GloBE Loss. See the Commentary to Article 4.1.5.

Article 5.1.3

12. As noted above, Article 5.1.3 provides that the Adjusted Covered Taxes and GloBE Income or Loss of Investment Entities located in a jurisdiction are excluded from the jurisdictional ETR computation. The exception in Article 5.1.3 extends also to Insurance Investment Entities. This exclusion is necessary because an Investment Entity or an Insurance Investment Entities that is controlled by the MNE Group can be included in the GloBE Rules, but such an Investment Entity or Insurance Investment Entity would be subject to the special rules in Chapter 7. (The scope of the Excluded Entity definition in Article 1.5 applies only to an Investment Entity that is the UPE or that satisfies the requirements of Article 1.5.2) Article 5.1.3 helps to maintain the tax neutrality of controlled Investment Entities under the GloBE Rules and facilitates the application of the special rules in Chapter 7 to income earned by an MNE Group through an Investment Entity or an Insurance Investment Entities. When necessary, the ETR of Investment Entities and Insurance Investment Entities is computed separately pursuant to Article 7.4.

13. The rule in Article 5.1.3 is not relevant in the case of an Investment Entity or an Insurance Investment Entity that is a Tax Transparent Entity because its income and taxes are allocated to Constituent Entity-owners, Permanent Establishments, or unrelated persons under Article 3.5.3 and Article 4. 3.2.