Article 5.4.1

66. If the ETR of a jurisdiction is subject to an ETR Adjustment then Article 5.4.1 provides the mechanism for performing the re-calculations for the prior year. Article 5.4.1 treats any additional Top-up Tax computed in respect of those prior Fiscal Years as Additional Current Top-up Tax, which is allocated to Constituent Entities in the jurisdiction under Article 5.2. To avoid the complexity and administrative burden of requiring an amended GloBE Information Return and additional separate payment of Top-up Tax, the Additional Top-Up Tax is instead charged to the Fiscal Year in which the recalculation was performed. In this case Inclusive Framework members considered that the need to avoid compliance and administrative burdens outweighed competing considerations relating to accuracy in connection with the attribution of Top-up Tax based on changes in ownership interests of LTCEs between the prior year and the year the recalculation is undertaken.

67. Article 5.4.1 is not intended to address ordinary mistakes in the computations under the GloBE Rules or adjustments to GloBE Income arising from an examination of a Constituent Entity’s application of the IIR or the UTPR. Such adjustments are not made on a prospective basis by including them in Additional Current Top-up Tax. For example, if an MNE Group erroneously excluded an item of income from the computation of its GloBE Income due to a misclassification of interest income as a dividend, it should follow the relevant administrative procedures for correcting such errors. This may entail filing an amended tax return to increase the amount of Top-up Tax payable in the jurisdiction. Similarly, if this error is discovered by the relevant tax authority on examination, the tax authority may adjust the GloBE tax liability in respect of the relevant Fiscal Year and apply its normal administrative procedures and rules, including assessment of interest or penalties, on that redetermination of tax liability. Stated differently, Article 5.4.1 applies only when there is an adjustment to a local tax item that has a follow-on effect on computations under the GloBE Rules, such as a transfer pricing adjustment that affects the income and tax liability of Constituent Entities in two or more jurisdictions.

Article 5.4.2

68. Article 5.4.2 provides a special rule for when there is additional Top-up Tax due as a result of a recalculation performed in accordance with Article 5.4.1 and there is no Net GloBE Income for the jurisdiction for the current Fiscal Year. This rule provides that the GloBE Income of the Constituent Entities in the jurisdiction shall be increased for the purposes of Article 2.2.2 in an amount equal to the additional Top-up Tax due divided by the Minimum Rate. For this purpose any GloBE Loss determined for the Fiscal Year is disregarded. This rule ensures that when a recalculation results in additional Top-up Tax that is payable in a Fiscal Year with no GloBE Income for a jurisdiction that there is still a mechanism in place by which the Top-up Tax that is owed can be allocated to Parent Entities that may be subject to an IIR.

Article 5.4.3

69. Under Article 4.1.5, Top-up Tax may be due as a result of a negative Adjusted Covered Taxes Amount that represents a larger loss for the jurisdiction than the Expected Adjusted Covered Taxes Amount. As discussed in the Commentary to Article 4.1.5, this rule essentially requires that attributes resulting from permanent differences be paid for with additional Top-up Tax arising in the Fiscal Year in which the attribute is generated. This facilitates the continued alignment of GloBE deferred tax accounts with the accounts used for financial reporting purposes. Article 5.4.3 requires the allocation of the Top-up Tax arising as a result of such permanent differences to the Constituent Entity that generated the attribute resulting from the permanent difference.

70. The following example illustrates the operation of Article 5.4.3. Assume in a Fiscal Year there are two Constituent Entities in Country C. Constituent Entity A reports a GloBE Loss of (100) and Adjusted Covered Taxes of (15) for GloBE purposes. Constituent Entity B also reports a GloBE Loss of (100), but reports Adjusted Covered Taxes of (18) for GloBE purposes. Under Article 4.1.5 the Expected Adjusted Covered Taxes Amount for Country C is (30), but the Adjusted Covered Taxes Amount is actually (33) due to the permanent difference of (3) generated by Constituent Entity B. Article 4.1.5 provides that additional Top-up Tax of 3 is due with respect to Country C for the Fiscal Year. The operation of Article 5.4.3 allocates such Top-up Tax of 3 to Constituent Entity B, since that is the Constituent Entity which generated the permanent difference.

71. Article 5.4.3 also creates an amount of GloBE income for each Constituent Entity to which the Topup Tax arising under Article 4.1.5 is allocated. This GloBE Income is used solely for purposes of Article 2.2 to determine a Parent Entity’s Allocable Share of Top-up Tax arising under Article 4.1.5. The GloBE Income created under Article 5.4.3 is equal to the Top-up Tax allocated to the Entity under Article 5.4.3 divided by the Minimum Rate. For this purpose any GloBE Loss determined for the Fiscal Year is disregarded.

72. It is possible for GloBE Income to be created for Constituent Entities in a jurisdiction for the purposes of Article 2.2.2 under both Articles 5.4.2 and 5.4.3. In this scenario, each article is applied without regard to the income created under the other article. For purposes of Article 2.2.2, the GloBE Income for any Constituent Entity for which GloBE Income has been created under both articles is the sum of the income created under each article.

Article 5.4.4

73. When Additional Current Top-up Tax arises from a re-calculation under Articles 5.4.1 to 5.4.3, Article 5.4.4 treats the Constituent Entity to which the Additional Current Top-up Tax is allocated as a LowTax Constituent Entity for purposes of Chapter 2. Whether a jurisdiction is a Low-Tax Jurisdiction is determined annually and the Additional Current Top-up Tax may arise in a year for which the jurisdiction is not a Low-Tax Jurisdiction. The rules of Chapter 2 apply with respect to Low-Taxed Constituent Entities. This rule ensures that those rules apply properly to the Additional Current Top-up Tax to years in which the Constituent Entity’s location is not a Low-Tax Jurisdiction.