Article 7.6.1

100. Article 7.6.1 provides for a Five-Year election to use the Taxable Distribution Method. The election is made by the Filing Constituent Entity and is only available in the case of the Constituent Entity-owners that are subject to tax in their location on distributions from the Investment Entity and only if the Constituent Entity-owner can be reasonably expected to be subject to tax on such distributions at a rate that equals or exceeds the Minimum Rate. The election need not be made with respect to all Constituent Entity-owners of the Investment Entity. However, the election applies to all of the Constituent Entity-owner’s Ownership Interests in the Investment Entity.

Article 7.6.2

101. Article 7.6.2 sets out the operation of the Taxable Distribution Method.

102. Paragraph (a) requires the Constituent Entity-owner to include actual and deemed distributions in the computation of its GloBE Income in the Fiscal Year for which it is subject to tax on the distribution. The GloBE Rules do not have an independent definition of deemed distribution, although Article 7.6.5(c) treats certain transfers of an Ownership Interest as a deemed distribution. The reference to deemed distribution in paragraph (a) is intended to ensure that the Taxable Distribution Method is coordinated with the tax treatment under local tax rules. Thus, deemed distributions under the Taxable Distribution Method are generally determined by reference to the law applicable to the Constituent Entity-owner. This feature of the Taxable Distribution Method is a departure from the ordinary GloBE Rules, where distributions from Constituent Entities are excluded from GloBE Income. The Taxable Distribution Method is intended to match both the timing and location of the income earned by an MNE Group through the Investment Entity with the tax on that income in the location where the Constituent Entity-owner is subject to tax on the distributions.

103. A Constituent Entity-owner that is itself an Investment Fund, i.e. an intermediate Investment Fund, does not include the distribution in its GloBE Income or Loss, to preserve the tax neutrality of Investment Entities. However, distributions to intermediate Investment Entities do not re-start the four-year clock on distributions to the Constituent Entity-owner for which the election is made. As explained below, distributions do not reduce the Undistributed Net GloBE Income until they reach a Constituent Entity that is not an Investment Entity.

104. Paragraph (b) requires the Constituent Entity-owner to include the Local Creditable Tax Gross-up in its GloBE Income and Adjusted Covered Taxes. The Local Creditable Tax Gross-up is defined in Article 7.6.5(d). It is generally the amount of Covered Taxes paid by the Investment Entity that is allowed as a credit in the computation of the Constituent Entity-owner’s tax liability in respect of a distribution from the Investment Entity. Rather than creating a separate regime for tracking and managing Covered Taxes associated with each Constituent Entity-owner’s share of the Investment Entity’s GloBE Income that is subject to the Taxable Distribution Method, the GloBE Rules rely on the tax credit rules in the Constituent Entity-owner’s location. Thus, the rule effectively provides credit for Covered Taxes paid by the Investment Entity under the GloBE Rules to the same extent a credit is allowed for local tax purposes. The rule also requires that the Local Creditable Tax Gross-up be treated as additional GloBE Income so that the tax credit does not have the same effect as allowing both a deduction and a credit.

105. Paragraph (c) provides that the Constituent Entity-owner’s proportionate share of the Investment Entity’s Undistributed Net GloBE Income is treated as GloBE Income of the Investment Entity for the Reporting Fiscal Year and the result of multiplying the Minimum Rate by such GloBE Income is treated as Top-up Tax of a Low-Tax Constituent Entity in the Fiscal Year for purposes of Chapter 2. Liability for this Top-up Tax is determined pursuant to Chapter 2.

106. Finally, to achieve the intended result of attributing income (and tax consequences) of the Investment Entity to the Constituent Entity-owners rather than the Investment Entity, Article 5.1.3 requires that the Investment Entity’s GloBE Income or Loss for the Fiscal Year, and any Adjusted Covered Taxes attributable to such income, are excluded from all ETR computations under Chapter 5 and Articles 7.4.1 to 7.4.5, except to the extent the Adjusted Covered Taxes are included in the Constituent Entity-owners GloBE Income or Loss and Adjusted Covered Taxes pursuant to paragraph (b) of the Article.

Article 7.6.3

107. Article 7.6.3 defines the Undistributed Net GloBE Income and Article 7.6.4 provides additional rules to prevent double counting and to allow loss carry forwards.

108. Generally, the definition of Undistributed Net GloBE Income tests whether the GloBE Income arising in the Tested Year was distributed or offset by losses by the end of the Testing Period. Thus, as a practical matter, the MNE Group must maintain an Undistributed Net GloBE Income account for each Tested Year. The Undistributed Net GloBE Income is calculated for the entire Investment Entity, but Topup Tax is computed based on the Constituent Entity-owner’s share of the Undistributed Net GloBE Income.

109. Under Article 7.6.5, the Tested Year is the third Fiscal year preceding the Reporting Fiscal Year. The Testing Period is the four-year period beginning with the Tested Year and ending with the Reporting Fiscal Year. For example, if the Investment Entity fully distributed its GloBE Income to its Constituent Entity-owners over the course of this four year period, no Top-up Tax could be imposed under the Taxable Distribution Method. The owner could of course be subject to Top-up Tax in one of those years based on its own circumstances.

110. The definition of Undistributed Net GloBE Income in Article 7.6.3 starts with the GloBE Income for the Tested Year, if any. If there is zero GloBE Income or a GloBE Loss for a Fiscal Year, the Undistributed Net GloBE Income for such year is zero and remains zero while that year is in the Testing Period.

111. Once established, the Undistributed Net GloBE Income account for a Tested Year is reduced first by the amount of Covered Taxes, if any, paid by the Investment Entity. This is necessary because the distributable earnings of the Investment Fund would be reduced by Covered Taxes. However, Covered Taxes are added back to the Financial Accounting Net Income or Loss in the computation of GloBE Income or Loss. Consequently, without this adjustment, all of an Investment Entity’s GloBE Income would not be distributable. The Investment Entity’s Covered Taxes are, however, subsequently included in the Adjusted Covered Taxes of the Constituent Entity-owner to the extent they are included in the Local Creditable Tax Gross-up associated with a distribution or deemed distribution.

112. The Undistributed Net GloBE Income is further reduced by distributions to shareholders other than Constituent Entities that are Investment Entities and deemed distributions. Distributions to all other shareholders, including non-Group Entities, reduce the Undistributed Net GloBE Income. Distributions to Constituent Entities that are Investment Entities reduce Undistributed Net GloBE Income only when they are further distributed to a non-Investment Entity. MNE Groups may use any reasonable method of determining whether distributions through a chain of Investment Entities are distributed to a nonInvestment Entity. For example, an MNE Group may treat distributions of an Investment Entity as being first attributable to distributions received from other Investment Entities of the MNE Group.

113. Undistributed Net GloBE Income is also reduced for losses because losses reduce the amount that can be distributed as a dividend. Paragraph (c) reduces Undistributed Net GloBE Income by losses that arise during the Testing Period. However, if the losses arising in the Testing Period exceed the Undistributed Net GloBE Income accounts, an Investment Loss carry-forward must be created to reduce the Undistributed Net GloBE Income arising in subsequent Fiscal Years.

Article 7.6.4

114. The Undistributed Net GloBE Income account for the Tested Year is reduced by distributions during the Testing Period to the extent such distributions were not treated as reducing the Undistributed Net GloBE Income account for a previous Tested Year. Thus, distributions only reduce Undistributed Net GloBE Income of one year; they cannot be double-counted.

115. The Undistributed Net GloBE Income is further reduced by GloBE Losses, if any, arising in the Testing Period and any Investment Loss Carry-forward from a prior period. Investment Loss Carryforwards are the amount of GloBE Losses arising before the Tested Year that were not completely absorbed, i.e. reduced to zero, before the loss year rolled out of the Testing Period. For purposes of computing Undistributed Net GloBE Income, GloBE Losses are reduced when they are used to reduce Undistributed Net GloBE income and thus cannot be used to reduce the Undistributed Net GloBE Income of another Tested Year.

116. If the MNE Group has not owned an interest in the Investment Entity for three consecutive years, the GloBE Income for each preceding year that it did not own an interest is considered to be zero for purposes of determining the Undistributed Net GloBE Income. Accordingly, there will not be any Undistributed Net GloBE Income for the first three years in which the MNE Group owns an interest in the Investment Entity.

Article 7.6.5

117. Article 7.6.5 contains definitions related to the Taxable Distribution Method.

(a.) Paragraph (a) defines Tested Year as the third year preceding the Reporting Fiscal Year.

(b.) Paragraph (b) defines Testing Period as the four-year period beginning with the Tested Year and ending with the Reporting Fiscal Year. These definitions are important to the determination of an Investment Entity’s Undistributed Net Globe Income. These definitions, together with the other provisions of Article 7.6.3, allow distributions in the Tested Year and the three succeeding Fiscal Years to reduce the Undistributed Net GloBE Income of the Investment Entity.

(c.) Paragraph (c) treats a transfer of a direct or indirect Ownership Interest in the Investment Entity to a person that is not a Group Entity as a deemed distribution. The amount of the deemed distribution is determined based on the proportional decrease in the transferring Constituent Entity’s Ownership Interest. This rule applies irrespective of whether the Constituent Entityowner that transferred its interest is subject to tax as a result of the transfer. Without this rule, the Undistributed Net GloBE Income attributable to the disposed Investment Entity would continue to be deferred until the end of the Testing Period.

(d.) Paragraph (d) defines the Local Creditable Tax Gross-up as the amount of Covered Taxes incurred by the Investment Entity that is allowed as a credit against the Constituent Entityowner’s tax liability arising in connection with a distribution from the Investment Entity. The Local Creditable Tax Gross-up is discussed in the Commentary to Article 7.6.2(b).