Multinational Top-up Tax and Domestic Top-up Tax

MTT62220 - Charging mechanisms: Undertaxed Profits Rule: Examples of determining untaxed amounts

Example 1

Group AB consists of two companies. Company A is the ultimate parent of the group and is located in Jurisdiction A. Company B is a wholly owned, direct subsidiary of Company A and is located in Jurisdiction B.

Company A and Company B each have top-up tax amounts of 100.

Jurisdiction A implements the Pillar 2 rules (a QDMTT, an IIR and a UTPR). Jurisdiction B does not.

Company A is potentially undertaxed because it is the ultimate parent of a multinational group. However, because Jurisdiction A has implemented a QDMTT which qualifies for the QDMTT Safe Harbour (see MTT15110) it collects the 100 top-up tax amount under its QDMTT. For the purposes of MTT, the top-up amount is nil because of the QDMTT Safe Harbour, so the untaxed amount is nil.

Company B is not potentially undertaxed because none of the three conditions are met:

• it is not the ultimate parent of the group
• it is not located in the same territory as the ultimate parent, and
• the ultimate parent is a responsible member (i.e. Company A is required to apply an IIR on its ownership interests in Company B).

Note that Exception 1 does not apply, because all of the ownership interests that Company A has in company B are direct ownership interests.

In this example, the untaxed amount for group AB is nil.

Example 2

Consider Group AB again, except in this case Jurisdiction B implements the Pillar 2 rules (a QDMTT, an IIR and a UTPR) and Jurisdiction A does not.

Company A is potentially undertaxed because it is the ultimate parent of a multinational group. Company A is not subject to a QDMTT in this example so the untaxed amount for Company A is 100.

Company B is potentially undertaxed because Company A, the ultimate parent, is not a responsible member. However, because Jurisdiction B has implemented a QDMTT which qualifies for the QDMTT Safe Harbour (see MTT15110) it collects the 100 top-up tax amount under its QDMTT and the untaxed amount for Company B is nil.

In this example, the untaxed amount for group AB is 100.

Example 3

Group DEFG consists of four companies. Company D is the ultimate parent of the group. It holds 100% of the ownership interests in Company E and Company F. Company E holds 50% of the ownership interests in Company G. Company F holds the other 50% of the ownership interests in Company G. 

Companies D, E, F and G are located in Jurisdictions D, E, F and G respectively. Each has a top-up amount of 100

Jurisdiction E implements the Pillar 2 rules (a QDMTT, an IIR and a UTPR), Jurisdictions D, F and G do not.

Company D is potentially undertaxed because it is the ultimate parent of a multinational group. Company D is not subject to a QDMTT in this example so the untaxed amount for Company D is 100.

Company E is potentially undertaxed because the ultimate parent is not a responsible member. However, because Jurisdiction E has implemented a QDMTT which qualifies for the QDMTT Safe Harbour (see MTT15110) it collects the 100 top-up tax amount under its QDMTT and the untaxed amount for Company E is nil.

Company F is potentially undertaxed because the ultimate parent is not a responsible member. Jurisdiction F has not implemented a QDMTT, so the untaxed amount for Company F is 100.

Company G is potentially undertaxed because the ultimate parent is not a responsible member. Here it is necessary to consider exception 1 because Company D does not hold any direct ownership interests in Company G:

• the ultimate parent is not a responsible member (met),
• the ultimate parent has no direct ownership interests in the member (met), and
• any indirect ownership interests the ultimate parent has in a member are through ownership interests in a responsible member (not met – while half of Company D’s interests are held through a responsible member, Company E, the other half are held through a member which is not a responsible member, Company F).

So, exception 1 is not met and Company G remains potentially undertaxed.

We then have to consider whether Company G has an untaxed amount. The top-up tax amount calculated for Company G is 100.

The top-up tax amount(s) of Company G attributed to responsible member(s) is 50. This is because Company E is chargeable to top-up tax under the IIR based on a top-up tax amount of 100, multiplied by an allocation ration of 50%. This means that the untaxed amount of Company G is 50 (100 - 50).

This means that the untaxed amount for DEFG Groups is 250, comprising 100 in respect of Company D, 100 in respect of Company F and 50 in respect of Company G.

Example 4

Group LMNO consists of four companies. Company L is the ultimate parent of the multinational group. Company L directly holds 75% of the ownership interests in Company M and 75% of the ownership interests in Company N. The remaining ownership interests in Companies M and N are held by unrelated third parties.

Company M holds 90% of the ownership interests in Company O, Company N holds the remaining 10% of ownership interests in Company O.

Companies L, M, N and O are located in Jurisdictions L, M, N and O respectively.

Jurisdiction M implements an IIR, but Jurisdictions L, N and O do not.

In this example, Company O has a top-up tax amount of 100. None of the other group companies have a top-up tax amount.

Company O is potentially undertaxed because the ultimate parent is not a responsible member. Here it is necessary to consider exception 1 because Company L does not hold any direct ownership interests in Company O:

• the ultimate parent is not a responsible member (met), and
• the ultimate parent has no direct ownership interests in the member (met), and
• any indirect ownership interests the ultimate parent has in a member are through ownership interests in a responsible member (not met – while 90% of Company L’s interests are held through a responsible member, Company M, the remaining 10% are held through a member which is not a responsible member, Company N).

So, exception 1 is not met and Company O remains potentially undertaxed.

The total top-up tax amount of Company O is 100. The top-up tax amount(s) of Company O attributed to responsible member(s) is 90. This is because Company M is chargeable to top-up tax under the IIR based on a top-up tax amount of 100, multiplied by an allocation ration of 90%. This means that the untaxed amount of Company G is 10 (100 - 90).

In this example, it is notable that the total amount of top-up tax collected is 100. This demonstrates that the total top-up tax due from a group where the UTPR applies may exceed that which would have been due under an IIR.