Step-by-step computation for Macro-step 6

Purpose

The purpose of the Charging Mechanisms is to identify the amount of Top-Up Tax attributed to the parent entities of the Low Tax Constituent Entities according to the Income Inclusion Rule.

General Logic

In order to perform the computation, the different IPEs and POPEs and their Income Inclusion Ratios in their various subsidiaries are first computed. After this initial step, the exception to the IIR are identified along the shareholding chains, before computing the Allocable shares of Top-Up Tax of each Parent Entity still subject to the IIR in their LTCE subsiaries.

Data Input

The Data input for Macro-step consists in :

• The list of Top-Up Tax computed in Macro-step 5 for each LTCE's ;
• The Matrices of Indirect Ownership interests as well as Controlling Interest;

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Data Output

The Data output for Macro-step 5 consists in :

• The list of IPEs and POPEs subject to the IIR ;
• The amounts of Top-Up Tax due by these Parent entities;

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Detailed Step by step approach

Step 6.1. - Scope of Application of the IIR

Purpose

The purpose of the this step is to assess the prevalence of the IIR in the perimeter and insert this information on an entity basis in order to apply the exception rules to the IIR of the article 2.1. later on.

General Logic

This Step 6.1. will consist in the construction of a DirectIIR Diagonal Matrix that will be combined with the Controlling Interest Matrix to form the IndirectIIR Matrix that contains the information about the applicability of the IIR for the Parent entities with a Controlling Interests.

Data Input

The Data input for Step 6.1. consists in :

• The list of Jurisdiction with a QIIR
• The Controlling Interest Matrix (or Approximate)

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Data Output

The Data output for Step 6.1. consists in :

• The DirectIIR Matrix
• The IndirectIIRMatrix

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Detailed computations

The list of Micro-Step is a follows :

• Micro-Step 6.1.1. Construction of the DirectIIR Matrix
• Micro-Step 6.1.2. Construction of the IndirectIIR Matrix

Micro-Step 6.1.1. Construction of the DirectIIR Matrix

Let's build an DirectIIR matrix that has 1 on the diagonal if the entity is in a Jurisdiction with IIR and 0 otherwise.

Micro-Step 6.1.2. Construction of the IndirectIIR Matrix

The IndirectIIR matrix, calculated as IIRDirect multiplied by ControllingInterest, is used to identify if 'i' is a parent entity of 'j' under the IIR.

This Matrix Product is determined by the formula :

IndirectIIR(i,j) = the sum across k of (IIRDirect(i,k) times ControllingInterest(k,j)).

This equals IIRDirect(i,i) multiplied by ControllingInterest(i,j), which results in 1 times ControllingInterest(i,j) if 'i' is subject to the IIR, and 0 otherwise, given that IIRDirect is a diagonal matrix.

Step 6.2. - Identification and qualification of all Parent Entities

Purpose

The purpose of this step is to identify all the POPEs and IPEs for the application of the IIR.

General Logic

This Step 6.2. will consist in identifying all the qualifying Parent Entities in the GloBE Perimeter before applying the IPE and POPE criterion. The methodology is highly conservative as all Parent entities start as POPEs and only qualify as IPEs if they qualify to the test.

Data Input

The Data input for Step 6.2. consists in :

• The Ownership Interest Matrix
• The list of entities in the GloBE perimeter and their characteristics from Macro-step 1

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Data Output

The Data output for Step 6.2. consists in :

• The list of IPEs and POPEs

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Detailed computations

The list of Micro-Step is a follows :

• Micro-Step 6.2.1. Identification of the qualifying parent entities
• Micro-Step 6.2.2. Sorting qualifying parent entities between POPEs and IPEs

Micro-Step 6.2.1. Identification of the qualifying parent entities

Using the Indirect Ownership Interest Matrix, construct the set of Constituent Entities that have at least one Indirect Ownership interest and that are neither part of a JV Sub-Group, a Permanent Establishment or an Investment Entity.

Entity i is a qualifying parent if:

• there exist at least one other Entity j in the GloBE perimeter for which IndirectOwnershipInterst( i, j)>0;
• i is not a UPE;
• i is a Constituent Entity;
• i is neither part of a JV Sub-group, a Permanent Establishment or an Investment Entity

Micro-Step 6.2.2. Sorting qualifying parent entities between POPEs and IPEs

At the beginning of this stage all qualifying parent entities are marked as POPEs. They will only be marked as IPEs if after thorough computation, the less than 20% of their ownership interests is held directly or indirectly by shareholders that are not Constituent Entities.

It is assumed in 6.2.2. that ownership interests partially held through a JV sub-group, in a Constituent Entity, still qualify for this test.

Just like in Step 1.6. a new Ownership Interest Matrix is formed as follows:

• All entities without subsidiaries are dropped from the matrix
• a generic "Out of Group" shareholder is created that aggregates all the shareholdings in remaining any entity of:
  • all out of group entities
  • all Excluded entities

The Indirect ownership computation using Baldone ownership is applied to this specific matrix.

Using the Indirect Ownership Interest of the generic "Out of Group" shareholder it is then simple to apply the criterion :

• if this ownership interest is >20% : the entity stays a POPE;
• if this ownership interest is =<20% : the entity is marked an IPE;

Step 6.3. - Construction of Allocable share matrix

Purpose

The purpose of this stage is to determine the Allocable Share of Top-Up Tax allocable to any potentially paying entity as identified in the step 6.2. .

General Logic

This Step 6.3. will consist in the computation of the Inclusion Ratio of each Parent Entity in its LTCE subsdiary to determine the Allocable share according to the mechanisms described in article 2.2..

Data Input

The Data input for Step 6.3. consists in :

• The Indirect Ownership Matrix
• A forced Inclusion Ratio Matrix
• The Diagonal Top-Up Tax Matrix as per the Macro-step 5.

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Data Output

The Data output for Step 6.3. consists in :

• The Allocable Share Matrix

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Detailed computations

The list of Micro-Step is a follows :

• Micro-Step 1.2.1.

Micro-Step 6.3.1. Computation of the Inclusion Ratio Matrix

Logic

The OECD Team has writen the computation of the Inclusion Ratio without any direct reference to Ownership Interests in order to prevent any abuse or tinkering of the notions at play.

2.2.2. A Parent Entity’s Inclusion Ratio for a Low-Taxed Constituent Entity for a Fiscal Year is the ratio of (a) the GloBE Income of the Low-Taxed Constituent Entity for the Fiscal Year, reduced by the amount of such income attributable to Ownership Interests held by other owners, to (b) the GloBE Income of the Low-Taxed Constituent Entity for the Fiscal Year.

In normal situation however we have the following :

amount [...] attributable to Ownership Interests held by other owners = ( 1 - Indirect Ownership Interest of the Parent Entity in the LTCE) x GloBE Income of the LTCE for the FY

thus

(a) the GloBE Income of the LTCE for the FY, reduced by the amount [...] attributable to Ownership Interests held by other owners = GloBE Income of the LTCE for the FY - ( 1 - Indirect Ownership Interest of the Parent Entity in the LTCE) x GloBE Income of the LTCE for the FY

and therefore the following simplification

Inclusion ratio = Indirect Ownership Interest of the Parent Entity in the LTCE x GloBE Income of the Low-Taxed Constituent Entity for the Fiscal Year / GloBE Income of the Low-Taxed Constituent Entity for the Fiscal Year

What about the flow-through the case of the flow-through described at Article 2.2.4. ?

As the GloBE Income term was, according to the article, supposed to be corrected from the effect of the GloBE Income attributable to persons that are not in the Group, in a symmetric manner for both the numerator and the denominator, this article does not impact our simplified computation. It may have if the initial simplification hypothesis does not hold true.

Implementation

Unless a specific Inclusion Ratio Matrix is provided directly, The Inclusion Ratio Matrix will be equal to the Indirect Ownership Interest Matrix.

Micro-Step 6.3.2. Allocable Share Matrix computation

The Allocable Share Matrix is simply the Matrix Product Inclusion Ratio Matrix multiplied by the Diagonal Top-Up Tax Matrix

Micro-Step 1.2.3. Entity absent from the shareholding structure

This .

Step 6.5. - Final charging mechanism of LTCE's TUT to paying entities

Purpose

The purpose of the .

General Logic

This Step 1.2. will consist in .

Data Input

The Data input for Step 1.2. consists in :

• The list of

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Data Output

The Data output for Step 1.2. consists in :

• The list of

The detailed matrix is available in the relevant section of the Pillar 2 Data Structure.

Detailed computations

The list of Micro-Step is a follows :

• Micro-Step 1.2.1.

Micro-Step 1.2.1. Unknown subsidiaries

This step .

Micro-Step 1.2.2. Unknown parents

This .

Micro-Step 1.2.3. Entity absent from the shareholding structure

This .