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The OECD's Global Anti-Base Erosion (GloBE) Rules introduce a significant shift in the international tax landscape, aiming to establish a global minimum tax rate. The rules introduce a concept of the Ultimate Parent Entity (UPE). The UPE serves as the apex of a multinational group's ownership structure, ultimately responsible for ensuring the group's compliance with the minimum tax threshold.
Here, we discuss the meaning of the UPE, its role and importance and the challenges faced by the UPE.
Meaning
The UPE is the entity at the very top of a multinational group's ownership structure. It is an entity that owns directly or indirectly a controlling interest in any other entity. Essentially, it is the parent company that is not owned or controlled by any other entity.
Further, a Group will be considered as an MNE Group if it has one or more entities or permanent establishments (PEs) located in a jurisdiction other than the UPE jurisdiction.
Determining Group-Wide Tax Liability
The UPE's primary function involves assessing the effective tax rate (ETR) for the entire multinational group. This requires meticulous consolidation of tax liabilities and income from all subsidiaries operating across various jurisdictions. By evaluating the group's overall tax burden, the UPE can determine whether it meets the 15% minimum tax rate.
Identifying Low-Tax Jurisdictions
Another role of the UPE is to identify subsidiaries operating in countries with tax rates below the 15% threshold. These jurisdictions may trigger the application of a top-up tax.
Calculating and Paying Top-Up Tax
When the group's ETR falls below the 15% minimum, the UPE becomes liable for a top-up tax. The UPE pays the minimum tax in proportion to its ownership interests in those entities that have low taxed income.
This tax bridges the gap between the actual tax paid by the group and the minimum tax requirement. The UPE is responsible for accurately calculating the top-up tax amount and ensuring its timely payment to the relevant tax authorities.
Reporting and Disclosure
Pillar 2 mandates detailed reporting and disclosure requirements for multinational groups. The UPE is also responsible for submitting detailed information to tax authorities in the jurisdictions where the group operates. This includes comprehensive data on the group's structure, income, taxes paid, and other relevant financial information.
Challenges
The UPE faces several challenges in fulfilling its responsibilities due to differences in tax regulations, currencies, fiscal years of the UPE and the Constituent Entities across jurisdictions. Determining the group's ETR and calculating the top-up tax can be challenging due to complex ownership structures and varying tax rules across jurisdictions. However, this can be addressed with the help of advisors and maintaining detailed documentation.
Conclusion
This implementation of GloBE Rules is quite challenging as it requires to consider the affairs of group entities across various jurisdictions. There are detailed rules for determining whether an entity is a UPE or a Constituent Entity and so on. As these rules are set to apply in many jurisdictions from 2025, taxpayers must understand the implementation of these provisions along with the transitional rules.
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