3.21. GloBE Rules-Article 3.2.7-Intragroup Financing Expenses Exclusion for Low Tax CEs

Core Mechanism Dual Effect Requirement: Increases low-tax entity's expenses (reducing GloBE income) Fails to generate proportional taxable income in high-tax counterparty Anticipatory Test: Assessed over entire expected duration of financing arrangement Based on reasonable expectations at inception Objective test based on actual transactions and outcomes Key Definitions Low Tax Entity (Article 10.1): Located in low-tax jurisdiction (ETR less than minimum rate with net GloBE income) Would be low-tax if ignoring intra-group financing income or expenses High Tax Counterparty: Located in non-low-tax jurisdiction Would remain non-low-tax ignoring intra-group financing Intra-Group Financing Arrangement: High-tax counterparty directly or indirectly provides credit or makes investment in low-tax entity Includes all related steps, transactions, unenforceable agreements and understandings Series of transactions treated as single arrangement if objectively linked Application Framework Paragraph 127 - Basic Rule: Prevents arrangements that increase expenses of low-tax entities while not correspondingly increasing taxable income of high-tax counterparties Prevents artificial ETR inflation without real tax impact Paragraph 130 - Application Criteria: Applies only if arrangement expected to reduce low-tax entity's GloBE income Must not increase high-tax counterparty's taxable income Duration assessment based on objective factors including financing needs Short-term loans financing long-term investments treated as long-term Structural Scenarios Back-to-Back Loans: High-tax entity lends to intermediary, which then lends to low-tax entity Treated as arrangement if intermediary's purpose was on-lending Exception: Genuine treasury centers managing working capital independently Tax Attribute Utilization: Interest carry-forwards used to offset received interest income Excess interest capacity preventing taxable income recognition Creates ETR distortion despite formal debt treatment Example 327-1: Hybrid Instrument Treatment Structure: B Company (30% tax rate) lends to A Company (10% tax rate) Instrument treated as debt for accounting (creating deductible interest), but equity for tax (no taxable receipts) ETR Distortion: A Company: Interest expense reduces GloBE income but not taxable income; ETR artificially rises B Company: Interest income increases GloBE income but not taxable income (dividend treatment); ETR artificially falls GloBE Adjustment: Interest expense excluded from A Company's GloBE income A Company ETR remains 10%, B Company ETR remains 30% - no artificial inflation or deflation Example 327-2: Interest Carry-Forward Structure: B Company (30% rate) lends to A Company (10% rate) A Company: Interest deduction denied due to high leverage/thin capitalization violation B Company: Excess interest carried forward shelters interest income ETR Distortion: A Company: Interest expense reduces GloBE income but non-deductible for local tax; ETR artificially increased B Company: Interest income increases GloBE income but offset by carry-forward for local tax; ETR artificially decreased GloBE Adjustment: Interest expense excluded from A Company's GloBE income Prevents artificial ETR inflation for A Company and neutralizes double non-taxation (income sheltered in B Company) Application Flowchart Identify arrangement between group entities Classify parties as low-tax entity or high-tax counterparty Assess tax impact: Does it reduce low-tax entity's GloBE income? Does it fail to increase high-tax counterparty's taxable income? Evaluate duration based on objective factors Determine application of Article 327 Practical Implications Caution Required For: Back-to-back lending structures Use of tax attributes (interest carry-forwards) Financing arrangements lacking economic substance Documentation Essentials: Demonstrate arm's length nature Genuine business purpose Independent treasury operations if claimed Policy Rationale: Targets arrangements designed to exploit rate differentials between jurisdictions Prevents creation of stateless income for tax planning Focuses on economic substance over legal form Requires proactive review of intra-group loans and investments Excluded Payments Paragraph 127 - Key Exclusions: Payments qualifying for exemption Deductions, credits or other tax benefits if benefit amount relates to payment received Next Steps Muhammad Altaf Hussain will study Intra-Jurisdictional Transaction Elimination in the next session .

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