🌎 What if the non-deductibility of illegal payments for GloBE purposes violates the definition of taxable income in an implementing jurisdiction?
💵 This is one of a long list of policy choices that were made by representatives of Inclusive Framework jurisdictions in the GMR. However unlikely, if an illegal payment is accounted for in the FANIL of a given CE, the entity is supposed to “add back” that expense for purposes of the calculation of its GloBE Income or Loss.
❓ If asked, most people would probably oppose the idea of allowing the deductibility of bribes from the basis of income taxes (which the GloBE Top-Up Taxes definitely are). Much like it is immoral for people to engage in criminal activity, one could argue that it is immoral to allow someone to “benefit” from it by reducing their taxable base and paying less tax. The problem with this argument is that income taxes are imposed on an economic event: the acquisition of income. If the item of income someone acquired stems from criminal activity, should it be exempt from taxation? Surely not, because tax law should not distinguish between licit and illicit income – it is income nevertheless and it was earned by someone subject to its provisions.
⚖️ The question is why should that logic not apply to the definition of the taxable basis of an income tax, meaning “income”? If a taxpayer can prove that a certain expense was duly incurred and was necessary for the preservation of the business, does it really matter – from a definitional standpoint – that the expense is associated with an illegal payment? And if the answer is that tax law must abide by certain “external” limitations of public policy, is that argument in some way opening the definition of “income” to a moral assessment of its components? If an illegal payment is non-deductible, should perhaps a payment to a polluting company be non-deductible? Maybe a payment to a company selling unhealthy products?
🔎 These are some of the tricky questions raised by Art. 3.2.1(g) of the GMR and its § 76, which says – and this is important – that a payment can be qualified as “illegal” even if it is not illegal in the jurisdiction of the CE. If it is illegal in the jurisdiction of the UPE, that is enough for the CE to have a potentially higher GloBE Income and a lower ETR (because the premise is that the payment is not illegal in its jurisdiction).
📚 If you’re interested in reading more about this topic, we recommend an article written in Portuguese by Ramon Tomazela and titled “A Dedutibilidade de Despesas com o Pagamento de Propina à Luz das Leis Internas e das Convenções Internacionais Celebradas pelo Brasil” (“The Deductibility of Bribery Expenses in Light of Domestic Laws and International Conventions Signed by Brazil”). It was published by IBDT – Instituto Brasileiro de Direito Tributário in Revista Direito Tributário Atual (2021): https://bit.ly/4kjjGfR
