In the New York Times, Jesse Drucker and Dylan Freedman have a new article, “N.Y. Times: Crocs Has a Trick for Dodging Taxes: a Tiny Office in Malta.” From the article:

Take the stairs to the second floor of an old brewery on the Mediterranean archipelago of Malta and buzz yourself in to a tiny office hidden behind a heavy metal door.

The air smells of hops, but this place isn’t just brewing beer: It’s the headquarters for a convoluted strategy that the world’s biggest corporations use to dodge billions of dollars in U.S. income taxes.

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Officially, Malta levies a 35 percent corporate tax, but firms can drive that rate to nearly zero. Accounting firms supply local tax advisers to serve as board members for the shell companies, while colleagues at the same firms audit the entities’ financial statements.

What the article does not do is explain precisely how this structure works. As best I can tell, the structure does a few things for a U.S.-parented multinational:

• Forming a Maltese financing company ends up stripping out earnings from other jurisdictions (e.g., high-tax jurisdictions in the EU) through deductible payments to the financing company.
• Under Maltese corporate tax rules, the financing company ends up paying little-to-no corporate tax in Malta.
• Under the GloBE rules, the income received by the Maltese company is allocated to a U.S. branch, which allows the multinational to blend that income with U.S. income elsewhere in the group, thereby ensuring that no top-up tax applies to the Maltese earnings.

From this, I think we can also make some assumptions. For example, the Maltese subsidiary would likely be a CFC. Income generated from these intercompany financing payments would therefore presumably constitute net CFC tested income rather than Subpart F income, assuming section 954(c)(6) applies to exclude the related-CFC payments from foreign personal holding company income. For a U.S. corporate parent, that income would then be subject to U.S. tax at the preferential effective rate applicable to net CFC tested income (currently 12.6%, before taking account of foreign tax credits and other adjustments).

What does not appear to be clear from the public reporting is how the U.S. branch of the Maltese subsidiary operates for ordinary U.S. tax purposes. Under the U.S.–Malta income tax treaty, the United States generally may tax the business profits of a Maltese enterprise only to the extent attributable to a U.S. permanent establishment. Profits attributable to such a permanent establishment would generally be taxable in the United States as ECI and could also implicate the branch profits tax. But the GloBE rules generally determine the income attributable to a treaty permanent establishment by reference to the applicable treaty’s profit-attribution rules. Thus, it is unclear what mechanism allows the structure to allocate the relevant financing income to the U.S. branch for GloBE purposes without simultaneously subjecting that income—or a comparable amount of income—to current U.S. taxation as ECI and potentially the branch profits tax.