111AW Tax treatment of deferred tax assets, deferred tax liabilities and transferred assets upon transition

Summary

This section provides for the allowance of pre-existing deferred tax accounting attributes to be used in the calculation of the adjusted covered taxes to prevent distortions in the calculation of the ETR. The section allows the MNE group to take into account the deferred tax accounting attributes of the MNE group at the beginning of the transition year, at the lower of the minimum rate or the applicable domestic tax rate. In case of a deferred tax asset (DTA) that has been recorded at a rate lower than the minimum rate, such DTA may be taken into account at the minimum rate if the taxpayer can demonstrate that the DTA is attributable to a qualifying loss.

Details

(1) For the purpose of this section, a transition year, for a jurisdiction, means the first fiscal year in which an MNE group or large-scale domestic group falls within the scope of a qualified IIR, qualified UTPR or qualified domestic top-up tax, in respect of that jurisdiction.

(2)(a) Provides that an MNE Group or a large-scale domestic group shall take into account all the deferred tax assets and deferred tax liabilities, reflected or disclosed in the financial accounts of all the constituent entities in a jurisdiction for the transition year when determining the effective tax rate for a jurisdiction in accordance with section 111AC in a transition year, and for each subsequent fiscal year.

(2)(b) Deferred tax assets and deferred tax liabilities shall be taken into account at the lower of the minimum tax rate, or the applicable domestic tax rate.

(2)(c) Where a deferred tax asset is attributable to a qualifying loss, and the deferred tax asset has been recorded at a tax rate lower than the minimum tax rate, that deferred tax asset shall be taken into account at the minimum tax rate for this purpose.

(2)(d) The impact of any valuation adjustment or accounting recognition adjustment, with respect to a deferred tax asset, shall be disregarded.

(2)(e) For the purposes of determining the total deferred tax adjustment amount, as set out in section 111X (Total deferred tax adjustment amount), the reversal of a loss deferred tax asset, as set out in section 111X (Total deferred tax adjustment amount), shall first be attributable to a loss deferred tax asset which arose in the most recent fiscal year until the balance of the loss deferred tax asset is exhausted by such amounts, and then, if necessary, to a loss deferred tax asset which arose in the next most recent fiscal year until the balance of the loss deferred tax asset is exhausted by such amounts, and so on for preceding fiscal years, i.e. the reversal of a loss deferred tax asset is attributable to losses arising in later years in priority to earlier years.

(3) For the purposes of subsection (2)(a), deferred tax assets arising from items excluded from the calculation of qualifying income or loss and generated in a transaction that takes place after 30 November 2021, shall not be taken into account when determining the effective tax rate for a jurisdiction.

(4) Where after 30 November 2021, and before the commencement of a transition year in respect of the transferring entity, assets, other than inventory, are transferred between constituent entities, the acquirer’s basis in the acquired assets for the purposes of this Part shall be equal to the transferring entity’s carrying value of the transferred assets at the time immediately before disposal, with deferred tax assets and deferred tax liabilities determined accordingly.

Relevant Date: Finance Act 2024