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

Definitions

(1) Introduces definitions relating to the tax treatment of deferred tax assets, deferred tax liabilities and transferred assets upon transition:

“governmental arrangement” means any agreement, ruling, decree, grant or similar arrangement, including any amendment or modification thereof, with the central, state or local government, or their administration or agencies that carry out government functions, of a jurisdiction which provides an entitlement to a tax credit or other tax relief where a critical aspect of the credit or relief, such as the eligibility thereto or the amount thereof, relies on discretion exercised by that government or their administration or agencies that carry out government functions;

“grace period” means—

1. for deferred tax expense attributable to the reversal of a deferred tax asset described in paragraph (a) or (b) of subsection (5), all fiscal years beginning on or after 1 January 2024 and before 1 January 2026 but not including a fiscal year that ends after 30 June 2027, and
2. for deferred tax expense attributable to the reversal of a deferred tax asset described in paragraph (c) of subsection (5), all fiscal years beginning on or after 1 January 2025 and before 1 January 2027 but not including a fiscal year that ends after 30 June 2028;

“grace period limitation amount” means the deferred tax expense attributable to the reversal of deferred tax assets described in subsection (5) that does not exceed the aggregate of 20 percent of the amount of each such deferred tax asset originally recorded and taken into account for the purposes of subsection (2) at the lower of the minimum tax rate or the applicable domestic tax rate;

“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, subject to subsections (5) to (10), 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) Except where the tax law or practice of a jurisdiction provides otherwise in respect of the order of offset of losses against a covered tax, 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.

(2)(f) For the purposes of determining the total deferred tax adjustment amount, as set out in section 111X, where a loss deferred tax asset arising in a fiscal year (in this paragraph referred to as the ‘originating fiscal year’) is attributable to both a qualifying loss and a loss that is not a qualifying loss, then, the reversal of that loss deferred tax asset, as set out in section 111X, shall be attributable to a qualifying loss in the same proportion as the qualifying loss bears to the sum of the qualifying loss and the loss that is not a qualifying loss in the originating fiscal year.

(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.

(5) For the purposes of subsection (2) and subject to subsection (7), no account shall be taken of the following deferred tax assets or deferred tax liabilities:

1. a deferred tax asset that is attributable to a governmental arrangement concluded or amended after 30 November 2021;
2. a deferred tax asset that is attributable to an election or choice exercised or changed by a constituent entity, joint venture or joint venture affiliate after 30 November 2021 that retroactively changes the treatment of a transaction in determining its taxable income in a jurisdiction, in a taxable period for which an assessment by the tax authority of the jurisdiction was already made or a tax return was already filed;
3. a deferred tax asset or a deferred tax liability arising from a difference in the tax basis and carrying value of an asset or liability if the tax basis or carrying value was established pursuant to a tax chargeable on profits or gains under the law of a jurisdiction that is similar to corporation tax, that was enacted by a jurisdiction, that did not previously impose such a tax, after 30 November 2021 and before the transition year.

(6) For the purposes of subsection (2), no account shall be taken of a deferred tax asset to the extent that it is attributable to a loss that arose more than 5 fiscal years preceding the effective date of introduction of a new tax chargeable on profits or gains under the law of a jurisdiction that is similar to corporation tax, that was enacted by a jurisdiction that did not previously impose such a tax.

(7) Subject to subsections (8) and (9), the deferred tax expense attributable to the reversal of a deferred tax asset described in subsection (5) may be taken into account during the grace period but shall not exceed the grace period limitation amount.

(8) Subsection (7) shall not apply to a deferred tax expense attributable to the reversal of a deferred tax asset, or portion thereof, to the extent that such deferred tax asset, or portion thereof, results from—

1. a governmental arrangement concluded or amended after 18 November 2024,
2. an election or choice described in paragraph (b) of subsection (5) exercised or changed by a constituent entity, joint venture or joint venture affiliate after 18 November 2024, or
3. a difference in the tax basis and carrying value of an asset or liability established pursuant to a tax chargeable on profits or gains under the law of a jurisdiction that is similar to corporation tax that was enacted after 18 November 2024.

(9) For the purposes of subsection (7), where, after 18 November 2024, there is a change in—

1. a governmental arrangement, or
2. the law, an election or choice, or accounting methodology,

that results in an increase in the amount of a deferred tax asset described in subsection (5) that reverses during the grace period, the additional amount that reverses compared to the amount that would have reversed absent such change shall not be taken into account during the grace period.

(10) The sum of the total amount of deferred tax expense that is attributable to the reversal of deferred tax assets described in subsection (5) that a constituent entity, joint venture or joint venture affiliate may include when determining the effective tax rate for a jurisdiction in accordance with section 111AC and the calculation of simplified covered taxes under section 111AJ shall not exceed the maximum amount allowable under subsections (7) to (9) during the grace period.

Relevant Date: Finance Act 2025