Revenue Note for Guidance

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Revenue Note for Guidance

111X Total deferred tax adjustment amount

Definitions

(1) Introduces definitions required for the interpretation of the treatment of deferred tax and related amounts for the purposes of this Part.

“aggregate deferred tax liability category” means a category of deferred tax liabilities determined in relation to two or more general ledger accounts, consistent with the chart of accounts used for the purposes of determining the financial accounting net income or loss of an entity, that fall under the same balance sheet account or sub-balance sheet account;

“disallowed accrual” means any movement in deferred tax expense accrued in the financial accounts of a constituent entity which relates to an uncertain tax position or to distributions from a constituent entity;

“FIFO methodology” means the methodology set out in paragraphs 90.22 and 90.23 of section 1.3, paragraph 59 of the June 2024 Guidance;

“June 2024 Guidance” means the document entitled OECD (2024), Tax Challenges Arising from the Digitalisation of the Economy – Administrative Guidance on the Global Anti-Base Erosion Model Rules (Pillar Two), June 2024, OECD/G20 Inclusive Framework on BEPS, OECD, Paris, published by the OECD on 17 June 2024;

“LIFO methodology” means the methodology set out in paragraphs 90.22 and 90.24 of section 1.3, paragraph 59 of the June 2024 Guidance;

“recapture exception accrual” means an amount of tax expense accrued in the financial accounts of a constituent entity that is attributable to changes in associated deferred tax liabilities in respect of:

  1. cost recovery allowances on tangible assets,
  2. the cost of a licence or similar arrangement from a government for the use of immovable property or exploitation of natural resources which entails significant investment in tangible assets,
  3. research and development expenses,
  4. de-commissioning and remediation expenses,
  5. fair value accounting on unrealised net gains,
  6. foreign currency exchange net gains,
  7. insurance reserves and insurance policy deferred acquisition costs,
  8. gains from the sale of tangible property located in the same jurisdiction as the constituent entity that are reinvested in tangible property in the same jurisdiction, or
  9. additional amounts accrued as a result of accounting principle changes with respect to any item listed under subparagraphs (a) to (h);

“swinging account” means a general ledger account for which variances in accounting and tax rules result in a net deferred tax asset or a net deferred tax liability at different points over the life of the assets or liabilities encompassed within the general ledger account;

“unclaimed accrual” means any increase in a deferred tax liability recorded in the financial accounts of a constituent entity for a fiscal year that is not expected to be paid within the time period referenced in subsection (9) (i.e. five years within the end of the fiscal year in which it arose), and for which the filing constituent entity elects, in accordance with section 111AAAD, not to include in total deferred tax adjustment amount for that fiscal year.

Application

(2) Subject to subsections (3) to (8), where the tax rate applied for the purposes of calculating the deferred tax expense in the financial accounts of a constituent entity for a fiscal year is:

  • (2)(a) equal to or less than the minimum tax rate, the total deferred tax adjustment amount to be added to the adjusted covered taxes of a constituent entity for a fiscal year pursuant to section 111U(1)(b) shall be the deferred tax expense accrued in its financial accounts for a fiscal year with respect to covered taxes, or
  • (2)(b) greater than the minimum tax rate, the total deferred tax adjustment amount to be added to the adjusted covered taxes of a constituent entity for a fiscal year pursuant to section 111U(1)(b) shall be the deferred tax expense accrued in its financial accounts for a fiscal year with respect to covered taxes recalculated at the minimum tax rate.

(3)(a)&(b) The total deferred tax adjustment amount of a constituent entity for a fiscal year shall be increased by any amount of disallowed accrual, unclaimed accrual and any amount of recaptured deferred tax liability determined in a preceding fiscal year in accordance with subsection (9), which has been paid during the fiscal year.

(4) Where, for a fiscal year, a loss deferred tax asset is not recognised in the financial accounts of a constituent entity because the recognition criteria are not met, the total deferred tax adjustment amount shall be reduced by the amount that would have reduced the total deferred tax adjustment amount if a loss deferred tax asset for the fiscal year had been accrued.

(5) Subject to subsection (6), the total deferred tax adjustment amount of a constituent entity for a fiscal year shall not include:

  • (5)(a) the amount of deferred tax expense with respect to items excluded from the calculation of qualifying income or loss of the constituent entity under Chapter 3,
  • (5)(b) the amount of deferred tax expense with respect to disallowed accruals and unclaimed accruals,
  • (5)(c) the impact of a valuation adjustment or accounting recognition adjustment with respect to a deferred tax asset,
  • (5)(d) the amount of deferred tax expense arising from a re-measurement with respect to a change in the applicable domestic tax rate, and
  • (5)(e) the amount of deferred tax expense with respect to the generation and use of tax credits.

(6)(a) Subsection (5)(e) shall not apply to an amount of deferred tax expense where a substitute loss carry-forward arises in accordance with paragraph (b).

(6)(b) A substitute loss carry-forward shall arise where all of the following conditions are met:

  • the tax laws of a jurisdiction requires that foreign source income offset domestic source losses before foreign tax credits may be applied against tax imposed on foreign source income,
  • the constituent entity has a domestic tax loss in that jurisdiction that is fully or partially offset by foreign source income, and
  • the tax laws in that jurisdiction allows foreign tax credits to be used to offset a tax liability in a subsequent year in relation to income that is included in the calculation of the constituent entity’s qualifying income or loss.

(7)(a) Where all of the conditions set out in subsection (6) are met, the deferred tax expense attributable to the substitute loss carry-forward deferred tax asset shall be included in the constituent entity’s total deferred tax adjustment amount in the fiscal year that it arises and in the fiscal years it reverses, but only to the extent that the foreign tax credit that gave rise to the substitute loss carry-forward deferred tax asset is used to offset a tax liability on income included in the constituent entity’s qualifying income or loss.

(7)(b) Subject to paragraph (c), the amount of substitute loss carry-forward deferred tax asset is equal to the lesser of:

  • the amount of the foreign tax credit in respect of the foreign source income inclusion that, under the tax law of the jurisdiction, is allowed to be carried forward from the taxable period in which the constituent entity had a tax loss, before taking into account any foreign source income, to a subsequent fiscal year, and
  • the amount of the constituent entity’s tax loss for the taxable period, before taking into account any foreign source income, multiplied by the applicable domestic tax rate.

(7)(c) Subsection (5)(a) (which provides for the exclusion of the amount of deferred tax expense with respect to items excluded from the calculation of qualifying income or loss of the constituent entity) and section 111AW(2) (regarding transitional deferred tax attributes) shall apply to the substitute loss carry-forward deferred tax asset.

(8)(a) Where a deferred tax asset which is attributable to a qualifying loss of a constituent entity has been recorded for a fiscal year at a rate lower than the minimum tax rate, provided that the constituent entity can demonstrate that the deferred tax asset is attributable to a qualifying loss, it may be recalculated at the minimum tax rate in the same fiscal year and the total deferred tax adjustment amount shall be reduced accordingly.

(8)(b) For the purposes of determining the total deferred tax adjustment amount for a fiscal year, the reversal of a loss deferred tax asset 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.

(9) Subject to subsection (10), a deferred tax liability that is not reversed or has not been paid within 5 years of the end of the fiscal year in which it arose shall be recaptured to the extent it was taken into account in the total deferred tax adjustment amount of a constituent entity, and for this purpose:

  • (9)(a) the recaptured deferred tax liability for the current fiscal year is the amount of the increase in the category of deferred tax liability that was included in the total deferred tax adjustment amount in the fifth year preceding the current fiscal year that has not reversed by the end of the last day of the current fiscal year, and
  • (9)(b) the amount of the recaptured deferred tax liability determined for the current fiscal year shall be treated as a reduction to the covered taxes in the fifth preceding fiscal year and the effective tax rate and top-up tax of that fiscal year shall be recalculated in accordance with section 111AF (additional top-up tax).

(10)(a) Subject to paragraph (b) where a deferred tax liability is a recapture exception accrual, it shall not be recaptured in accordance with subsection (9).

(10)(b) Where a constituent entity has a general ledger account or aggregate deferred tax liability category, as the case may be, that includes one or more deferred tax liabilities that are not a recapture exception accrual, the general ledger account or the entire aggregate deferred tax liability category, as the case may be, shall not be recaptured in accordance with paragraph (a).

(11) For the purposes of subsection (9), subject to subsections (12) and (13), categories of deferred tax liability for an entity shall be determined:

  • on an item-by-item basis, where deferred tax liabilities related to each single asset or liability are tracked individually,
  • on a general ledger account basis, where deferred tax liabilities related to all the assets or liabilities encompassed in a general ledger account are grouped and tracked as a single deferred tax liability category, or
  • on an aggregate deferred tax liability category basis.

(12) For the purposes of subsections (9) and (11), where categories of deferred tax liability are determined on an aggregate deferred tax liabilities category basis, deferred tax liabilities related to:

  • non-amortisable intangible assets, including goodwill,
  • amortisable intangible assets with an accounting life of more than 5 years, or
  • receivables from, and payables to, a connected person,

as the case may be, shall only be aggregated up to the general ledger account and cannot be aggregated with other general ledger accounts.

(13) For the purposes of subsections (9) and (11), an aggregate deferred tax liability category shall not include:

  • any general ledger account that on a standalone basis would always generate only deferred tax assets, or
  • deferred tax liabilities relating to swinging accounts.

(14)(a) For the purposes of subsection (9), a constituent entity may use the FIFO methodology to determine whether a deferred tax liability has reversed where:

  • the deferred tax liability is determined in relation to a single general ledger account,
  • the deferred tax liability is determined in relation to an aggregate deferred tax liability category that consists solely of deferred tax liabilities determined in relation to general ledger accounts with a similar reversal trend, or
  • the deferred tax liability and other deferred tax liabilities are aggregated within an aggregate deferred tax liability category without a similar reversal trend, but the constituent entity can demonstrate that the FIFO methodology nevertheless results in appropriate recapture of deferred tax liabilities to the extent their reversal trend extends beyond 5 years.

(14)(b) For the purposes of paragraph (a), deferred tax liabilities related to an aggregate deferred tax liability category are considered to have a similar reversal trend if such deferred tax liabilities fully reverse within a two-year period of each other.

(15) For the purposes of subsection (9), for any aggregate deferred tax liability category for which a constituent entity chooses not to use, or for which it cannot use, the FIFO methodology, the LIFO methodology shall be used to determine whether a deferred tax liability has reversed.

(16) Unless otherwise expressly provided for under this Part, where under this Part the qualifying income or loss of a constituent entity related to an asset or a liability, as the case may be, is calculated based on a value of the asset or the liability (in this subsection referred to as the “GloBE carrying value”) which differs from the value of the asset or liability as recorded in the financial statements used to determine the qualifying income or loss of the constituent entity, the constituent entity shall, for the purposes of this section, determine:

  • the deferred tax assets and liabilities relating to the asset or liability by reference to the GloBE carrying value, and
  • the total deferred tax adjustment amount using a deferred tax expense determined:
    1. by reference to the deferred tax assets and liabilities calculated in accordance with paragraph (a), and
    2. in accordance with the accounting standard used to calculate the deferred tax expense recorded in the financial statements used to determine the qualifying income or loss of the constituent entity.

Relevant Date: Finance Act 2024