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(1) In this section—

“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—

(a) 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

(b) 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.

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(e) ^[6]>For the purposes^<[6][6]>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^<[6] of determining the total deferred tax adjustment amount, as set out in section 111X, the reversal of a loss deferred tax asset, as set out in section 111X, 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.

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(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.

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(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:

(a) a deferred tax asset that is attributable to a governmental arrangement concluded or amended after 30 November 2021;

(b) 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;

(c) 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—

(a) a governmental arrangement concluded or amended after 18 November 2024,

(b) 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

(c) 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—

(a) a governmental arrangement, or

(b) 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.

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