111P. Adjustments to determine qualifying income or loss

(1) In this section—

“accounting functional currency” means the functional currency used to determine the constituent entity’s financial accounting net income or loss;

“accrued pension expense” means the difference between the amount of pension liability expense or pension liability income included in the financial accounting net income or loss in relation to a pension fund and the amount contributed by the constituent entity to a pension fund for the fiscal year and the amount of the adjustment referred to in subsection (2)(i) shall be based on the following formula—

((Accrued Income or Accrued Expense) + (Contribution)) × (-1)

where—

“additional tier one capital” means an instrument issued by a constituent entity pursuant to prudential regulatory requirements;

“arm’s length principle” means the principle under which transactions between constituent entities must be recorded by reference to the conditions that would have been obtained between independent enterprises in comparable transactions and under comparable circumstances;

“asymmetric foreign currency gain or loss” means a foreign currency gain or loss of an entity whose accounting and tax functional currencies are different and that is—

(a) included in the calculation of the taxable income or loss of a constituent entity and attributable to fluctuations in the exchange rate between the accounting functional currency and the tax functional currency of the constituent entity,

(b) included in the calculation of the financial accounting net income or loss of a constituent entity and attributable to fluctuations in the exchange rate between the accounting functional currency and the tax functional currency of the constituent entity,

(c) included in the calculation of the financial accounting net income or loss of a constituent entity and attributable to fluctuations in the exchange rate between a third foreign currency and the accounting functional currency of the constituent entity, and

(d) attributable to fluctuations in the exchange rate between a third foreign currency and the tax functional currency of the constituent entity, irrespective of whether that third foreign currency gain or loss is included in the taxable income;

“excluded dividend” means, subject to subsection (14), a dividend or other distribution received or accrued in respect of an ownership interest, other than a dividend or other distribution received or accrued in respect of—

(a) an ownership interest—

(i) held by a group in an entity that carries rights to less than 10 per cent of the profits, capital or reserves, or voting rights of that entity at the date of the distribution or disposition (in this section referred to as a ‘portfolio shareholding’), and

(ii) that is economically owned by the constituent entity for less than one year at the date of the distribution,

or

(b) an ownership interest in an investment entity that is subject to an election pursuant to section 111AV,

but where a dividend or other distribution is received or accrued in respect of an ownership interest which is a financial instrument that has both equity and debt components under the acceptable financial accounting standard, only the amounts received or accrued in respect of the equity component of the ownership interest shall be treated as an excluded dividend;

“excluded equity gain or loss” means a gain or loss, included in the financial accounting net income or loss of a constituent entity, arising from—

(a) changes in the fair value of an ownership interest, other than a portfolio shareholding,

(b) an ownership interest that is included under the equity method of accounting, or

(c) the disposal of an ownership interest, other than the disposal of a portfolio shareholding;

“included revaluation method gain or loss” means a net gain or loss, increased or decreased by any associated covered taxes for the fiscal year, arising from the application of an accounting method or practice that, in respect of all property, plant and equipment—

(a) periodically adjusts the carrying value of such property, plant and equipment to its fair value,

(b) records the changes in value arising from the adjustment referred to in paragraph (a) in other comprehensive income as gain or loss, and

(c) does not subsequently report the gain or loss accrued in other comprehensive income referred to in paragraph (b) through profit and loss;

“intra-group financing arrangement” means a financing arrangement whereby one or more constituent entities directly or indirectly provide credit to, or otherwise makes an investment in, one or more other constituent entities of the same group;

“net taxes expense” means, in respect of a constituent entity and a fiscal year, the net amount of—

(a) covered taxes accrued as an expense and any current and deferred covered taxes included in the income tax expense, including covered taxes on income that is excluded from the qualifying income or loss calculation,

(b) deferred tax assets attributable to a loss accrued for the fiscal year,

(c) qualified domestic top-up taxes accrued as an expense,

(d) taxes arising pursuant to the rules of the Directive or, as regards third country jurisdictions, the OECD Model Rules, accrued as an expense,

(e) disqualified refundable imputation taxes accrued as an expense, and

(f) taxes accrued by an insurance company in respect of returns to policyholders to the extent that subsection (10)(a) applies in relation to those taxes,

in the financial accounting net income or loss;

“policy disallowed expense” means, in respect of a fiscal year, an expense accrued by the constituent entity for—

(a) illegal payments, or

(b) fines and penalties that are equal to or greater than €50,000, or an equivalent amount in the functional currency in which the financial accounting net income or loss of the constituent entity is calculated,

in the financial accounting net income or loss;

“prior period errors and changes in accounting principles” means a change in the opening equity of a constituent entity at the beginning of a fiscal year that is attributable to—

(a) a correction of an error in the determination of the financial accounting net income or loss of the constituent entity in a previous fiscal year that affected the income or expenses that may be included in the calculation of the qualifying income or loss of the constituent entity in that previous fiscal year, except to the extent such correction of an error resulted in a material decrease of a liability for covered taxes subject to section 111AB, or

(b) a change in accounting principles or policy that affected the income or expenses included in the calculation of the qualifying income or loss of the constituent entity;

“tax functional currency” means the functional currency used to determine the constituent entity’s taxable income or loss for a covered tax in the jurisdiction in which it is located;

“third foreign currency” means a currency that is not the constituent entity’s tax functional currency or accounting functional currency.

(2) To determine the qualifying income or loss of a constituent entity in respect of a fiscal year, the financial accounting net income or loss of that constituent entity shall be adjusted by the following:

(a) net taxes expense;

(b) excluded dividends;

(c) excluded equity gains or losses;

(d) included revaluation method gains or losses;

(e) gains or losses from the disposal of assets and liabilities excluded pursuant to section 111AN;

(f) asymmetric foreign currency gains or losses;

(g) policy disallowed expenses;

(h) prior period errors and changes in accounting principles;

(i) accrued pension expenses; and

(j) the net amount of the additions and reductions to qualifying income for the fiscal year as set out in section 111W.

(3) (a) On the making of an election by a filing constituent entity, a constituent entity shall, in the calculation of qualifying income or loss of the constituent entity in respect of a fiscal year, substitute the amount allowed as a deduction in the calculation of its taxable income in the jurisdiction where it is located for the amount expensed in its financial accounts for a cost or expense of such constituent entity that was paid with stock-based compensation.

(b) Where a stock-option granted by a constituent entity expires without being exercised, the amount of stock-based compensation cost or expense that has been deducted from the financial accounting net income or loss of the constituent entity in the calculation of its qualifying income or loss for all previous fiscal years in respect of that stock-option shall be included in the calculation of qualifying income or loss of the constituent entity in respect of the fiscal year in which that option has expired.

(c) Where part of the amount of stock-based compensation cost or expense has been recorded in the financial accounts of the constituent entity in fiscal years prior to the fiscal year in which the election referred to in paragraph (a) is made, an amount equal to the difference between the total amount of stock-based compensation cost or expense that has been deducted in the calculation of its qualifying income or loss in those previous fiscal years and the total amount of stock-based compensation cost or expense that would have been deducted in the calculation of its qualifying income or loss in those previous fiscal years if the election had been made in such fiscal years, shall be included in the calculation of the qualifying income or loss of the constituent entity for that fiscal year.

(d) The election referred to in paragraph (a) shall be made in accordance with section 111AAAD and shall apply to all constituent entities located in the same jurisdiction for the fiscal year in which the election is made and all subsequent fiscal years.

(e) Where the election referred to in paragraph (a) is withdrawn, the amount of unpaid stock-based compensation cost or expense deducted pursuant to the election that exceeds the financial accounting expense accrued shall be included in the calculation of the qualifying income or loss of the constituent entity in the fiscal year in which the election is withdrawn.

(4) (a) Any transaction between constituent entities of an MNE group located in different jurisdictions that is not—

(i) recorded in the same amount in the financial accounts of both constituent entities in the calculation of financial accounting net income or loss, or

(ii) consistent with the arm’s length principle,

shall be adjusted in the calculation of qualifying income or loss of the constituent entities so as to be in the same amount and consistent with the arm’s length principle.

(b) A loss from a sale or transfer of an asset between 2 constituent entities located in the same jurisdiction that is not recorded consistently with the arm’s length principle shall be adjusted in the calculation of qualifying income or loss of the constituent entities based on the arm’s length principle if that loss is included in the calculation of the qualifying income or loss of a constituent entity for a fiscal year.

(5) (a) A qualified refundable tax credit or marketable transferable tax credit shall be treated as income in the calculation of qualifying income or loss of a constituent entity for a fiscal year.

(b) A tax credit which is not a qualified refundable tax credit or a marketable transferable tax credit shall not be treated as income in the calculation of qualifying income or loss of a constituent entity for a fiscal year.

(c) Where a qualified refundable tax credit or marketable transferable tax credit is related to the acquisition, or construction, of an asset and the constituent entity which has the benefit of the tax credit—

(i) has an accounting policy of reducing the carrying value of the asset in respect of such a tax credit, or

(ii) recognises the tax credit as deferred income over the productive life of that asset,

then, the constituent entity concerned may follow the same accounting policy for the purposes of determining the qualifying income or loss of the constituent entity for a fiscal year.

(6) (a) On the making of an election by a filing constituent entity, gains and losses in respect of assets and liabilities that are subject to fair value or impairment accounting in the consolidated financial statements for a fiscal year shall be determined on the basis of the realisation principle in the calculation of qualifying income or loss of a constituent entity.

(b) Gains or losses which result from applying fair value or impairment accounting in respect of an asset or a liability shall be excluded from the calculation of the qualifying income or loss of a constituent entity for a fiscal year under paragraph (a).

(c) The carrying value of an asset or a liability for the purpose of determining a gain or a loss under paragraph (a) shall be the carrying value adjusted for accumulated depreciation on the later of—

(i) the time the asset was acquired, or the liability was incurred, or

(ii) the first day of the fiscal year in respect of which the election is made.

(d) The election referred to in paragraph (a) shall be made in accordance with section 111AAAD and shall apply to all constituent entities located in a jurisdiction to which the election is made unless the filing constituent entity chooses to limit the election to the tangible assets of the constituent entities or to investment entities.

(e) Where the election referred to in paragraph (a) is withdrawn in respect of a fiscal year, an amount equal to the difference between—

(i) the fair value of the asset or liability, and

(ii) the carrying value adjusted for accumulated depreciation of the asset or liability on the first day of the fiscal year in respect of which the withdrawal is made,

shall be—

(I) included, if the fair value exceeds the carrying value adjusted for accumulated depreciation, or

(II) deducted, if the carrying value adjusted for accumulated depreciation exceeds the fair value,

in the calculation of qualifying income or loss of the constituent entities in respect of that fiscal year.

(7) (a) On the making of an election by a filing constituent entity, the qualifying income or loss of a constituent entity arising from the disposal of local tangible assets by that constituent entity to entities other than entities who are members of the same group in respect of a fiscal year shall be adjusted in accordance with this subsection.

(b) The net gain arising from the disposal of local tangible assets referred to in paragraph (a) in the fiscal year in which the election referred to in that paragraph is made shall be offset against any net loss of a constituent entity located in the local tangible asset jurisdiction arising from the disposal of local tangible assets in the fiscal year in which the election is made and in the 4 fiscal years prior to that fiscal year (in this subsection referred to as ‘the 5 year period’).

(c) The net gain referred to in paragraph (b) shall be offset against the net loss, if any, referred to in that paragraph that has arisen in the earliest fiscal year of the 5 year period in priority to later fiscal years, with any remaining net gain being carried forward and offset against the net loss, if any, in subsequent fiscal years of the 5 year period.

(d) Where, after the application of paragraph (b), there is an amount of net gain which remains unrelieved, such amount shall be spread evenly over the 5 year period for the purpose of the calculation of the qualifying income or loss of each constituent entity located in the local tangible asset jurisdiction that has made a net gain from the disposal of local tangible assets in the fiscal year in which the election referred to in paragraph (a) is made.

(e) The amount of net gain referred to in paragraph (d) which is to be allocated to each constituent entity, shall be calculated as follows:

NG × (NGCE / NGCES)

where—

(f) Where no constituent entity that has made a net gain from the disposal of local tangible assets in the fiscal year for which the election referred to in paragraph (a) is made is located in the local tangible asset jurisdiction in a fiscal year that occurs during the 5 year period, the residual amount of net gain referred to in paragraph (d) shall be allocated equally to each constituent entity in that jurisdiction in that fiscal year.

(g) Any adjustments made pursuant to this subsection for a fiscal year preceding the fiscal year in respect of which the election referred to in paragraph (a) is made shall be subject to adjustments in accordance with section 111AF.

(h) The election referred to in paragraph (a) shall be made annually in accordance with section 111AAAD.

(8) Any expense related to an intra-group financing arrangement shall not be taken into consideration in the calculation of qualifying income or loss of a constituent entity for a fiscal year where—

(a) the constituent entity is a low-taxed constituent entity or would have been low-taxed if the expenses had not accrued to the constituent entity,

(b) it is reasonable to assume that, over the expected duration of the intra-group financing arrangement, the intra-group financing arrangement will increase the amount of expenses taken into account in the calculation of the qualifying income or loss of that constituent entity, without resulting in a commensurate increase in the taxable income of the constituent entity providing the credit or making the investment (in this subsection referred to as the ‘counterparty’), and

(c) the counterparty is located in a jurisdiction that is not a low-tax jurisdiction or in a jurisdiction that would not have been low-taxed if the income related to the expense had not been accrued to the counterparty.

(9) (a) On the making of an election by a filing constituent entity, an ultimate parent entity shall apply its consolidated accounting treatment to eliminate income, expense, gains and losses from transactions between constituent entities that are—

(i) located in the same jurisdiction, and

(ii) included in a tax consolidation group,

for the purpose of calculating the net qualifying income or loss of those constituent entities for a fiscal year.

(b) In the fiscal year in respect of which the election referred to in paragraph (a) is made or withdrawn, appropriate adjustments shall be made so that items of qualifying income or loss are not taken into consideration more than once or omitted as a result of such election or withdrawal.

(c) For the purposes of this subsection, constituent entities are included in a tax consolidation group if under the law of a jurisdiction the income, expenses, gains and losses of those constituent entities may for tax purposes be aggregated, surrendered to each other or otherwise shared or transferred between them as a result of a connection between those constituent entities.

(d) The election referred to in paragraph (a) shall be made in accordance with section 111AAAD.

(10) An insurance company shall—

(a) exclude from the calculation of its qualifying income or loss, any amount charged to policyholders for taxes paid by the insurance company in respect of returns to the policyholders, and

(b) include in the calculation of its qualifying income or loss any returns to policyholders that are not reflected in its financial accounting net income or loss to the extent that the corresponding increase or decrease in liability to the policyholders is reflected in its financial accounting net income or loss.

(11) (a) Any amount that is recognised as a decrease in the equity of a constituent entity for a fiscal year and is the result of distributions made or due in respect of additional tier one capital shall be treated as an expense in the calculation of its qualifying income or loss for that fiscal year.

(b) Any amount that is recognised as an increase in the equity of a constituent entity for a fiscal year and is the result of distributions received or due to be received in respect of additional tier one capital held by the constituent entity shall be included in the calculation of its qualifying income or loss for that fiscal year.

(12) (a) A financial instrument issued by one constituent entity and held by another constituent entity in the same MNE group or large-scale domestic group shall be classified as debt or equity consistently for both the issuer and holder of the financial instrument and accounted for accordingly in the calculation of their qualifying income or loss.

(b) Where constituent entities in the same MNE group or large-scale domestic group have classified a financial instrument differently, the classification adopted by the issuer of the financial instrument shall be applied by the issuer and the holder of the financial instrument and accounted for accordingly in the calculation of their qualifying income or loss.

(13) On the making of an election by a filing constituent entity, foreign exchange gains or losses included in a constituent entity’s financial accounting net income or loss shall be treated as an excluded equity gain or loss to the extent that—

(a) such foreign exchange gains or losses are attributable to hedging instruments that hedge the currency risk in ownership interests other than portfolio shareholdings,

(b) such foreign exchange gains or losses are recognised in other comprehensive income in the consolidated financial statements, and

(c) the hedging instrument is considered an effective hedge under the acceptable or authorised financial accounting standard used in the preparation of the consolidated financial statements.

(14) On the making of an election by a filing constituent entity, a constituent entity shall include in the calculation of its qualifying income or loss for a fiscal year all dividends received by the constituent entity with respect to a portfolio shareholding.

(15) (a) Where a movement in an insurance company’s reserves economically matches an excluded dividend, net of any investment management fee, from a security held by the insurance company on behalf of a policyholder, the movement in the insurance reserves shall not be allowed as an expense in the calculation of the constituent entity’s qualifying income or loss.

(b) Where a movement in an insurance company’s reserves is related to an excluded dividend or an excluded equity gain or loss from a security held by the insurance company on behalf of a policyholder, it shall not be allowed as a deduction in the calculation of the constituent entity’s qualifying income or loss.

(16) On the making of an election by a filing constituent entity, the amount of a debt release included in the financial accounting net income or loss of a constituent entity shall be excluded from the calculation of the constituent entity’s qualifying income or loss, where the debt

release—

(a) is undertaken under statutorily provided insolvency or bankruptcy proceedings, that are supervised by a court or other judicial body in the relevant jurisdiction or where an independent insolvency administrator is appointed,

(b) arises pursuant to an arrangement where one or more creditors is a person not connected with the debtor, and it is reasonable to assume that the debtor would be insolvent within 12 months but for the release of the debt under the arrangement, or

(c) subject to subsection (17) and where paragraph (a) or (b) do not apply, occurs when the debtor’s liabilities are in excess of the fair market value of its assets determined immediately before the debt release.

(17) An amount of a debt release included in the financial accounting net income or loss of a constituent entity shall only be excluded from the calculation of the constituent entity’s qualifying income or loss in accordance with paragraph (c) of subsection (16) with respect to debts owed to a creditor that is a person that is not connected with the debtor and only to the extent of the lesser of—

(a) the excess of the debtor’s liabilities over the fair market value of its assets determined immediately before the debt release, or

(b) the reduction in the debtor’s attributes under the tax laws of the debtor’s jurisdiction resulting from the debt release.