111X. Total deferred tax adjustment amount

(1) In this section—

“disallowed accrual” means—

(a) any movement in deferred tax expense accrued in the financial accounts of a constituent entity which relates to an uncertain tax position, and

(b) any movement in deferred tax expense accrued in the financial accounts of a constituent entity which relates to distributions from a constituent entity;

“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—

(a) cost recovery allowances on tangible assets,

(b) 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,

(c) research and development expenses,

(d) de-commissioning and remediation expenses,

(e) fair value accounting on unrealised net gains,

(f) foreign currency exchange net gains,

(g) insurance reserves and insurance policy deferred acquisition costs,

(h) 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

(i) additional amounts accrued as a result of accounting principle changes with respect to any item referred to in subparagraphs (a) to (h);

“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 period referred to in subsection (9), 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.

(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—

(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

(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) The total deferred tax adjustment amount of a constituent entity for a fiscal year shall be increased by—

(a) any amount of disallowed accrual or unclaimed accrual paid during the fiscal year, and

(b) 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—

(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,

(b) the amount of deferred tax expense with respect to disallowed accruals and unclaimed accruals,

(c) the impact of a valuation adjustment or accounting recognition adjustment with respect to a deferred tax asset,

(d) the amount of deferred tax expense arising from a re-measurement with respect to a change in the applicable domestic tax rate, and

(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.

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

(i) the tax laws of a jurisdiction require that foreign source income offset domestic source losses before foreign tax credits may be applied against tax imposed on foreign source income,

(ii) the constituent entity has a domestic tax loss in that jurisdiction that is fully or partially offset by foreign source income, and

(iii) 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.

(b) Subject to paragraph (c), for the purposes of paragraph (a), the amount of substitute loss carry-forward deferred tax asset is equal to the lesser of—

(i) 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

(ii) 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.

(c) Subsection (5)(a) and section 111AW(2) shall apply to the substitute loss carry-forward deferred tax asset.

(8) 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.

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

(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

(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 year preceding the current fiscal year and the effective tax rate and top-up tax of that fiscal year shall be recalculated in accordance with section 111AF.

(10) Where a deferred tax liability is a recapture exception accrual, it shall not be recaptured in accordance with subsection (9).