Finance (No. 2) Act 2023 · Updated to 29 Dec 2023 · Chapter 6
171. Mechanism to address temporary differences
Feedback & supportThe Total Deferred Tax Adjustment Amount for a Constituent Entity for the Financial Year is equal to the deferred tax expense accrued in its financial accounts if the applicable tax rate is below the Minimum Rate or, in any
Total Deferred Tax Adjustment Amount
“Total Deferred Tax Adjustment Amount” means an amount as determined under subsection 171(1);
other case, such deferred tax expense recast at the Minimum
Rate, with respect to Covered Taxes for the Financial Year subject to the adjustments provided in subsections (2)
Covered Taxes
“Covered Taxes” means— (a) taxes recorded in the financial accounts of a Constituent Entity with respect to its income or profits or its share of the income or profits of a Constituent Entity in which it owns an Ownership Interest; (b) taxes on distributed profits, deemed profit distributions, and non-business expenses imposed under an Eligible Distribution Tax System; (c) taxes imposed in lieu of a generally applicable corporate income tax; and (d) taxes levied by reference to retained earnings and corporate equity, including a Tax on multiple components based on income and equity, Finance (No. 2) but does not include any amount of— (a) Multinational Top-up Tax accrued by a Parent Entity under a Qualified Income Inclusion Rule; (b) Qualified Domestic Top-up Tax accrued by a Constituent Entity; (c) taxes attributable to an adjustment made by a Constituent Entity as a result of the application of a set of rules equivalent to Articles 2.4 to 2.6 of the GloBE Model Rules (including any provisions of the GloBE Model Rules associated with those articles) that are included in the domestic law of a jurisdiction and that are implemented and administered in a way that is consistent with the outcomes provided for under the GloBE Model Rules provided that such jurisdiction does not provide any benefits that are related to such rules; (d) a Disqualified Refundable Imputation Tax; (e) taxes paid by an insurance company in respect of returns to policy holders;
and (3) and excluding—
the amount of deferred tax expense with respect to items excluded from the computation of GloBE
Income or Loss under Chapter 5 of this Part;
the amount of deferred tax expense with respect to
Disallowed Accruals and Unclaimed Accruals;
the impact of a valuation adjustment or accounting recognition adjustment with respect to a deferred tax asset;
the amount of deferred tax expense arising from a re-measurement with respect to a change in the applicable domestic tax rate; and
the amount of deferred tax expense with respect to the generation and use of tax credits.
The Total Deferred Tax Adjustment Amount is adjusted by—
increasing it by the amount of any Disallowed Accrual or Unclaimed Accrual paid during the Financial
Year;
increasing it by the amount of any Recaptured Deferred
Tax Liability determined in a preceding Financial
Year which has been paid during the Financial Year;
and
reducing it by the amount that would be a reduction to the Total Deferred Tax Adjustment Amount due to recognition of a loss deferred tax asset for a current year tax loss, where a loss deferred tax asset has not been recognised because the recognition criteria are not met.
Finance (No. 2)
A deferred tax asset that has been recorded at a rate lower than the Minimum Rate may be recast at the Minimum Rate in the Financial Year such deferred tax asset becomes a GloBE
Loss, if the taxpayer can demonstrate that the deferred tax asset is attributable to a GloBE Loss and the Total Deferred
Tax Adjustment Amount in subsection (2) is reduced by the amount that a deferred tax asset is increased due to being recast under this subsection.
To the extent a deferred tax liability, that is not a
Recapture Exception Accrual, is taken into account under this section and such amount is not paid within the five subsequent Financial Years, the amount must be recaptured pursuant to this section.
The Amount of the Recaptured Deferred Tax Liability determined for the current Financial Year shall be treated as a reduction to Covered Taxes in the fifth preceding Financial
Financial Year
“Financial Year” means an accounting period with respect to which the Ultimate Parent Entity of the Multinational Enterprise Group prepares its Consolidated Financial Statements and in the case of Consolidated Financial Statements as defined in paragraph (d) of the definition of “Consolidated Financial Statements”, Financial Year means the calendar year;
Year and the Effective Tax Rate and Multinational Top-up
Effective Tax Rate
“Effective Tax Rate” means, in respect of a Multinational Enterprise Group, the sum of the Adjusted Covered Taxes of each Constituent Entity located in the jurisdiction divided by the Net GloBE Income of the jurisdiction for the Financial Year;
Tax of such Financial Year shall be recalculated under the rules of subsection 181(1).
The Recaptured Deferred Tax Liability for the current
Financial Year is the amount of the increase in a category of deferred tax liability that was included in the Total Deferred
Tax Adjustment Amount in the fifth preceding Financial Year that has not reversed by the end of the last day of the current
Financial Year, unless such amount relates to a Recapture
Exception Accrual.
For the purposes of this section—
“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; and
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 the tax expense accrued attributable to changes in associated deferred tax liabilities, in respect of—
cost recovery allowances on tangible assets;
the cost of a licence or similar arrangement from the government for the use of immovable property or exploitation of natural resources that entails significant investment in tangible assets;
research and development expenses;
de-commissioning and remediation expenses;
fair value accounting on unrealised net gains;
foreign currency exchange net gains;
insurance reserves and insurance policy deferred acquisition costs;
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; and
additional amounts accrued as a result of accounting principle changes with respect to categories under paragraphs (a) to (h);
“Unclaimed Accrual” means any increase in a deferred tax liability recorded in the financial accounts of a Constituent
Entity for a Financial Year that is not expected to be paid within the time period set forth in subsections (4) to (6) and for which the Filing Constituent Entity makes an Annual
Election not to include in Total Deferred Tax Adjustment
Amount for such Financial Year.
Finance (No. 2)