154 Exclusion of qualifying intra-group financing arrangement expenses
(1) Where—
(a) the underlying profits of the member of a multinational group for an accounting period reflect expenses attributable to a qualifying intra-group financing arrangement that could be reasonably expected, over the expected duration of the arrangement, to—
(i) increase the amount of expenses taken into account in calculating the member’s underlying profits, and
(ii) not result in a corresponding increase in the taxable income of a member of the group that is a high tax member for that period,
(b) the member is a low tax member for that period, and
(c) the expenses are not required to be included as a result of section 155,
the member’s underlying profits for that period are to be adjusted to exclude those expenses.
(2) In this section—
“intra-group financing arrangement” means an arrangement between two or more members of a multinational group under which a member (member A) directly or indirectly provides credit or otherwise makes an investment in another member (member B);
an intra-group financing arrangement is “qualifying” if member A is a high tax member and member B is a low tax member;
a member of a multinational group is a “low tax member” in an accounting period if the effective tax rate for the standard members of the group located in the member’s territory for that period would, ignoring intra-group financing arrangements, be less than 15%;
a member of a multinational group is a “high tax member” in an accounting period if the effective tax rate for the standard members of the group located in the member’s territory would, ignoring intra-group financing arrangements, be 15% or more.
(1) Where amounts recognised by a member of a multinational group as a decrease to its equity in an accounting period that is attributable to distributions paid or payable in respect of qualifying tier one capital issued by the member are not reflected in its underlying profits for that period as expenses, those profits are to be adjusted to reflect those amounts as expenses.
(2) Where amounts recognised by a member of a multinational group as an increase to its equity in an accounting period that is attributable to distributions received or receivable in respect of qualifying tier one capital held by the member are not reflected in its underlying profits for that period as income, those profits are to be adjusted to reflect those amounts as income.
(3) In this Part “qualifying tier one capital” means an instrument issued by an entity pursuant to regulatory requirements applicable to the banking or insurance sector that is convertible to equity or written down if a pre-specified trigger event occurs and that has other features which are designed to aid loss absorbency in the event of a financial crisis.
(1) Where the underlying profits of a member of a multinational group for an accounting period reflect the inclusion of international shipping profits, the member’s underlying profits for that period are to be adjusted to exclude those profits.
(2) The member’s international shipping profits for the period are the sum of the member’s—
(a) core international shipping profits (see section 157), and
(b) ancillary international shipping profits (see section 158).
(3) Subsection (1) does not apply if, in the period, the strategic and commercial management of any ship used in international shipping giving rise to those profits is not effectively carried on within the territory in which the member is located.
(4) In this section, and in sections 157 and 158—
“international shipping” means the transportation of passengers or cargo by ship between different territories;
“transportation” does not include towing or dredging.
(1) A member’s core international shipping profits for a period are the member’s core international shipping revenue for the period less the member’s core international shipping costs for the period.
(2) A member’s core international shipping revenue is all revenue earned by the member in consideration for the member’s performance of core international shipping activities.
(3) A member’s core international shipping costs are the sum of—
(a) all costs incurred by the member that are directly attributable to the member’s performance of core international shipping activities, and
(b) all costs incurred by the member that are indirectly attributable to the member’s performance of core international shipping activities multiplied by the core international shipping factor.
(4) The core international shipping factor is the member’s core international shipping revenue divided by all revenue earned by the member from any source.
(5) An activity is a core international shipping activity if it is of a type referred to in subsection (6).
(6) The types of activity are—
(a) carrying out international shipping, whether alone or in conjunction with another person;
(b) leasing as lessor a ship to be used for international shipping, where—
(i) the ship is leased fully equipped, crewed and supplied, or
(ii) the lessee is a member of the same multinational group and the purpose of the lease is to allow that member to carry out a core international shipping activity;
(c) arranging for another person to carry out international shipping under slot-chartering arrangements;
(d) the sale of a ship used in international shipping, where the ship has been held for use by the member for at least one year.
(1) A member’s ancillary international shipping profits for a period are the member’s ancillary international shipping revenue for the period, less—
(a) the member’s ancillary international shipping costs for the period, and
(b) the member’s ancillary international shipping profit cap adjustment for the period.
(2) A member’s ancillary international shipping revenue is all revenue earned by the member in consideration for the member’s performance of ancillary international shipping activities.
(3) A member’s ancillary international shipping costs are the sum of—
(a) all costs incurred by the member that are directly attributable to the member’s performance of ancillary international shipping activities, and
(b) all costs incurred by the member that are indirectly attributable to the member’s performance of ancillary international shipping activities multiplied by the ancillary international shipping factor.
(4) The ancillary international shipping factor is the ancillary international shipping revenue divided by all revenue earned by the member from any source.
(5) An activity is an ancillary international shipping activity if—
(a) it is of a type referred to in subsection (6), and
(b) it is performed primarily in connection with international shipping.
(6) The types of activity are—
(a) leasing as lessor a ship to be used for international shipping, where—
(i) the ship is not leased fully equipped, crewed and supplied,
(ii) the lessee is a third party, and
(iii) the lease has not been in effect for a period exceeding three years, or entered into on terms that would result in the lease being in effect for such a period;
(b) selling tickets for a domestic leg of an international voyage carried out by a third party;
(c) leasing as lessor a container of a kind used for international shipping;
(d) storing such a container for a short period, including by leasing as lessor space for the storage of such a container by another person;
(e) providing support services (see subsection (7)(e)) to persons engaged in international shipping;
(f) holding assets necessary for the member to carry out a core international shipping activity;
(g) the disposal of emissions allowances it is necessary for the member to hold in order to carry out international shipping.
(7) For the purposes of subsection (6)—
(a) “third party”, in relation to a member of a multinational group, means a person that is not—
(i) the member, or
(ii) a member of the same multinational group;
(b) “domestic leg of an international voyage” means the transportation of passengers or cargo by ship between two locations in a single territory in circumstances where the ship’s overall voyage has proceeded from or will continue to a different territory;
(c) a lease of a ship is in effect for the period in which the practical effect of that lease and any associated arrangements (including any other lease) is that a person is in the position of a lessee of the ship, whether or not the lease or any other document expressly provides that the person is a lessee of the ship for the whole of that period;
(d) “lessee”, in relation to a ship, means the person referred to in paragraph (c);
(e) “support services” means engineering, maintenance, cargo handling, catering and customer relations services.
(8) The member’s ancillary international shipping profit cap adjustment is to be calculated by taking the following steps—
Step 1
Determine the “cap threshold” in accordance with Steps 2 to 5.
Step 2
Calculate the core international shipping profits for each member of the group in the territory.
Step 3
Add together the amounts calculated at Step 2.
Step 4
If the result of Step 3 is nil or less, the cap threshold is nil. Otherwise, proceed to Step 5.
Step 5
Divide the result of Step 3 by two. This is the cap threshold.
Step 6
Calculate the ancillary international shipping profits for each member of the group in the territory (ignoring the requirement to subtract the ancillary international shipping profit cap adjustment).
Step 7
Add together the amounts calculated at Step 6.
Step 8
Subtract the cap threshold from the result of Step 7. If the result is nil or less, the member’s ancillary international shipping profit cap adjustment is nil. Otherwise, proceed to Step 9.
Step 9
If the ancillary international shipping profits for the member calculated at Step 6 are nil or less, the member’s ancillary international shipping profit cap adjustment is nil. Otherwise, proceed to Step 10.
Step 10
Add together any positive ancillary international shipping profits calculated at Step 6.
Step 11
Divide the ancillary international shipping profits for the member calculated at Step 6 by the result of Step 10.
Step 12
Multiply the result of Step 8 by the result of Step 11. This is the member’s ancillary international shipping profit cap adjustment.
159 Permanent establishment income and expense attribution
(1) Where a member of a multinational group is a permanent establishment falling within paragraph (a) of section 232(2) (entity treated as permanent establishment in accordance with tax treaty), its underlying profits are to be adjusted so that they —
(a) reflect all amounts of income and expense that are attributable to it in accordance with the tax treaty under which it is treated as a permanent establishment, and
(b) do not reflect amounts attributable to its main entity in accordance with that treaty.
(2) Where a member of a multinational group is a permanent establishment falling within paragraph (b) of section 232(2) (permanent establishment taxed on similar basis to residents in absence of tax treaty), its underlying profits are to be adjusted so that they —
(a) reflect all amounts of income and expense that are attributable to it in accordance with the law of the territory in which the member is located, and
(b) do not reflect amounts attributable to its main entity in accordance with the law of that territory.
(3) Where a member of a multinational group is a permanent establishment falling within paragraph (c) of section 232(2) (permanent establishment located in territory without corporate income tax), its underlying profits are to be adjusted so that they —
(a) reflect all amounts of income and expense that would be attributed to it in accordance with Article 7 of the OECD tax model, and
(b) do not reflect amounts that would be attributed to its main entity in accordance with the OECD tax model.
(4) Amounts are to be reflected (or, as the case may be, not reflected) in the underlying profits of a permanent establishment in accordance with subsections (1) to (3) whether or not—
(a) in the case of an amount of income, it is subject to tax or not, or
(b) in the case of an amount of expense, it is deductible or not.
(5) See also section 135(1)(b) (by virtue of which equivalent adjustments to those set out in subsections (1) to (3) will already be reflected in the underlying profits accounts of a permanent establishment that does not have separate financial accounts from the main entity prepared in accordance with acceptable accounting standards).
160 Attribution of losses between permanent establishment and main entity
(1) Subsection (2) applies where, on determining (ignoring this section) the adjusted profits of a member of a multinational group that is a permanent establishment for an accounting period (“the relevant period”), that member has a loss.
(2) So much of that loss as—
(a) is treated as an allowable expense of the main entity for the purposes of the computation of tax in the territory in which the main entity is located, and
(b) is not set off against an item of income that is subject to tax under the laws of both the territory of the permanent establishment and the territory of the main entity,
is to be treated as an expense of the main entity for the purposes of determining the adjusted profits of the main entity for the relevant period.
(3) Subsections (4) and (5) apply where an amount (“the relevant amount”) is treated as an expense of the main entity for the purposes of determining its adjusted profits for the relevant period as a result of subsection (2).
(4) The relevant amount is to be excluded from the adjusted profits of the permanent establishment for the relevant period.
(5) Where, on determining (ignoring this section) the adjusted profits of the permanent establishment for an accounting period after the relevant period, the permanent establishment has made a profit for that period, those profits are to be treated as income of the main entity for the purpose of determining that entity’s adjusted profits for that period.
(6) But subsection (5) only applies until the total amount treated as income of the main entity as a result of that subsection is equal to the relevant amount.
(7) Where profits of the permanent establishment for an accounting period are treated as income of the main entity as a result of subsection (5), those profits are to be excluded from the adjusted profits of the permanent establishment for that period.
(1) The filing member of a multinational group may elect that all of the group’s members in a territory, or all of the group’s members in that territory that are investment entities, are to use the realisation principle in determining gains and losses in relation to—
(a) all assets and liabilities that are subject to fair value or impairment accounting, or
(b) tangible assets that are subject to fair value accounting or impairment accounting.
(2) Where such an election is in force in relation to members of multinational group in a territory—
(a) the underlying profits of each of the group’s members for each of the accounting periods in respect of which the election is in force are to be adjusted so as to exclude gains and losses in respect of assets or liabilities to which the election applies that are attributable to fair value or impairment accounting;
(b) the carrying value of an asset or liability to which the election applies to be used for the purposes of determining gains or losses in respect of that asset or liability, is to be its carrying value at the later of—
(i) the commencement of the first accounting period of the multinational group to which the election applied, or
(ii) the time the asset was acquired or the liability was incurred.
(3) Paragraph 1 of Schedule 15 (long term elections) applies to an election under this section.
(4) Where an election under this section has been revoked, the underlying profits of each member of a multinational group in respect of which the election was in force are to be adjusted in the first accounting period in respect of which the election no longer applies (“the revocation period”) by adjusting for the change in treatment of the assets and liabilities that were subject to the election and that remain held by the member at the commencement of the revocation period.
(5) To adjust the underlying profits of a member of a multinational group for the change in treatment of an asset or liability subject to an election under this section, subtract the carrying value of that asset or liability as determined in accordance with subsection (2)(b) from the fair value of the asset or liability at the commencement of the revocation period and—
(a) if the amount given is positive, add it to those profits, or
(b) if the amount is negative, subtract it from those profits.
162 Election to reflect deductions for stock-based compensation
(1) The filing member of a multinational group may make an election under this section for the members of the group located in a territory to adjust their underlying profits in accordance with subsection (2).
(2) Where such an election has effect—
(a) the underlying profits of each such member is adjusted by substituting, for the amount of any expense for stock-based compensation, the amount that was allowed as a deduction for the same expense when calculating the member’s taxable income, and
(b) where such a member has an expense for stock-based compensation that arises in connection with an option that expires without exercise, the underlying profits of that member for the accounting period in which the option expires are to be increased by such amount of that expense as was an expense in determining the member’s adjusted profits for a previous accounting period.
(3) Where—
(a) the underlying profits of a member of a multinational group are adjusted in accordance with subsection (2) in respect of an amount of stock-based compensation,
(b) some expenses in respect of that compensation were recorded in the underlying profits of the member in one or more accounting periods before the election had effect, and
(c) the sum of the expenses recorded in those periods exceeds the sum of what those expenses would have been had the election been in effect for those periods,
the member’s adjusted profits are to be adjusted to include the amount of that excess as if it were income.
(4) Paragraph 1 of Schedule 15 (long term elections) applies to an election under this section.
(5) Where—
(a) the underlying profits of a member of a multinational group are adjusted in accordance with subsection (2),
(b) the election is revoked before all of the stock-based compensation has been paid, and
(c) the sum of amounts deducted in accordance with subsection (2) exceeds the sum of the financial account expense accrued that has been paid,
the member’s adjusted profits are to be adjusted to include the amount of that excess as if it were income.
163 Election to spread certain capital gains over five years
(1) The filing member of a multinational group may elect that the net gain in respect of the disposal of local tangible assets by standard members of the group in a territory in an accounting period (“the election period”) is to be spread across that period and the preceding 4 accounting periods (and those preceding periods are referred to collectively as “the look-back period”) in accordance with subsection (2).
(2) To spread the net gain across those periods take the following steps—
Step 1
For each standard member of the group in the territory in the first accounting period of the look-back period (“the carry-back period”), determine whether it has net losses in respect of the disposal of local tangible assets (ignoring any losses in relation to which these steps have previously been carried out).
Step 2
Allocate the proportion of the net gain in the election period to each standard member with such losses in the carry-back period that is equal to the proportion those losses represent of the total losses in respect of the disposal of local tangible assets of all such members of the group in the carry-back period.
Step 3
Adjust the underlying profits of each such member by reducing the member’s losses (but not below nil) by the amount allocated to it under Step 2.
Step 4
If there remains an amount of the net gain which was not used to reduce members’ losses in accordance with Step 3, carry out Steps 1 to 3 again, but as if—
the reference in Step 2 to the net gain were to that amount, and
the reference to the first accounting period of the look-back period were to the second accounting period of the look-back period.
Step 5
If there still remains an amount of the net gain which was not used to reduce the members’ losses, carry out Steps 1 to 3 again but as if—
the reference in Step 2 to the net gain were to that amount, and
the reference to the first accounting period of the look-back period were to the third accounting period of the look-back period.
Step 6
If there still remains an amount of the net gain which was not used to reduce the members’ losses, carry out Steps 1 to 3 again but as if—
the reference in Step 2 to the net gain were to that amount, and
the reference to the first accounting period of the look-back period were to the fourth accounting period of the look-back period.
Step 7
If there still remains an amount of the net gain which was not used to reduce the members’ losses, carry out Steps 1 to 3 again but as if—
the reference in Step 2 to the net gain were to that amount, and
the reference to the first accounting period of the look-back period were to the election period.
Step 8
If there still remains an amount of the net gain which was not used to reduced the members’ losses, divide the amount remaining by 5.
Step 9
Determine which of the standard members of the group (“current gain members”) located in the territory have net gains from the disposal of local tangible assets in the election period.
A current gain member is not to be regarded as a current gain member in any accounting period in which—
it is not a standard member of the group, or
it is not located in the territory.
Step 10
For the election period and each accounting period that is in the look-back period, adjust the underlying profits for that period (“the adjustment period”) of each current gain member by adding the amount given by multiplying—
the result of Step 8, by
the amount given by dividing—
the net gains of the current gain member from the disposal of local tangible assets in the election period, by
the sum of net gains from the disposal of local tangible assets in the election period of all current gain members in the adjustment period.
Step 11
Where there are no current gain members in an accounting period in the look-back period, adjust the underlying profits for that period of each standard member located in the territory for that period by adding the amount given by multiplying—
the result of Step 8, by
the amount given by dividing 1 by the number of standard members of the group in the territory in that accounting period.
Step 12
Where there are no standard members of the group in the territory in one or more accounting periods in the look-back period, further adjust the underlying profits for the election period of each current gain member by adding the amount given by multiplying—
the result of Step 8 multiplied by the number of accounting periods in the look-back period in which no standard members of the group were located in the territory, by
the amount given by dividing—
the net gains of the current gain member from the disposal of local tangible assets in the election period, by
the sum of net gains from the disposal of local tangible assets in the election period of all current gain members.
(3) For the purposes of this section any gain or loss arising from the transfer of assets between ... members of a multinational group is to be ignored.
(4) Where, as a result of an election under this section, the underlying profits of a member of a multinational group in an accounting period is adjusted, the following are to be recalculated for that period—
(a) the effective tax rate for the member and the other members of that group located in the same territory, and
(b) the top-up amounts that those members would have.
(5) Section 206—
(a) makes provision about the consequences of a recalculation (which may include the generation of an additional top-up amount), and
(b) applies to recalculations under subsection (4).
(6) Where an election under this section has effect in relation to a member of a multinational group, any amount of tax with respect to any gains or loss in respect of the disposal of local tangible assets in the election year is to be excluded from the calculation of the member’s covered tax balance.
(7) Paragraph 2 of Schedule 15 (annual elections) applies to an election under this section.
(8) In this section “local tangible asset” means immovable property in the same territory as the member disposing of it is located.
(1) The filing member of a multinational group may elect that standard members of the group that are located in the same territory and are included in a tax consolidation group are to apply the consolidated accounting treatment of the ultimate parent to eliminate income, expenses, gains and losses arising from transactions between those members.
(2) Where an election under this section has effect—
(a) the underlying profits of those members are to be adjusted accordingly in the accounting periods for which the election has effect, and
(b) the underlying profits of those members are to be adjusted for the first accounting period for which the election has effect so as to ensure that there are no duplications or omissions of items of income, expenses, gains or losses arising from the making of the election.
(3) Paragraph 1 of Schedule 15 (long term elections) applies to an election under this section.
(4) Where an election under this section is revoked, the underlying profits of the members to whom the election applied are to be adjusted in the first accounting period in which the revocation has effect so as to ensure that there are no duplications or omissions of items of income, expenses, gains or losses arising from the revocation of the election.
(5) For the purposes of this section, members of a multinational group in a territory are included in a “tax consolidation group” if under the law of that territory the income, expenses, gains or losses of those members 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 members.
165 Election to have excluded equity gains and losses included
(1) The filing member of a multinational group may elect that qualifying excluded equity gains or losses of the standard members of the group in a territory are to be treated as not being excluded equity gains or losses for the purposes of section 142.
(2) Excluded equity gains or losses are “qualifying” if
(a) either—
(i) those gains or losses are subject to covered taxes (as taxable gains or allowable losses) in that territory, or
(ii) in the case of gains or losses falling within section 142(2)(a) that are not subject to covered taxes in that territory, gains or losses on the disposal of the qualifying interest in question are subject to covered taxes in that territory , and
(b) in the case of gains or losses falling within section 142(2)(b), the gains or losses are not in respect of an interest to which section 142(3) applies.
(3) Paragraph 1 of Schedule 15 (long term elections) applies to an election under subsection (1).
(4) But a revocation of the election under that paragraph does not have effect in relation to equity gains or losses in respect of an ownership interest if—
(a) any member’s adjusted profits have included a loss in respect of that ownership interest as a result of subsection (1), and
(b) that loss would otherwise have been excluded from those profits as a result of section 142(1).
Accordingly, subsection (1) will apply to equity gains and losses in respect of that ownership interest even after the election is revoked.
166 Election in relation to hedging currency risk in ownership interests
(1) The filing member of a multinational group may elect that the underlying profits of a member of the group specified in the election are to be adjusted to exclude qualifying gains or losses arising from fluctuations in exchange rates.
(2) A gain or loss arising from fluctuations in exchange rates is “qualifying” to the extent—
(a) the gain or loss is attributable to an instrument intended to act as a hedge against currency risk in ownership interests held by the member or another member of the group, other than an ownership interest in an entity falling within subsection (3),
(b) the gain or loss is recognised in other comprehensive income in the consolidated financial statements of the ultimate parent,
(c) the instrument is considered an effective net investment hedge under the authorised accounting standard upon which those statements are prepared,
(d) where the instrument is held by the member, the economic and accounting effect of the hedge has not been transferred to any other entity, and
(e) where the instrument is not held by the member, the economic and accounting effect of the hedge has been transferred to the member.
(3) An ownership interest in an entity held by a member of a multinational group falls within this subsection if the members of that group do not, between them, have qualifying interests that entitle them to 10% or more of the entity’s —
(a) profits,
(b) capital,
(c) reserves, and
(d) voting rights.
(4) Paragraph 1 of Schedule 15 (long term elections) applies to an election under this section.
(1) This section applies where a member of a multinational group (“M”)—
(a) is not regarded as tax transparent in the territory in which it is located, and
(b) is regarded as tax transparent in a territory in which a member of the group with an ownership interest in it (“G”) is located.
(2) Where—
(a) the adjusted profits of G reflect profits of M, and
(b) the basis for the profits of M being so reflected is that M (along with any other entities through which G holds that interest) is regarded as tax transparent in the territory in which G is located,
such profits as are reflected on that basis are to be allocated to M (and included in the adjusted profits of M to the extent not already included) and excluded from the adjusted profits of G.
168 Underlying profits of transparent ... entities
(1) This section applies where a member of a multinational group (“M”) is a flow-through entity.
(2) An entity is a flow-through entity if—
(a) it is regarded as tax transparent in the territory in which it is created, and
(b) it is not subject to a covered tax on its profits in another territory as a result of being tax resident in that territory.
(2A) Subject to subsection (2C), a member of the group is a “reference entity” in relation to M if that member—
(a) is a non-FTE entity, and
(b) holds an ownership interest in M which is not held through a non-FTE entity.
(2B) In subsection (2A) “non-FTE entity” means an entity that is not a flow-through entity.
(2C) If no member of the group is a reference entity in relation to M by virtue of subsection (2A), the ultimate parent of the group is a “reference entity” in relation to M.
(3) A proportion of the underlying profits of M is to be allocated to any member of the group (“R”)—
(a) which is a reference entity in relation to M, and
(b) in relation to which condition A or B is met.
(4) The proportion to be allocated to R is equal to the percentage ownership interest R has in M in relation to which condition A or B is met ....
(5) Condition A is met if—
(a) R’s ownership interest in M is direct,
(b) R’s ownership interest in M is a flow-through ownership interest, and
(c) M is regarded as tax transparent in the territory in which R is located.
(6) Condition B is met if—
(a) R’s ownership interest in M is indirect,
(b) R’s ownership interest in M is a flow-through ownership interest,
(c) M and each entity through which the ownership interest is held are regarded as tax transparent in the territory in which R is located, and
(d) no entity through which R holds the ownership interest is a reference entity in relation to M.
(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(8) Where underlying profits of M are allocated to a member of the group of which M is a member, those profits are to be included in the member’s adjusted profits and excluded from the adjusted profits of M.
(9) Where every ownership interest in M held by a member of the group is a flow-through ownership interest, and an individual or entity (“the investor”) that is not a member of the group has an ownership interest in M which is held—
(a) directly, or
(b) through a direct ownership interest in an entity in which a member of the group which is a reference entity in relation to M has an ownership interest,
a proportion of M’s underlying profits, equal to the percentage ownership interest the investor has in M, is to be excluded from the adjusted profits of M.
(9A) Where M is the main entity in relation to a permanent establishment falling within paragraph (a), (b) or (c) of section 232(2), any reduction of M’s underlying profits by virtue of subsection (9) is to be applied before any attribution of M’s underlying profits to a permanent establishment in accordance with section 159.
(10) Any amount of M’s underlying profits not allocated to an entity ... in accordance with this section is to be included in the adjusted profits of M.
(10ZA) Where M is treated as a flow-through entity by virtue of an election made in relation to R and M under section 213 (investment entity tax transparency election), the underlying profits of R are to be adjusted so as to exclude any gain, profit or loss—
(a) that arises from changes in the fair value of, or from the impairment of, R’s interest in M, and
(b) that is not an excluded equity gain or loss (taking into account any election under section 165),
but the amount excluded under this subsection is not to exceed the amount of M’s underlying profits that is allocated to R under subsection (3).
(10A) For the purposes of subsections (5), (6) and (9), an ownership interest in M held by a member of the group is a flow-through ownership interest if (and so far as)—
(a) M is regarded, otherwise than by virtue of section 169(2), as tax transparent in the territory in which M was created,
(b) the interest is held directly and M is treated by virtue of section 169(2) as being regarded as tax transparent to the extent of the interest, or
(c) the interest is derived from a direct ownership interest in M to which paragraph (b) applies.
(11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
169 Certain non tax resident entities to be treated as flow-through entities
(1) This section applies to a member of a multinational group that—
(a) is not tax resident in any territory,
(b) is not subject to covered taxes,
(c) does not have a place of business in the territory where it is created, and
(d) is not regarded as tax transparent in the territory in which it is created.
(2) A member of a multinational group to which this section applies is to be treated as being regarded as tax transparent in the territory it is created in to the extent that—
(a) it is regarded as tax transparent in the territory in which holders of direct ownership interests in the member are located, and
(b) its income, expenditure, profits and losses are not attributable to a permanent establishment.
(3) Accordingly, such a member is to be treated as a flow-through entity.
170 Adjustments for ultimate parent that is a flow-through entity
(1) Where—
(a) the ultimate parent of a multinational group is a flow-through entity, and
(b) on determining its adjusted profits for an accounting period (ignoring this section), it has made a profit for that period,
those profits are to be further adjusted so as to exclude any amount of those profits that is qualifying.
(2) An amount of those profits is qualifying if—
(a) it represents an amount of those profits to which the holder of a direct ownership interest in the ultimate parent is entitled as a result of that interest, and
(b) condition A, B or C is met.
(2A) For the purposes of this section—
(a) each holder of a direct ownership interest in the ultimate parent is treated as entitled as a result of that interest to a proportion of the ultimate parent’s adjusted profits (that is to say, its adjusted profits ignoring this section), and
(b) the proportion of those adjusted profits to which each holder is treated as entitled is the proportion of those profits to which it would have been entitled had the actual amount of profits accruing to the ultimate parent been equal to its adjusted profits.
(3) Condition A is that the holder of the ownership interest is subject to tax on the amount for a taxable period that ends within 12 months of the accounting period mentioned in subsection (1)(b) and—
(a) the holder is subject to tax on the full amount of the ultimate parent’s profits to which it is entitled at a nominal rate equal to, or in excess of, 15%, or
(b) it is reasonable to expect that the sum of—
(i) the covered taxes payable by the ultimate parent in respect of the amount of the ultimate parent’s profits to which the holder is entitled, and
(ii) taxes payable by the holder of the ownership interest in respect of the amount of the ultimate parent’s profits to which the holder is entitled,
is equal to, or more than, 15% of the amount of the profits of the ultimate parent to which the holder of the interest is entitled.
(4) Condition B is that the holder of the ownership interest is an individual that—
(a) is tax resident in the territory of the ultimate parent, and
(b) does not hold ownership interests that together entitle the person to more than 5% of the profits and assets of the ultimate parent.
(5) Condition C is that the holder of the ownership interest is a governmental entity, an international organisation, a non-profit organisation or a pension fund that—
(a) is located in the territory of the ultimate parent, and
(b) does not hold ownership interests that together entitle that entity to more than 5% of the profits and assets of the ultimate parent.
(5A) Subsections (5B) and (5C) apply where—
(a) the holder of the ownership interest is not subject to tax on an amount of the ultimate parent’s profits for a taxable period that ends within 12 months of the accounting period mentioned in subsection (1)(b), and
(b) the holder would be subject to tax on the amount for a taxable period ending within that 12-month period but for a difference which will be eliminated over time between—
(i) the time when any income, expense, gain or loss is recognised in the ultimate parent’s financial statements, and
(ii) the time when that income, expense, gain or loss is reflected in the profits of the ultimate parent on which the holder is subject to tax (“the holder’s taxable profits”).
(5B) Condition A has effect, for each accounting period up to and including the period in which that timing difference is eliminated, as if the income, expense, gain or loss were instead reflected in the holder’s taxable profits in the taxable period in which it is recognised in the ultimate parent’s financial statements.
(5C) In a period for which, under subsection (5B), the holder’s taxable profits of a particular type are treated for the purposes of condition A as greater or less than what they actually are, it is to be assumed—
(a) that any excess is subject to tax at the same nominal rate at which the holder’s taxable profits of that type are actually subject to tax,
(b) that the holder pays tax on any excess at that rate,
(c) that any shortfall is not subject to tax, and
(d) that the holder pays no tax on any shortfall.
(6) Where the adjusted profits of the ultimate parent of a multinational group for an accounting period are reduced as a result of subsection (1), its covered tax balance (see section 174) is—
(a) in the case of a positive covered tax balance, to be reduced by the same proportion that the underlying profits were reduced, or
(b) in the case of a negative covered tax balance, to be increased by that same proportion.
(7) Where—
(a) the ultimate parent of a multinational group is a flow-through entity,
(b) on determining its adjusted profits for an accounting period (ignoring this section), it has made a loss for that period,
those profits are to be further adjusted so as to exclude any disqualified amount of that loss.
(8) An amount of that loss is disqualified if the holder of an ownership interest in the ultimate parent is allowed to use that amount in computing the holder’s taxable income.
(9) This section applies to a member of a multinational group as it applies to the ultimate parent if the member is—
(a) a permanent establishment through which the ultimate parent wholly or partly carries out its business, if the ultimate parent is a flow-through entity, or
(b) a permanent establishment through which the business of a flow-through entity is carried out, if —
(i) the entity is regarded as tax transparent in the territory in which the ultimate parent is located, and
(ii) the ultimate parent’s interest in that entity is held directly or through one or more entities all of which are regarded as tax transparent in that territory.
171 Ultimate parent subject to qualifying dividend regime
(1) Where—
(a) the ultimate parent of a multinational group that is subject to a qualifying dividend regime distributes a qualifying dividend within 12 months of the end of its accounting period, and
(b) on determination of its adjusted profits for the period, it has made a profit,
its adjusted profits for that period are to be reduced (but not below nil) by the amount of that dividend if any one of conditions A to C is met.
(2) Condition A is that the qualifying dividend is subject to tax in the hands of the dividend recipient for a taxable period that ends within 12 months of the end of the ultimate parent’s accounting period and—
(a) its recipient is subject to tax on the full amount of the dividend at a nominal rate equal to, or in excess of, 15%,
(b) it is reasonable to expect that the sum of the ... covered taxes payable by the ultimate parent in respect of the profits represented by the dividend and taxes payable by the dividend recipient in respect of the dividend income is at least the amount given by multiplying the amount of that income by 15%, or
(c) the ultimate parent is a supply cooperative and the recipient is an individual.
(3) For the purposes of subsection (2) patronage dividends made by a supply cooperative are subject to tax to the extent they reduce an expense or cost that is deductible in the computation of the recipient’s taxable income.
(4) Condition B is that the recipient of the qualifying dividend is an individual that—
(a) is tax resident in the territory of the ultimate parent, and
(b) does not hold ownership interests in the ultimate parent held directly, or through entities that are regarded as tax transparent in the territory in which the individual is tax resident, that together entitle the individual to more than 5% of the profits and assets of the ultimate parent.
(5) Condition C is that the recipient of the qualifying dividend is located in the territory of the ultimate parent and is—
(a) a governmental entity,
(b) an international organisation,
(c) a non-profit organisation, or
(d) a pension fund that is not a pension services entity.
(6) Where the adjusted profits of the ultimate parent of a multinational group for an accounting period are reduced as a result of subsection (1)—
(a) its covered tax balance, excluding any tax in respect of which a deduction for the dividend was allowed, is—
(i) in the case of a positive covered tax balance, to be reduced by the same proportion that adjusted profits were reduced, or
(ii) in the case of a negative covered tax balance, to be increased by that same proportion, and
(b) its adjusted profits are to be further reduced by an amount equal to the amount by which its covered tax balance was adjusted under paragraph (a).
(7) References in this section to “the recipient” of a qualifying dividend means—
(a) the direct recipient of the qualifying dividend, or
(b) an entity or individual with ownership interests in the direct recipient if—
(i) in the case of an entity, it is located in a territory in which the direct recipient, and every entity through which that ownership interest is held, is regarded as tax transparent, or
(ii) in the case of an individual, they are tax resident in a territory in which the direct recipient, and every entity through which that ownership interest is held, is regarded as tax transparent.
(8) Where there is more than one recipient of a dividend as a result of paragraph (b) of subsection (7)—
(a) this section is to be applied separately in relation to each recipient,
(b) where a recipient falls within that paragraph, references to the dividend is to so much of the dividend to which that recipient is entitled to as a result of its ownership interests in the direct recipient.
But a reduction of adjusted profits may not be made more than once in respect of a dividend or a part of it (where more than one individual or entity can be regarded as a recipient of the whole dividend or a part of it).
(9) For the purposes of this section and section 172—
“qualifying dividend regime” means a tax regime designed to result in a single level of taxation on the owners of an entity through—
a deduction from the income of the entity for distributions of profits to the owners,
a regime where certain of the profits (“the relevant profits”) of a UK REIT or overseas REIT equivalent are not taxed provided a sufficient proportion of the relevant profits is distributed, or
a regime applicable to a supply cooperative that exempts the cooperative from taxation on profits in connection with its distribution of patronage dividends;
“qualifying dividend” means—
in the case of a qualifying dividend regime falling within paragraph (a) of the definition of qualifying dividend regime, a dividend or other distribution made to an owner of the entity,
in the case of a qualifying dividend regime falling within paragraph (b) of the definition of qualifying dividend regime, a dividend or other distribution which would count towards satisfying the condition that a sufficient proportion of the relevant profits of the UK REIT or overseas REIT equivalent have been distributed (assuming that condition had not already been met), or
in the case of a qualifying dividend regime falling within paragraph (c) of the definition of qualifying dividend regime, a patronage dividend;
“supply cooperative” means a cooperative that acquires goods or services and sells them to its members or patrons;
“cooperative” means an entity that collectively markets or acquires goods or services on behalf of its members and that is subject to a tax regime in the territory in which it is located that is designed to ensure tax neutrality in respect of—
property or services of the members sold through the cooperative, or
property or services acquired by members through the cooperative;
“patronage dividend” means a distribution by a cooperative to its members.
172 Application of section 171 to members in the same territory as the ultimate parent
(1) Subsection (2) applies to a distribution of a qualifying dividend by a member of a multinational group where conditions X and Y are met.
(2) Where this subsection applies, subsections (1) and (6) of section 171 apply to the distribution made by the member as it applies to a distribution by the ultimate parent in relation to which one of conditions A to C in that section apply.
(3) Condition X is that the member—
(a) is located in the same territory as the ultimate parent,
(b) the member and the ultimate parent are subject to the same qualifying dividend regime,
(c) all of the ultimate parent’s ownership interests in the member are—
(i) direct, or
(ii) held solely through other members of the group who are located in that territory and subject to the regime.
(4) Condition Y is that—
(a) the distribution of the qualifying dividend is made—
(i) to the ultimate parent, or
(ii) to one of the members referred to in subsection (3)(c)(ii),
(b) in the case of a distribution made to the ultimate parent, the whole of the qualifying dividend is distributed by the ultimate parent and one of the conditions A to C in section 171 applies to each of the distributions made from the qualifying dividend, and
(c) in the case of a distribution made to one of the members referred to in subsection (3)(c)(ii)—
(i) the whole of the dividend is distributed to the ultimate parent, or to one of the members referred to in that subsection provided the whole amount is eventually distributed to the ultimate parent via one or more further distributions to members referred to in that subsection, and
(ii) the ultimate parent distributes the whole of the dividend and one of conditions A to C in section 171 applies to each of the distributions made from the qualifying dividend.
(5) For the purposes of this section, it is to be assumed that —
(a) where the ultimate parent, or a member referred to in subsection (3)(c)(ii), has received the whole of the qualifying dividend, but has also received other distributions or has other income, any subsequent distribution by the ultimate parent or member is funded first by the qualifying dividend and then by any other amounts, and
(b) where the ultimate parent receives amounts from members referred to in subsection (3)(c)(ii), those amounts fund distributions that meet one of conditions A to C in section 171 before distributions that do not.
(1) The following are covered taxes in relation to a member of a multinational group—
(a) taxes on profits of that member (including, where it has direct or indirect ownership interests in another member of the group, taxes on its share of the income or profits of that other member),
(b) taxes imposed on the member under an eligible distribution tax system,
(c) taxes imposed on the member as a substitute for a tax on profits that generally applies in the territory in which the tax is imposed, and
(d) taxes charged by reference to the capital of a company, or by reference to its capital and profits.
(2) But none of the following are to be regarded as covered taxes—
(a) multinational top-up tax, or any tax equivalent to multinational top-up tax;
(b) a qualifying domestic top-up tax (see section 256);
(c) a qualifying undertaxed profits tax (see section 257);
(d) a disqualified refundable imputation tax (see section 253);
(e) where the member carries on a life assurance business, taxes in respect of which amounts were charged to the member’s policyholders.
(1) To determine the covered tax balance of a member of a multinational group for an accounting period—
Step 1
Determine the amount of the qualifying current tax expense accrued by the member for that period.
Step 2
Determine whether any amounts need to be excluded from that expense under section 175 (and adjust it accordingly).
Step 3
Determine whether any amounts need to be reflected in that expense under section 176 (and adjust it accordingly).
Step 4
If any amount of covered taxes is taken into account more than once in the qualifying current tax expense, adjust it so that the amount is only taken into account once.
(2) For the purposes of this Part, current tax expense is to be expressed—
(a) as a positive number where it represents an expense, and
(b) as a negative number where it represents a credit.
(3) If the result of subsection (1) is a negative amount that amount (expressed as a positive number) is a “negative covered tax balance”.
(4) If the result of subsection (1) is a positive amount, or nil, that amount is a “positive covered tax balance”.
(5) In this Part—
references to the “covered tax balance” of a member of a multinational group are to a positive covered tax balance or a negative covered tax balance;
“qualifying current tax expense” means the amount of the current tax expense as reflected in the member’s partially adjusted profits to the extent the expense relates to covered taxes.
(6) For the purposes of the definition of “qualifying current tax expense” in subsection (5), the member’s “partially adjusted profits” are its underlying profits with the adjustments contained in the following sections applied—
section 137A (use of substituted values);
section 139 (profits adjusted to be profits before consolidation adjustments to eliminate intragroup transactions);
section 140 (profits adjusted to be profits before certain purchase accounting adjustments).
175 Amounts excluded from qualifying current tax expense
(1) The amounts referred to in subsection (2) are to be excluded from a member of a multinational group’s qualifying current tax expense (to the extent they would otherwise be included).
(2) Those amounts are as follows—
(a) any amount that relates to income or gains that are not included in the member’s adjusted profits;
(b) any amount that relates to an uncertain tax position;
(c) any amount of credit or refund in respect of a qualifying refundable tax credit , or in respect of a marketable transferable tax credit, that is recorded as a reduction of qualifying current tax expense;
(d) any amount that is not expected to be paid before the end of the period of three years commencing with the first day after the end of the accounting period;
(e) any amount allocated to another member of the multinational group in accordance with this Part;
(f) any amount excluded under section 180(3)(b) (blended CFC regime).
(3) The reference in subsection (2)(a) to income or gains that are not included in the member’s adjusted profits does not include any income or gains that are not included in its adjusted profits solely because of an election under section 164 (intra-group transactions).
176 Amounts to be reflected in qualifying current tax expense
(1) The amounts referred to in subsection (2) are to be reflected in a member of a multinational group’s qualifying current tax expense (to the extent they were not already reflected).
(2) Those amounts are as follows—
(a) any amount of covered taxes reflected in the member’s underlying profits but which (ignoring this paragraph) is not reflected in the qualifying current tax expense;
(b) the total deferred tax adjustment amount (see section 182);
(c) any amount of covered taxes paid, or refunded, in the current accounting period that relates to an uncertain tax position where the amount was excluded under section 175(2)(b) for a previous accounting period;
(d) any amount of credit or refund in respect of a tax credit (whether refundable or not) that—
(i) is not a qualifying refundable tax credit or a marketable transferable tax credit, and
(ii) has not been reflected in its qualifying current tax expense in the current accounting period or a previous accounting period (see section 148);
(e) any amount of covered taxes refunded or credited to the member, other than a qualifying refundable tax credit or a marketable transferable tax credit;
(f) where section 187(5) applies in relation to the member, the amount of special loss deferred tax assets used, in accordance with section 187(7), by the member for the current accounting period;
(g) any amount of covered taxes recorded in other comprehensive income of the member relating to amounts included in determining its adjusted profits that are subject to covered taxes under the law of the territory in which the member is located;
(h) any amount of covered taxes relating to an amount reflected in the member’s adjusted profits as a result of section 146 (adjustment for changes in accounting polices and prior period errors);
(i) any amount allocated to the member from another member of the multinational group in accordance with this Part.
(3) For the purposes of this Part—
(a) an amount of tax paid or tax expense is to be expressed as a positive number, and
(b) an amount of tax credit or refund is to be expressed as a negative number.
176A Meaning of “non-marketable transferable tax credits”
(1) Sections 176B and 176C make provision about “non-marketable transferable tax credits”.
(2) A tax credit held by a member of a multinational group that is the originator of the credit is a non-marketable transferable tax credit if—
(a) it may be transferred to another person or entity, and
(b) it is neither a marketable transferable tax credit nor a qualifying refundable tax credit.
(3) A tax credit held by a member of a multinational group as a purchaser of the credit is a non-marketable transferable tax credit if it is neither a marketable transferable tax credit nor a qualifying refundable tax credit.
(4) In this section and in sections 176B and 176C “originator” and “purchaser” are to be construed in accordance with section 148A(1)(a).
176B Value of non-marketable transferable tax credits: originator
(1) The covered tax balance of a member of a multinational group that holds a non-marketable transferable tax credit as originator is to be adjusted to secure that the value of the credit is reflected as follows.
(2) The value of the tax credit is to be reflected as it is used.
(3) If the credit is transferred (after the end of the period of 15 months after the end of the accounting period in which the credit is granted), the consideration for the transfer is to be reflected as a credit in the accounting period in which the transfer occurred.
176C Value of non-marketable transferable tax credits: purchaser
(1) The covered tax balance of a member of a multinational group that holds a non-marketable transferable tax credit as purchaser is to be adjusted to secure that the value the credit is reflected as follows.
(2) On using an amount of the credit, the amount given by subsection (3) is to be reflected as a credit in the covered tax balance for the accounting period in which it is used.
(3) That amount is the amount given by multiplying—
(a) the amount used divided by the full value of the credit, by
(b) the amount given by subtracting the purchase price of the credit from the full value of the credit.
(4) On transferring the credit, the amount in subsection (5) is—
(a) if positive, to be reflected as a credit in the covered tax balance for the accounting period in which the transfer occurred, or
(b) if negative, to be reflected as a loss in the adjusted profits of the member for that period.
(5) That amount is the amount given by subtracting—
(a) the sum of—
(i) the purchase price of the credit, and
(ii) any amounts recognised ... in the covered tax balance in accordance with subsection (2) (whether in that accounting period or a previous accounting period), from
(b) the sum of—
(i) the amount of the credit that has been used, and
(ii) the consideration for the transfer.
(6) Where the credit has not been transferred, and was not fully used, before its expiry, the amount in subsection (7) is to be reflected as a loss in the adjusted profits of the member for the accounting period in which the credit expired.
(7) That amount is the amount given by subtracting—
(a) the amount of the credit that was used, from
(b) the sum of the purchase price of the credit and any amounts recognised in accordance with subsection (2).
176D Tax credits etc allocated under tax equity partnerships
(1) Where—
(a) a member of a multinational group is an investor in a tax equity partnership arrangement, and
(b) an election under section 165 (excluded equity gains and losses included) applies in relation to the member for an accounting period,
qualifying flow-through tax benefits provided to the member under that arrangement in that period are to be excluded from the qualifying current tax expense of that member for that period.
(2) “Flow-through tax benefits” means—
(a) tax credits, other than qualifying refundable tax credits and marketable transferable tax credits, and
(b) the value of amounts of tax deductible losses,
that are made available to be used by an investor in a tax equity partnership arrangement under that arrangement (whether or not those credits or losses are used by the investor).
(3) Section 176E (proportional amortisation method) applies for the purposes of determining the extent to which flow-through tax benefits are “qualifying” where—
(a) in determining the underlying profits of the investor, the proportional amortisation method is used to account for the arrangement, or
(b) the filing member of the multinational group of which the investor is a member has elected that section 176E should apply for those purposes in relation to the member and the arrangement.
(4) Otherwise, section 176F (subtraction method) applies for those purposes.
(5) For the purposes of this Part, a member of a multinational group is an investor in a tax equity partnership arrangement if—
(a) the member has made an investment in an entity that is tax transparent in the territory in which the member is located,
(b) the investment is treated as an equity interest for tax purposes in the territory in which the member is located,
(c) the investment would, under an authorised accounting standard of the territory in which the entity operates, be treated as an equity interest,
(d) the entity is not a member of the multinational group, and
(e) it is reasonable to expect, at the time of making the investment, that the return on the investment would be negative in the absence of the provision of flow-through tax benefits.
(6) But a member of a multinational group is not to be regarded as an investor in a tax equity partnership arrangement if—
(a) the investment in the entity does not represent a genuine economic interest in that entity such that the member is exposed to the possibility of a loss on the investment, or
(b) the territory in which the member is located limits the use of tax equity partnership arrangements to arrangements that involve a multinational group subject to multinational top-up tax or its equivalent under the law of a territory outside the United Kingdom.
(7) Flow-through tax benefits provided to a member of a multinational group in an accounting period that are not qualifying are to be reflected as a credit in the qualifying current tax expense for that period.
(8) Flow-through tax benefits (whether qualifying or not) provided to a member of a multinational group are not to be reflected in the underlying profits of that member, even if that would be the effect of the election under section 165.
(9) For the purposes of subsection (3)(a), the “proportional amortisation method” means a method of accounting under which—
(a) the initial capital investment in the arrangement is amortised over the term of the investment with the amortisation expense for an accounting period based on the proportion of the flow-through tax benefits expected to be provided over the term of the arrangement that are expected to be provided in that period, and
(b) the difference between the flow-through tax benefits received in an accounting period and that amortisation expense for that period is reflected as tax expense.
(10) For the purposes of this section and sections 176E and 176F, the value of an amount of tax deductible losses made available to be used by an investor is given by multiplying that amount by the tax rate that applies to the investor.
(11) An election under subsection (3)(b)—
(a) must specify the first accounting period for which it is to have effect, which must be the first relevant period,
(b) must be made no later than the date by which the information return or overseas return notification in respect of the first relevant period is due,
(c) must be included in an information return submitted to HMRC or a qualifying authority in respect of the first relevant period,
(d) has effect for the first relevant period and each subsequent accounting period, and
(e) cannot be revoked.
(12) In subsection (11), “the first relevant period” means the later of—
(a) the first accounting period in which the member is an investor in the tax equity partnership arrangement, and
(b) the first accounting period for which the Pillar Two rules apply to the member.
(1) Where this section applies, to determine the extent to which flow-through tax benefits provided to an investor in an accounting period under a tax equity partnership arrangement are qualifying, take the following steps—
Step 1
Determine the amount of capital investment provided by the investor to the arrangement at its commencement.
Step 2
Divide the flow-through tax benefits provided under the arrangement in the accounting period by the total flow-through tax benefits expected (as at the end of the accounting period) to be provided over the whole term of the arrangement.
Step 3
Multiply the result of Step 1 by the result of Step 2.
Step 4
Add the following together—
the amounts, if any, of tax credits made available to be used by the investor under the arrangement in the accounting period;
the value of the amounts, if any, of tax deductible losses made available to be used by the investor under the arrangement in the accounting period;
the amounts, if any, of distributions made to the investor in the accounting period;
the amounts, if any, received by the investor for the sale of any part of its investment in the arrangement in the accounting period.
Step 5
If the result of Step 3 is equal to or greater than the result of Step 4, all of the flow-through tax benefits provided under the arrangement in the accounting period are qualifying.
Otherwise proceed to Step 6.
Step 6
Subtract the result of Step 3 from the result of Step 4.
Step 7
The amount of the flow-through tax benefits provided under the arrangement in the accounting period that is qualifying is the amount given by reducing the amount of those benefits (but not below nil) by the result of Step 6.
(2) Accordingly, the amount by which those benefits are reduced in accordance with Step 7 represents non-qualifying flow-through tax benefits which are to be reflected as a credit in the investor’s qualifying current tax expense.
(3) Subsections (4) to (6) apply in relation to an investor, an arrangement and an accounting period if flow-through tax benefits were provided to the investor under the arrangement in at least one earlier accounting period.
(4) Where the result of Step 3 in subsection (1) would (but for this subsection) be greater than N, this section has effect as if the result of Step 3 were N.
(5) To find N—
(a) identify the amount that was the result of Step 3 in subsection (1) in each earlier accounting period in which flow-through tax benefits were provided to the investor under the arrangement,
(b) add together all the amounts identified under paragraph (a), and
(c) subtract the result of paragraph (b) from the result of Step 1 in subsection (1).
The result is N, unless the result is below nil, in which case N is nil.
(6) A reference in subsection (5)(a) to the result of Step 3 in subsection (1) in an earlier accounting period, where subsection (4) had effect in relation to the earlier period, is to the result of that Step as modified under subsection (4).
Where this section applies, to determine the extent to which flow-through tax benefits provided to an investor in an accounting period under a tax equity partnership arrangement are qualifying, take the following steps—
Step 1
Determine the amount of capital investment provided by the investor to the arrangement at its commencement.
Step 2
Subtract the following from that amount—
the amounts, if any, of tax credits made available to be used by the investor under the arrangement since the commencement of the arrangement, other than tax credits—
that were made available in the accounting period, and
that are not qualifying refundable tax credits or marketable transferable tax credits;
the value of the amounts, if any, of tax deductible losses made available to be used by the investor under the arrangement since its commencement, other than losses made available in the accounting period;
the amounts, if any, of distributions made to the investor since the arrangement’s commencement;
the amounts, if any, received by the investor for the sale of any part of its investment in the arrangement.
Step 3
If the result of Step 2 is nil or less, no flow-through tax benefits provided under the arrangement in the accounting period are qualifying.
If the result of that step is more than nil, proceed to Step 4.
Step 4
Subtract the flow-through tax benefits provided to the investor in the accounting period under the arrangement from the result of Step 2.
Step 5
If the result of Step 4 is nil or greater, all of the flow-through tax benefits provided under the arrangement in the accounting period are qualifying.
Otherwise, the amount of those benefits that is qualifying is the amount of those benefits that when subtracted from the result of Step 2 would give a result of nil.
176G Clawback of earlier qualifying flow-through tax benefits
(1) This section applies to an investor in a tax equity partnership arrangement if—
(a) qualifying flow-through tax benefits are excluded under section 176D(1) from the investor’s covered tax balance for an accounting period, and
(b) the investor has an excess return from the arrangement in a later accounting period (“the later period”).
(2) For the purpose of determining the investor’s covered tax balance for the later period, the investor’s qualifying current tax expense for that period is to be adjusted (after the steps in section 174(1) have been taken) by subtracting the clawback amount.
(3) “The clawback amount” is determined as follows—
Step 1
Determine the total amount of the qualifying flow-through tax benefits provided to the investor under the arrangement in accounting periods before the later period.
Step 2
Subtract from the result of Step 1 the total of any amounts subtracted under subsection (2) from the investor’s qualifying current tax expense for accounting periods before the later period.
Step 3
Compare the result of Step 2 with the amount of the investor’s excess return from the arrangement in the later period.
Whichever is less is the clawback amount.
(4) For the purposes of this section an investor has an “excess return” from an arrangement in an accounting period (“the current period”) if the total relevant return exceeds the amount of capital investment provided by the investor to the arrangement at its commencement.
The amount of the excess return is the amount of the excess.
(5) In subsection (4) “the total relevant return” means the sum of—
(a) the amounts of the qualifying flow-through tax benefits provided to the investor under the arrangement that have been excluded under section 176D(1) in the current period or any earlier accounting period,
(b) the amounts of any distributions made to the investor under the arrangement in the current period or any earlier accounting period,
(c) the amounts received by the investor for the sale of any part of its investment in the arrangement in the current period or any earlier accounting period, and
(d) the amounts of any qualifying refundable tax credits and marketable transferable tax credits made available to be used by the investor under the arrangement in the current period or any earlier accounting period,
less the amount of any excess return that the investor had from the arrangement in any earlier accounting period.
(1) Any amount of qualifying current tax expense included in the underlying profits accounts of a member of a multinational group that is in respect of profits of a permanent establishment is to be allocated to the permanent establishment (and is to be regarded as qualifying current tax expense of the permanent establishment for the purposes of applying section 175(2)(a)).
(2) Where profits of a permanent establishment are treated as income of the main entity as a result of section 160(5), covered taxes on those profits are to be allocated to the main entity.
(3) But the amount allocated in accordance with subsection (2) is not to exceed the amount given by multiplying the amount of those profits by the highest corporate tax rate on ordinary income in the territory where the main entity is located.
(4) Any deferred tax asset with respect to a loss arising in the territory of a permanent establishment that is treated as an expense of the main entity as a result of section 160(2) is to be ignored in determining the covered tax balance of either the main entity or the permanent establishment.
(1) Where—
(a) profits have been allocated to a member of a multinational group (“O”) under section 167 or 168 (allocation of profits of hybrid and transparent entities), and
(b) the member from whom the profits have been allocated has an amount of qualifying current tax expense in respect of those profits,
that qualifying current tax expense is to be allocated to O.
(1A) Where—
(a) a member of a multinational group has an amount of qualifying current tax expense,
(b) that amount is in respect of profits not included in the member’s underlying profits, and
(c) if those profits had been included in the member’s underlying profits, a corresponding amount of adjusted profits would have been allocated to another member of the group (“O”) under section 167 or 168,
that qualifying current tax expense is to be allocated to O (and is to be regarded as qualifying current tax expense of O for the purposes of applying section 175(2)(a)).
(1B) Section 175(2)(a) (exclusion of amounts relating to income or gains not included in adjusted profits) applies to an amount of qualifying current tax expense allocated in accordance with subsection (1) as if—
(a) the reference to the member’s adjusted profits were to the adjusted profits of the member from whom the amount of qualifying current tax expense was allocated, and
(b) profits allocated from that member to O under section 167 or 168 were not excluded from the adjusted profits of that member.
(1C) Subsection (1D) has effect where—
(a) a member of a multinational group (“M”) is a flow-through entity, and
(b) any of the following are not regarded as tax transparent in the territory in which a member of the group (“R”), which is a reference entity in relation to M (within the meaning of section 168(2A)), is located—
(i) M;
(ii) any member of the group through which R’s ownership interest in M is held.
(1D) If—
(a) R, or any member of the group (“X”) which has an ownership interest in R, has an amount of qualifying current tax expense,
(b) that amount is in respect of profits not included in R’s, or as the case may be X’s, underlying profits, and
(c) had those profits had been included in R’s, or as the case may be X’s, underlying profits a corresponding amount of profits would have been allocated to M under section 167 (ignoring for this purpose subsection (1)(a) of that section) or 168,
that qualifying current tax expense is to be allocated to M (and is to be regarded as qualifying current tax expense of M for the purposes of section 175(2)(a)).
(2) But the amount of qualifying current tax expense in respect of mobile income allocated to O (under subsections (1) and (1A)) or to M (under subsection (1D)) is not to exceed the amount given by taking the following steps—
Step 1
Determine the effective tax rate of the members of the multinational group in the territory of O for the accounting period to which the qualifying current tax expense relates, ignoring that expense.
Step 2
Subtract the result of Step 1 from 15%.
Step 3
Multiply the result of Step 2 by the amount of mobile income to which the qualifying tax expense relates.
(3) For the purposes of this section and section 179, “mobile income” means income of a type mentioned in subsection (4) in respect of which a member of a multinational group is subject to tax—
(a) under a controlled foreign company tax regime (see section 179(4)), or
(b) as a result of an ownership interest in an entity regarded as tax transparent in the territory the member is located in but not so regarded in the territory in which that entity is located.
(4) Those types of income are—
(a) dividends or dividend equivalents,
(b) interest or interest equivalent,
(c) rent,
(d) a royalty,
(e) an annuity, or
(f) net gains from property of a type that produces income described in paragraphs (a) to (e).
(5) Where an amount of qualifying current tax expense would have been allocated to O, but the amount allocated is limited as a result of subsection (2) the amount not allocated remains with the member from whom it otherwise would have been allocated.
(6) But if an amount would, ignoring this subsection, remain with the member from whom it would have otherwise been allocated, and that amount relates to income or gains that are not included in the adjusted profits of O, that amount is to be excluded from the covered tax balance of both the member and O.
(1) Where—
(a) a member of a multinational group (“C”) is subject to a controlled foreign company tax regime, and
(b) C has an ownership interest in another member of the group (“F”) that is a CFC entity in relation to C,
any amount of qualifying current tax expense included in C’s underlying profits accounts with respect to tax on C’s share of the profits of F are to be allocated to F (to the extent it has not already been allocated as a result of another provision of this Part).
(1A) Qualifying current tax expense allocated to F is to be regarded as qualifying current tax expense of F for the purposes of applying section 175(2)(a).
(2) But the amount of qualifying current tax expense in respect of mobile income allocated to F is not to exceed the amount given by taking the following steps—
Step 1
Determine the effective tax rate of the members of the multinational group in the territory of F for the accounting period to which the qualifying current tax expense relates, ignoring that expense.
Step 2
Subtract the result of Step 1 from 15%.
Step 3
Multiply the result of Step 2 by the amount of mobile income to which the qualifying current tax expense relates.
(3) Subsection (1) does not apply to a controlled foreign company tax regime that is a blended CFC regime in accounting periods commencing on or before 31 December 2025 that end on or before 30 June 2027.
(3A) Where an amount of qualifying current tax expense would have been allocated to F but the amount allocated is limited as a result of subsection (2), the amount not allocated remains with C.
(3B) But if an amount would, ignoring this subsection, remain with C and that amount relates to income or gains that are not included in the adjusted profits of F, that amount is to be excluded from the covered tax balance of both C and F.
(4) In this Part—
“controlled foreign company tax regime” means a set of tax rules (other than multinational top-up tax or any tax equivalent to multinational top-up tax) under which an entity with an ownership interest in another entity located in a different territory (“the controlled foreign company”) is subject to current taxation on its share of part or all of the income earned by the controlled foreign company, irrespective of whether that income is distributed currently to it;
“CFC entity”, in relation to a member of a multinational group who is subject to a controlled foreign company tax regime, means—
a controlled foreign company in relation to that member,
a permanent establishment of such a controlled foreign company, or
an entity whose profits are treated, for the purposes of the regime, as the profits of such a controlled foreign company;
“blended CFC regime” means a controlled foreign company tax regime—
under which the income, losses and creditable taxes of all of the controlled foreign companies of the entity with ownership interests in them are aggregated for the purposes of calculating the entity’s tax liability under the regime,
that does not take into account the income of the entity, or members of a consolidated group of which the entity is a member, that arises in the location of the entity, apart from to the extent the entity may use its losses arising in that location to reduce its liability under the regime, and
which operates by reference to a rate which reflects a threshold for low taxation.
(1) This section applies to accounting periods commencing on or before 31 December 2025 that end on or before 30 June 2027.
(2) Subsection (3) applies where—
(a) a member of a multinational group (“C”) is subject to a blended CFC regime in an accounting period (“the relevant period”),
(b) C has an ownership interest in an entity (“F”) that is a ... CFC entity in relation to C, and
(c) the blended CFC allocation key of F is greater than nil.
(3) The appropriate proportion of C’s current tax expense so far as relating to that regime (after all deductions and use of any losses) is—
(a) where F is a member of the same multinational group as C, to be allocated to F, or
(b) where F is not a member of that group, to be excluded from the covered tax balance of C.
(4) The appropriate proportion is the proportion given by dividing the blended CFC allocation key for F for the relevant period by the sum of all blended CFC allocation keys for that period of ... CFC entities in which C has an ownership interest.
(5) The blended CFC allocation key for the relevant period of a ... CFC entity that C has an ownership interest in is the amount given by multiplying—
(a) the attributable income of C in relation to the CFC entity, by
(b) the percentage given by subtracting the applicable effective tax rate of the ... CFC entity for the relevant period from the applicable CFC rate for that period.
(6) But where—
(a) the result of subsection (5)(b) in relation to a ... CFC entity is less than nil, or
(b) the applicable effective tax rate of that entity is greater than 15%,
the blended CFC allocation key for that entity is to be treated as nil.
(7) The attributable income of C in relation to a CFC entity in which C has an ownership interest means C’s share of the income of the entity for the relevant period determined as it would be determined for the purposes of the blended CFC regime.
(8) The applicable effective tax rate of a ... CFC entity for the relevant period is—
(a) where it is located in a territory in which a single effective tax rate of all members of the multinational group of which C is a member is calculated for that period, that effective tax rate as it would be calculated if—
(i) any tax arising under a blended CFC regime were ignored, and
(ii) where the blended CFC regime permits foreign tax credit in respect of a qualifying domestic top-up tax on the same basis it would be permitted for covered taxes, that qualifying domestic top-up tax were a covered tax, or
(aa) where—
(i) the CFC entity is a member of the multinational group,
(ii) different effective tax rates are calculated for the period for different subsets of (one or more) members of the multinational group located in the territory where the CFC entity is located (“local blending subsets”), and
(iii) the CFC entity is a member of a local blending subset,
the effective tax rate of the local blending subset of which the CFC entity is a member, calculated on the assumptions set out in paragraph (a)(i) and (ii) (“the relevant assumptions”);
(ab) where—
(i) the CFC entity is not a member of the multinational group, or is a member of the multinational group but not a member of any local blending subset, and
(ii) different effective tax rates are calculated for the period for different local blending subsets,
the effective tax rate, calculated on the relevant assumptions, of the local blending subset whose members have collectively the highest attributable income of C in relation to the CFC entity (as mentioned in subsection (5)(a));
(b) where no applicable effective tax rate can be determined under paragraphs (a) to (ab) the effective tax rate that would be calculated for the relevant period for the ... CFC entities located in that territory in which C has an ownership interest if—
(i) those entities were members of a multinational group whose ultimate parent’s accounting period is the same as the relevant period,
(ii) the result of Step 2 in section 132(1) for those entities were the aggregate of their profits (and losses) before tax as shown in their financial accounts,
(iia) the combined covered tax balance for those entities were the aggregate of the taxes shown in their financial accounts,
(iii) any tax arising under a blended CFC regime were ignored, and
(iv) where the blended CFC regime permits foreign tax credit in respect of a qualifying domestic top-up tax on the same basis it would be permitted for covered taxes, that qualifying domestic top-up tax were a covered tax.
But this is subject to section 180A.
(9) The applicable CFC rate for the relevant period means the rate which reflects the threshold for low taxation by reference to which the blended CFC regime is generally operated, taking into account any credit for foreign taxes available under the regime.
(10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) Where the filing member of the multinational group mentioned in section 180(8)(a) has made a transitional safe harbour election under paragraph 3 of Schedule 16 for the relevant period in respect of the territory mentioned in section 180(8)(a), for the purposes of that section the effective tax rate of the members of the group in respect of which the election applies is to be taken to be the simplified effective tax rate of the standard members of the multinational group (as defined in paragraph 8 of Schedule 16)).
(2) Where the filing member of the multinational group mentioned in section 180(8)(a) has made a transitional safe harbour election under paragraph 10 of Schedule 16 (application in the case of joint venture group) for the relevant period in respect of the territory mentioned in section 180(8)(a), for the purposes of that section the effective tax rate of the members of the group in respect of which the election applies is to be taken to be the simplified effective tax rate of the standard members of that multinational group (as defined in paragraph 8 of Schedule 16).
(3) Subsection (4) has effect where the filing member of a particular multinational group mentioned in section 180(8)(a) has made one or more separate elections under any of paragraphs 1, 4, 5 and 6 of Schedule 16A for the relevant period in respect of the territory mentioned in section 180(8)(a).
(4) For the purposes of section 180, the effective tax rate of any member or set of members to which a particular election mentioned in subsection (4) relates is to be the rate (expressed as a percentage) given by dividing—
(a) the aggregate tax expense of that member or set of members used to determine the effective tax rate for the purposes of the qualifying domestic top-up tax applying in the territory for the accounting period, together with any amounts of qualifying domestic top-up tax paid of that member or set of members, by
(b) the income of that member or set of members determined for the purposes of the qualifying domestic top-up tax.
(5) In this section “relevant period” is to be interpreted in accordance with section 180(2)(a).
(1) Where qualifying current tax expense in respect of covered taxes accrued in an accounting period in the underlying profits accounts of a member of a multinational group (“R”) is in respect of a distribution received from another member of the group (“D”) in which R has a direct ownership interest, that expense is to be allocated to D.
(2) Reference in subsection (1) to a distribution received is to be treated as including deemed distributions taken account of for the purposes of taxes on a shareholder of an entity in respect of undistributed earnings or capital of the entity.
181A Cross-border allocation of current tax under cross-crediting regime
(1) Qualifying current tax expense is to be allocated between standard members of a multinational group in a territory in which a cross-crediting regime applies and standard members of the group in another territory in accordance with the cross-crediting regime methodology.
(2) A cross-crediting regime applies in a territory if, under the law of that territory, taxes paid with respect to one source of income arising in another territory give rise to foreign tax credits which can be used against another source of income arising in a further territory.
(3) The “cross-crediting regime methodology” means—
(a) provisions of regulations made under section 262(1)(a) (power to make further provision about the application of provisions of this Part etc) identified in the regulations as the cross-crediting regime methodology, or
(b) where no cross-crediting regime methodology is identified in any such regulations, the methodology described in the cross-crediting guidance.
(4) The “cross-crediting guidance” means Chapter 3.1 of Tax Challenges Arising from the Digitalisation of the Economy – Administrative Guidance on the Global Anti-Base Erosion Model Rules (Pillar Two), June 2024 published by the OECD on 17 June 2024.
(5) Where subsection (3)(b) applies, the cross-crediting guidance has effect as cross-crediting regime methodology with all necessary modifications for that purpose (for example, reference to a Five-Year Election is to be read as an election to which paragraph 1 of Schedule 15 (long term elections) applies).
(6) This Chapter is to have effect with such modifications as are necessary to give effect to the cross-crediting regime methodology.
181B Cross-border allocation of deferred tax assets and liabilities
(1) Deferred tax assets and liabilities are to be allocated between standard members of a multinational group in one territory and standard members of the group in another territory in accordance with the deferred taxes methodology.
(2) The “deferred taxes methodology” means—
(a) provisions of regulations made under section 262(1)(a) (power to make further provision about the application of provisions of this Part etc) identified in the regulations as the deferred taxes methodology, or
(b) where no deferred taxes methodology is identified in any such regulations, the methodology described in the cross-border deferred taxes guidance.
(3) The “cross-border deferred taxes guidance” means Chapter 4.2 of Tax Challenges Arising from the Digitalisation of the Economy – Administrative Guidance on the Global Anti-Base Erosion Model Rules (Pillar Two), June 2024 published by the OECD on 17 June 2024.
(4) Where subsection (2)(b) applies, the cross-border deferred taxes guidance has effect as deferred taxes methodology with all necessary modifications for that purpose (for example, reference to a Five-Year Election is to be read as an election to which paragraph 1 of Schedule 15 (long term elections) applies).
(5) This Chapter is to have effect with such modifications as are necessary to give effect to the deferred taxes methodology (and accordingly no allocation of deferred tax assets or liabilities is to be made under this Chapter in cases to which the deferred taxes methodology applies).
(1) The total deferred tax adjustment amount for a member of a multinational group for an accounting period is the deferred tax expense relating to covered taxes reflected in the member’s partially adjusted profits, but with that deferred tax expense adjusted as follows.
(2) The deferred tax expense is to be adjusted to exclude the following—
(a) any amount of that expense that reflects items not reflected in the member’s adjusted profits (other than items that are not reflected solely because of an election under section 164 (intra-group transactions));
(b) any amount of that expense that reflects disallowed accruals or unclaimed accruals;
(c) the impact of a valuation adjustment or accounting recognition adjustment with respect to a deferred tax asset;
(d) any amount of that expense arising from a re-measurement with respect to a change in the rate of tax;
(e) any amount of that expense that reflects the generation or use of tax credits (but see section 183 which permits the inclusion of qualifying foreign tax credits).
(2A) The deferred tax expense is to be adjusted to include (so far as it would not already) any amount of deferred tax expense in respect of covered taxes within section 176(2)(g) or (h) (amounts reflected in other comprehensive income etc).
(3) Where a deferred tax liability is reversed in an accounting period, and that deferred tax liability was treated as an unclaimed accrual in a previous accounting period, the deferred tax expense is to be increased by the amount of the deferred tax liability that has reversed.
(4) Where a deferred tax asset is not reflected in the deferred tax expense only as a result of the recognition criteria not being met, that deferred tax asset is to be reflected in the total deferred tax adjustment amount.
(5) Where the amount of a deferred tax asset is adjusted as a result of section 186, an amount equal to that adjustment is to be reflected in the total deferred tax adjustment amount.
(6) Where an amount of recaptured deferred tax liability (see section 184) that was determined for a previous accounting period is reversed during the accounting period, that amount is to be reflected in the total deferred tax adjustment amount.
(7) Where the deferred tax expense relates to covered taxes where the rate is greater than 15%, the amount of that expense (after adjustment under subsections (2) to (6)) is to be adjusted so that it reflects the amount it would have been had the rate been 15%.
(8) For the purposes of this section—
“disallowed accrual” means—
any movement in deferred tax expense reflected in the member’s underlying profits which relates to an uncertain tax position, or
any movement in deferred tax expense reflected in those profits which relates to distributions from another member of that group;
“partially adjusted profits”, in relation to a member of a multinational group, means its underlying profits with the adjustments contained in the following sections applied—
section 137A (use of substituted values);
section 139 (profits adjusted to be profits before consolidation adjustments to eliminate intragroup transactions);
section 140 (profits adjusted to be profits before certain purchase accounting adjustments).
“unclaimed accrual” means an increase in a deferred tax liability reflected in the member’s underlying profits for an accounting period—
that is not expected to be reversed before the end of the fifth accounting period after that period, and
in respect of which the filing member has elected not to include in the total deferred tax adjustment amount for that period.
Paragraph 2 of Schedule 15 (annual elections) applies to an election not to include an unclaimed accrual in the total deferred tax adjustment amount.
183 Qualifying foreign tax credits (substitute loss carry forward assets)
(1) A qualifying foreign tax credit of a member of a multinational group is to be included in the member’s total deferred tax adjustment amount.
(2) A foreign tax credit is qualifying if—
(a) the territory in which the member is located—
(i) requires that domestic losses are offset against relevant foreign income before foreign tax credits can be applied against tax on foreign income, and
(ii) permits foreign tax credits to be used to offset tax on domestic profits to the extent to which domestic losses have been offset against relevant foreign income in a previous taxable period,
(b) the member has used a domestic loss to offset (in whole or in part) relevant foreign income, and
(c) the foreign tax credit is in respect of tax imposed by another territory on that foreign income.
(3) The amount that may be included in the total deferred tax adjustment amount of the member is the lesser of—
(a) the foreign tax paid, and
(b) the amount of domestic loss used to offset the relevant foreign income, multiplied by the tax rate in the territory in which the member is located.
(4) Section 182(7) (adjustment where rate of tax exceeds 15%) applies to a qualifying foreign tax credit included in the member’s total deferred tax adjustment amount as it applies to the member’s deferred tax expense.
(5) In this section and in section 183A “relevant foreign income”, in relation to a member of a multinational group, means—
(a) income of a controlled foreign company of the member on which the member is taxed as a result of a controlled foreign company tax regime , and
(b) other qualifying income.
(6) For the purposes of subsection (5) “other qualifying income means”—
(a) income identified as such for the purposes of this section in regulations made under section 262(1)(a), or
(b) where no income is identified as other qualifying income in any such regulations, such income as is necessary to give effect to the substitute loss carry-forward guidance.
(7) The “substitute loss carry-forward guidance” means Chapter 4.1 of Tax Challenges Arising from the Digitalisation of the Economy – Administrative Guidance on the Global Anti-Base Erosion Model Rules (Pillar Two), June 2024 published by the OECD on 17 June 2024.