MTT15935 - Scope: Safe harbours: Transitional safe harbour: Adjustments required
When assessing whether the tests are met for safe harbour purposes, adjustments to the amounts reported in the qualified financial statements are generally not permitted, with certain exceptions.
Some adjustments are specifically required to the figures used for the purposes of the transitional safe harbour. These adjustments ensure the calculations undertaken for the transitional safe harbour tests are aligned as closely as possible to the full MTT calculations.
Additionally, adjustments that are permitted or required by the CbCR provisions can be made to those amounts, as they are made by the group for the purpose of preparing and filing the CbC Report.
In other cases, it may be necessary to make adjustments to the figures in the qualified financial statements in order to prepare the CbC Report, but these adjustments are not explicitly specified in the CbC Reporting legislation. These adjustments are also acceptable where necessary for the correct preparation and filing of the CbC Report.
This ensures that, in practice, the group will normally benefit from the convenience of completing the safe harbour tests using figures taken directly from the CbC Report.
The required adjustments are set out in Paragraphs 5 and 6, Schedule 16 to Finance (No.2) Act 2023.
Adjustments made to arrive at qualifying income tax expense
'Qualifying income tax expense' is income tax expense adjusted to exclude:
- amounts that do not relate to covered taxes, and
- amounts relating to uncertain tax positions.
Amounts relating to profits of a permanent establishment that are incurred in the territory of the permanent establishment should be allocated from the main entity to the permanent establishment.
Ultimate parent subject to deductible dividend regime
Where:
- the ultimate parent of a group is subject to a deductible dividend regime, and
- it registers a profit in its profit (loss) before income tax,
its profit (loss) before income tax is reduced, but not below zero, by the amount of qualifying dividends that would be deducted from its adjusted profits according to section 171(1).
This reduction cannot reduce the ultimate parent’s profit (loss) before income tax below zero.
Net unrealised fair value loss
Where:
- the members of the group in the territory have losses arising from changes in fair value of relevant ownership interests, and
- those losses exceed the gains on changes in fair value of relevant ownership interests by more than €50 million,
that loss is excluded from the aggregate profit (loss) before income tax for that territory.
Example
A group has two members in a territory, A Ltd and B Ltd.
A Ltd has a 4% ownership interest in X Ltd, and B Ltd has an 8% ownership interest in X Ltd. These ownership interests are held directly by A Ltd and B Ltd. No ownership interest in any other entity is held by A Ltd or B Ltd.
The ownership interest constitutes an equal right to profits, capital, reserves and voting rights in X Ltd.
In the accounting period, A Ltd records a €20 million fair value loss in respect of its ownership interest in entity 1. Group member B records a €40 million fair value loss in respect of its ownership interest.
An adjustment is required to exclude the losses, because:
The aggregate ownership interest of all members of the group in X Ltd is 12%, which is 10% or more, so the ownership interests are relevant.
There is a net loss of €60 million arising from changes in fair value of the relevant ownership interests in X Ltd.
There are no other relevant ownership interests from which A Ltd or B Ltd could have made a gain, so there is a net unrealised fair value loss.
The net unrealised fair value loss is €60 million, which exceeds €50 million.
Investment entity tax transparency election
Where:
- an investment entity tax transparency election has been made (see MTT45160), and
- an amount of profit or qualifying tax expense would be allocated from an investment entity to another member of the multinational group according to that section,
that amount must be reflected in that other member’s profit (loss) before income tax or qualifying tax expense.
If the amount is already reflected in those figures, no adjustment will be required for the purpose of the transitional safe harbour.
Any such reallocation for transitional safe harbour purposes has no bearing on computations under the full MTT calculations.
Taxable distribution method election
Where:
- a taxable distribution method election has been under section 214, and
- an amount of profit or qualifying tax expense would be reflected in the adjusted profits or covered tax balance of a member of the group as a result of that election,
that amount must be reflected in the member’s profit (loss) before income tax or qualifying tax expense.
If the amount is already reflected in those figures, no adjustment will be required.
Purchase price accounting adjustments
An adjustment will be required where the financial statements used to prepare the country-by-country report reflect purchase price accounting adjustments.
See MTT15931 for further guidance.
Other adjustments
Generally, no other adjustments are permitted to the figures used in the transitional safe harbour. This includes adjustments that the group would consider to make the figures more valid, or to align them more closely to the figures that would be used in the computations under the main MTT rules.
However, it is recognised that a group may prepare its consolidated financial statements in various ways, and adjustments may be made at various stages of the consolidation process.
Therefore, other adjustments are not prohibited if they are made either:
- In accordance with the relevant GAAP,
- To produce the CbC Report in accordance with relevant legislation or guidance, or
- To effectively reverse a prohibited adjustment, in order to arrive at the outcome that would have been reached had the prohibited adjustment not been made.
This is the case regardless of the point at which they are made in the process of preparing the CbC Report.
For example, a group may sub-consolidate at a level below the UPE, before reporting up to the UPE. It is possible for the sub-consolidated financial statements to be recognised as the qualified financial statements. Using the sub-consolidated statements may be more convenient for a group, as the consolidated financial statements may require disaggregation in order to preparing the CbC Report.
Conversely, a group that recognises the consolidated financial statements as the qualified financial statements may need to make adjustments to those statements in order to properly attribute amounts between entities and jurisdictions when preparing the CbC Report. These adjustments are acceptable even though may only be implicitly acceptable under the relevant CbCR legislation.