Multinational Top-up Tax and Domestic Top-up Tax

MTT21010 - Calculating the effective tax rate: Adjusted profits: The underlying profits

The underlying profits of a member of a group (other than a permanent establishment) are the member’s profits as they would be determined for that member in preparing the consolidated financial statements for the ultimate parent. This is set out in sections 134, 136 and 137 of Finance (No.2) Act 2023.

Different rules apply for determining the underlying profits of permanent establishments. See MTT41020 for guidance.

Underlying profits accounts

The ‘underlying profits accounts’ of a member are the statements or accounts used as the basis for determining the underlying profits of that member.

Alternative basis for determining underlying profits

The underlying profits of a member can be determined on an alternative basis. An alternative basis consists of the use of:

• an accounting standard that is not that of the consolidated financial statements, and
• information in the separate financial accounts of the member.

An alternative basis can be used to determine the underlying profits where all of the following conditions are met:

• it is not reasonably practicable to determine those profits on the basis of the accounting standard used in the preparation of the ultimate parent’s consolidated financial statements.
• the alternative accounting standard to be used is an acceptable or authorised accounting standard (see MTT09510).
• the alternative accounting standard is that used for the member’s financial accounts.
• the information in those accounts is reliable.

If an alternative accounting standard is used and an amount relevant to the underlying profits is recorded in a different currency to that used for the consolidated financial statements, it should be converted to the currency of the consolidated financial statements. See MTT09100 for guidance on currency.

Note that, for Domestic Top-up Tax purposes, different rules apply to the alternative basis for wholly domestic groups. See MTT21020 for guidance on the application of this provision for wholly domestic groups.

Reliable information

Information in the accounts is considered to be ‘reliable’ if an auditor applying the generally accepted auditing standards of a relevant territory would reasonably conclude that the processes relating to the preparation of the accounts are likely to make the information in those accounts a fair and accurate description of the financial results of the member.

A ‘relevant territory’ is either:

• the territory in which a member is located (see MTT18000+),
• the one in which the ultimate parent is located, or
• if the member is a stateless flow-through entity (see MTT41410), the territory in which the entity was created.

Significant accounting standard difference

When the alternative basis is used and the application of a particular policy of the alternative accounting standard results in a significant accounting standard difference that would not have arisen had the accounting standard of the ultimate parent been applied, the underlying profits must be adjusted to eliminate that difference.

A ‘significant accounting difference’ is a difference of more than 1 million euros between the treatment of an amount in the accounts of a member and the consolidated financial statements that is not eliminated over time.

Amounts outside of the profit and loss account

Any amount that is recognised outside the profit and loss account in the underlying profits accounts of a member is not to be reflected in the underlying profits of that member for MTT purposes, unless specifically required.

Substituted values

Where an MTT provision requires a value in the underlying profits accounts to be substituted with another value (the ‘substituted value’), that substituted value:

• should be used for all purposes of the MTT calculation instead of the value recorded in the accounts, and
• is to be updated in accordance with the accounting standard used in determining the underlying profits of the member.

For example, where the carrying value of an asset has been substituted and the value of that asset is relevant to the deferred tax expense, the substituted value should be used to determine the deferred tax expense.

Because the accounting standard used in preparing the underlying profits accounts is to be followed, where that standard does not require or permit the recognition of a deferred tax asset or liability, no such asset or liability should be recognised as a result of the substitution of a new value.

However, where the value of an asset has been substituted, and that substituted value is being used, no adjustments for impairment are required (i.e. the group is not required to undertake impairment testing on the substituted value). This provision is only needed in relation to assets as liabilities are not typically subject to impairment.

Where:

• the value of an asset recorded in the underlying profits accounts has been substituted, and
• in the underlying profits account for any period, its value has been impaired, and that impaired value is less than the substituted value of that asset for that period,

the value from the underlying profits accounts is to be used for that period and all subsequent periods, rather than the substituted amount.

The rules in relation to impairment losses are designed to prevent a group having to conduct impairment testing in relation to the substituted values. 

This treatment is set out in section 137A of the Act.

Example

An MTT provision requires the value of an asset to be substituted for the 2031 period.

The value of the asset in the underlying profits is 500. It must be substituted for a value of 350 according to the provision.

In each of the periods from 2032 to 2034, the value of the asset as recorded in the underlying profits is impaired by an amount of 100, in accordance with the relevant accounting standard.

In the 2031 and 2032 periods, the substituted value of the asset (350) should be used for all MTT purposes, because the substituted value is greater than the value as recorded in the underlying profits. No impairment is to be made to the substituted figure in the 2032 period.

In the 2033 period and onwards, the value of the asset as recorded in the underlying profits is less than the substituted value. The value of the asset as recorded in the underlying profits should now be used for MTT purposes.

Regulated mutual insurance entities

The underlying profits for a regulated mutual insurance entity (as defined in section 213 of the Act) should be the profit in the relevant financial statements after any transfer to or from the Unallocated Divisible Surplus (UDS) or Fund for Future Appropriations (FFA).