MTT25010 - Calculating the effective tax rate: Covered tax balance: Calculating the covered tax balance

The covered tax balance is the total amount of taxes to be included for members in that territory. The aggregate covered tax balance of all the members in a territory is the numerator in the effective tax rate calculation for that territory.

The covered tax balance of a member is determined by the following process:

Step 1 – Determine the qualifying current tax expense accrued by the member for that period.

The qualifying current tax expense of a member is the current tax expense for that member which relates to covered taxes (see MTT25100).

Step 2 – Adjust for any amounts that must be excluded from the covered tax balance (see MTT25200)

Step 3 – Adjust for any amounts that must be reflected in the covered tax balance (see MTT25210).

Step 4 - Adjust for any amounts to be allocated to or from the member as a result of the special rules relating to:

  • permanent establishments (see MTT41040).
  • tax transparent entities and hybrid entities (see MTT41470).
  • an ultimate parent that is a flow-through entity (see MTT41450).
  • CFC regimes (MTT25500).
  • blended CFC regimes (see MTT25510), and
  • intra-group distributions (see MTT25220).

Step 5 – Remove amounts which have been taken into account more than once.

This is set out in section 174 of Finance (No.2) Act 2023.

Deferred tax adjustments

Temporary differences in MTT are dealt with by deferred tax accounting. See MTT27000+ for guidance on determining the total deferred tax adjustment amount, which is to be reflected in the covered tax balance.

Negative covered tax balance where there is an adjusted profit

If the covered tax balance is less than zero, and the adjusted profits for the territory for the period are zero or greater:

  • the covered tax balance for the period is deemed to be nil, and
  • the negative covered tax balance is carried forward to subsequent periods.

See MTT25600 for further guidance.