MTT25520 - Calculating the effective tax rate: Covered tax balance: Allocation of current taxes under cross-crediting regime
Where a group has standard members in a territory in which a cross-crediting regime applies, the qualifying current tax expense is allocated to the members of the group in another territory in accordance with the methodology in section 181A of Finance (No.2) Act 2023.
Cross-crediting regime
A cross-crediting regime applies in a territory if, under the laws of that territory:
- taxes paid with respect to one source of income arising in another territory give rise to foreign tax credits, and
- those foreign tax credits can be used against another source of income arising in a third territory.
Example
MNE Group A has an ultimate parent, A1 Ltd, which is located in Territory A.
A1 Ltd has a PE in Territory B (PE1) and Territory C (PE2).
The tax rate is 15% in Territory A, 20% in Territory B and 5% in Territory C.
A1 Ltd has a gross tax liability of 7.5 in Territory A on 50 of foreign income arising to PE2 in Territory C.
Territory A provides a foreign tax credit of 20 for the tax paid of 20 in Territory B. Of that foreign tax credit, 15 is set against the tax liability in Territory A in relation to PE1.
The remaining, surplus foreign tax credit of 5 can be set against the tax liability in Territory A in respect of PE2. The gross tax liability of 7.5 in relation to PE2 is offset by a foreign tax credit of 2.5 for the tax paid in Territory C, and by a further foreign tax credit of 5 (the surplus tax credit in respect of PE1).
There is a cross-crediting regime in Territory A because that territory grants a foreign tax credit for tax paid in Territory B in respect of the income of PE1, and any surplus foreign tax credit may be used against the tax liability which arises in respect of the income of PE2 in Territory C.
Cross-crediting regime methodology
The cross-crediting regime methodology is set out in Chapter 3.1 of the June 2024 Agreed Administrative Guidance document published by the OECD.
When using this guidance, the OECD defined terms should be read as if they were substituted by their equivalents in UK legislation. For example, a reference to a Five-Year Election is to be read as an election to which paragraph 1 of Schedule 15 (long term elections) applies.
The methodology may be enacted into UK legislation by regulations.
Introduction in Finance Act 2025
Section 181A was introduced in FA25. This guidance page reflects the current version of the legislation. Consult FA25 for legislation applicable to prior periods if the retrospection election does not apply (see MTT09490).