MTT27020 - Calculating the effective tax rate: Covered tax balance: Deferred tax: Wholly domestic group or entity enters scope of MTT

These provisions apply in cases where a wholly-domestic group or a single entity is in scope of Domestic Top-up Tax (DTT) but not MTT, and then becomes a multinational group subject to the Pillar Two rules (i.e. a qualifying Income Inclusion Rule or Undertaxed Profits Rule, such as MTT).

This is set out in section 273B of Finance (No.2) Act 2023.

See MTT09150 for guidance on the meaning of 'Pillar Two rules apply'.

Recaptured deferred tax liability

Where:

  • a member has a recaptured deferred tax liability arising for DTT purposes, and
  • that liability arises in a period (the ‘initial period’) where it is not subject to the Pillar Two rules, and
  • Pillar Two rules begin to apply to the member for an accounting period before the sixth period after the initial period,

no recalculation is required under section 184(2) in relation to that liability for DTT purposes.

Special loss deferred tax asset election made

Where:

  • a special loss deferred tax asset election under section 187 is made for an entity for DTT purposes,
  • that election is made in a period where it is not subject to the Pillar Two rules,
  • Pillar Two rules begin to apply to the member in a subsequent period,

the election ceases to have effect from the first accounting period in which the Pillar Two rules apply.

In this case, the election may be made again for that first period in which the Pillar Two rules apply, even though the election can generally only be made once. Where the election is made again, it will have effect for both MTT and DTT purposes.

However, special loss deferred tax assets that arose in a pre-Pillar Two period cannot be used in the first period in which Pillar Two rules apply, for both DTT and MTT purposes.

Deferred tax asset arising before entry is reflected in a collective additional amount

Sections 185(6)-(7) have effect in relation to certain deferred tax assets arising before a group enters the Pillar Two regime. Where those provisions have effect, the deferred tax asset in question is to be ignored when determining the deferred tax expense of the member.

A special rule applies where:

  • this provision applies for MTT purposes, and
  • the deferred tax asset has already been reflected in a collective additional amount under section 203 for DTT purposes.

The rule will apply differently depending on whether and election under section 205 has been made to carry forward the collective additional amount (see MTT33120).

No election to carry forward is made

Where no section 205 election is made in relation to the collective additional amount, section 185(7) does not apply to the asset for MTT purposes to the extent that it was reflected in a collective additional amount under DTT.

Election to carry forward is made

Where:

  • an election is made under section 205 in relation to the collective additional amount, and
  • the subtraction required in a subsequent accounting period by 205(2)(a) has not occurred in a pre-Pillar Two period,

the amount to be subtracted under 205(2)(a) is reduced insofar as it reflects the asset.