MTT27100 - Calculating the effective tax rate: Covered tax balance: Deferred tax: Total deferred tax adjustment amount

To determine its MTT liability, a group must calculate the effective tax rate (ETR) for members in each territory in which it operates (see MTT20100). The covered tax balance consists of the qualifying current tax expense accrued by the member after certain adjustments have been made (see MTT25000). One such adjustment is the addition of the total deferred tax adjustment amount.

The total deferred tax adjustment amount consists of:

  • the deferred tax expense accrued in the member’s underlying profits which relates to covered taxes (the ‘deferred tax expense’), and
  • adjustments made to this figure.

This is set out in section 182(1) to (7) of Finance (No.2) Act 2023.

The deferred tax expense

The deferred tax expense is the deferred tax expense accrued in determining the member’s underlying profits. This is the net movement in the deferred tax assets and liabilities during the accounting period. Only the amount of deferred tax expense accrued which relates to covered taxes should be included for MTT purposes.

The underlying profits of a member are, normally, its profits as determined for the purpose of preparing the group’s consolidated financial statements.

See MTT21010 for further guidance on determining the underlying profits.

Amounts to be excluded from the deferred tax expense

The following items are excluded from the deferred tax expense:

  • any amount that relates to an amount not reflected in the member’s adjusted profits (see MTT27110)
  • any amount that reflects disallowed or unclaimed accruals (see MTT27120)
  • the impact of any valuation or accounting recognition adjustment in respect of a deferred tax asset (see MTT27130)
  • any amount of the deferred tax expense arising from a re-measurement due to a change in the tax rate (see MTT27140)
  • any amount of the deferred tax expense that reflects the generation or use of tax credits (see MTT27150)

Domestic Top-up Tax

For the purposes of Domestic Top-up Tax only, there is no need to exclude amounts of deferred tax expense that reflects the generation or use of a qualifying refundable tax credit.

See MTT27150 for further guidance on the exclusion of deferred tax expense relating to tax credits.

Reversal of deferred tax liability that was excluded as an unclaimed accrual

An adjustment is to be made to reflect the reversal of a deferred tax liability that was previously excluded in a previous accounting period as the result of an unclaimed accrual election.

See MTT27120 for guidance on unclaimed accruals.

Deferred tax asset not meeting recognition criteria

An adjustment is to be made to reflect deferred tax assets that are not included in the deferred tax expense as a result of failing to meet the accounting recognition criteria.

See MTT27130 for guidance on adjustments relating to accounting recognition.

Reversal of recaptured deferred tax liabilities

Where a deferred tax liability that has been recaptured subsequently reverses, the liability is to be reflected in the total deferred tax adjustment amount in the period of reversal.

See MTT27400 for guidance on recapture of deferred tax liabilities.

Qualifying foreign tax credits

A qualifying foreign tax credit is to be included in the total deferred tax adjustment amount.

See MTT27160 for guidance on qualifying foreign tax credits.

See MTT27165 for guidance on qualifying foreign tax credits where carry forward of credits are not permitted.

Deferred tax assets recorded below the minimum rate

A member may choose to revalue deferred tax assets at 15% if:

  • they have been recorded in the accounts using a tax rate below 15%, and
  • the asset is attributable to a period in which the member had an adjusted loss.

See MTT27170 for guidance on deferred tax assets recorded below the minimum rate.

Deferred tax expense arises in relation to a covered tax exceeding 15%

Where:

  • an amount of deferred tax expense is to be included in the total deferred tax adjustment amount after any adjustments have been made, and
  • it relates to a covered tax with a rate exceeding 15%,

that amount must be adjusted to reflect the amount that would be recorded if the rate was 15%.

Inclusion of existing assets and liabilities on entry into regime

Special rules apply when determining which deferred tax assets and liabilities to take into account in the deferred tax expense, in the first accounting period for which Pillar 2 rules apply.

See MTT27300 for guidance on the deferred tax expense on entry into the regime.

Special loss deferred tax assets

A group may elect that for a territory, all the standard members of the group will not have to calculate a total deferred tax adjustment amount. Instead, a special loss deferred tax asset is created when the standard members have made an aggregated net adjusted loss in the effective tax rate calculation for the period.

See MTT27010 for guidance on special loss deferred tax assets.

Remeasurement after change in tax rate

Where an amount of deferred tax expense arises from a change to the tax rate, that amount must be excluded when determining the total deferred tax adjustment amount.

See MTT27140 for guidance on remeasurement after a change in the tax rate.