MTT27110 - Calculating the effective tax rate: Covered tax balance: Deferred tax: Alignment with adjusted profits
Where an amount of thedeferred tax expense reflects an item that is not reflected in the member’s adjusted profits, it must be excluded when calculating the total deferred tax adjustment amount. This is to align the covered taxes with the adjusted profits when determining the effective tax rate.
See MTT21000 for guidance on determining the adjusted profits.
For example, where a territory taxes excluded equity gains upon disposal, but permits a tax deferral if the gain is “rolled-over” (for example, under business asset rollover relief under sections 152-162 Taxation of Chargeable Gains Act 1992), a deferred tax liability may be recognised. This liability must be excluded when determining the total deferred tax adjustment amount, because it arose in respect of an excluded equity gain, and that gain is excluded from the member’s adjusted profits.
This is set out in section 182(2)(a) of Finance (No.2) Act 2023.