Multinational Top-up Tax and Domestic Top-up Tax

MTT27140 - Calculating the effective tax rate: Covered tax balance: Deferred tax: Re-measurement 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. This is because the amounts accrued in this respect are simply changes to amounts already accrued in a previous year and should not be taken into account in the covered taxes balance for the current year (does not relate to current year adjusted profits).

Only the re-measurement of the amount of deferred tax expense is excluded. When the deferred tax asset or liability that has been remeasured reverses in a subsequent year, no further adjustment is required when calculating the total deferred tax adjustment amount in that year, that is, the tax rate prevailing for the period when the reversal takes place applies.

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

The impact of a change in tax rate on the deferred tax expense may need to be addressed through a post filing adjustment where the change in tax rate is relevant (see MTT25310).

Example

In 2035, Z Ltd incurs a tax loss of 100. The tax rate is 10% so this is recognised as a deferred tax asset of 10. For the purposes of this example, Z Ltd has chosen not to apply s186.

In 2036, Z Ltd makes neither a profit nor a loss, and the tax rate increases to 15%. In Z Ltd’s accounts the deferred tax asset in respect of the loss carried forward from 2035 is increased to 15. The increase of 5 to the deferred tax asset (and credit of 5 to deferred tax expense) is excluded from the total deferred tax adjustment amount for the 2036 period and so is not taken into account in calculating the covered tax balance and effective tax rate in 2036. Absent this exclusion, the covered taxes balance in 2036 would be lower by 5, causing the ETR to also reduce.

In 2037 (when the tax rate is still 15%), Z Ltd makes a profit of 100 and the carried forward tax loss is utilised in full so there is no actual tax payable and thus no current tax expense. This deferred tax asset of 15 is utilised and the accounts will show a deferred tax expense of 15. For MTT purposes, the 15 is reflected in the total deferred tax adjustment in 2037. The covered taxes balance for the year is 15 (made up of current tax expense of 0 and deferred tax expense of 15).