MTT27170 - Calculating the effective tax rate: Covered tax balance: Deferred tax: Deferred tax assets recorded below minimum rate

A member may choose to recognise the value of a deferred tax asset related to carried forward tax losses at a tax rate of 15%, where:

  • a member calculates the value of a deferred tax asset at a tax rate below 15%, and
  • the deferred tax asset is attributable to an accounting period in which the member had an adjusted loss.

The information return will be filled out according to the choice made by the group. This choice is not made in the format of an election.

This rule preserves the basic tenet that an MTT loss should offset the same amount of MTT income. For example, if the tax rate was 5%, a loss of 100 would give rise to a deferred tax asset of 5. When 100 of income was subsequently earned, the deferred tax asset of 5 would reverse and the covered taxes balance would be 5 through the deferred tax adjustment amount. Without this choice, top-up tax of 10 would be due when the 100 income was earned. With the member makes this choice, the deferred tax asset is recast to 15 and no top-up tax would be due. The outcome of the rule is that a loss of 100 shelters 100 of income.

This is set out in sections 182(5) and 186 of Finance (No.2) Act 2023.

Member’s tax loss is greater than its adjusted loss

Where the member’s tax loss upon which the deferred tax asset in the accounts is calculated exceeds its adjusted loss, only the part of the deferred tax asset that can be attributed to the member’s adjusted loss calculated under Chapter 4 can be recalculated to a rate of 15%.

Member’s tax loss is smaller than or equal to its adjusted loss

Where the member’s tax loss upon which the deferred tax asset in the accounts is calculated is smaller than or equal to its adjusted loss, the entire deferred tax asset may be recalculated to a rate of 15%.

Example 1

X Ltd is resident in Country X which has a 10% tax rate. In year 1, X Ltd has a tax loss of 1,000,000, but has determined it’s adjusted loss for the period to be 1,100,000.

X Ltd recognises a deferred tax asset of 100,000 in its accounts in respect of a carried forward tax loss of 1,000,000 (1,000,000 x 10%).

X Ltd’s tax loss upon which the deferred tax asset is calculated is less than its adjusted loss, and therefore X Ltd can choose for the entire deferred tax asset to be recalculated at a rate of 15% for the purposes of its MTT calculations.

Therefore the total deferred tax asset for the purposes of X Ltd’s MTT calculation is 150,000 (being 1,000,000 x 15%) if it chooses to recalculate the deferred tax asset.

As the full 1,000,000 loss is attributable to MTT adjusted loss, the full amount can be recast to shelter future MTT income of 1,000,000.

Example 2

Y Ltd is resident in Country Y which has a 10% tax rate. In year 1, Y Ltd has a tax loss of 1,000,000, but has calculated it’s adjusted loss for the period to be 900,000.

Y Ltd recognises a deferred tax asset of 100,000 in its accounts in respect of a carried forward tax loss of 1,000,000 (1,000,000 x 10%).

The tax loss upon which the deferred tax asset is calculated is greater than its adjusted loss, and therefore Y Ltd can only choose for part of the deferred tax asset to be recalculated at a rate of 15% for the purposes of its MTT calculations.

The difference between Y Ltd’s tax loss and Y Ltd’s adjusted loss is 100,000 and therefore only 900,000 (being 1,000,000 less 100,000) can be recast at a rate of 15%. The remaining 100,000 is not recast, but remains at 10%. Therefore, the total deferred tax asset for the purposes of Y Ltd’s MTT calculation is 145,000 (being 900,000 x 15% plus 100,000 x 10%) if it chooses to recalculate the deferred tax asset.