Finance (No. 2) Act 2023

(d) paragraph (d) of the definition in section 111A of ‘permanent establishment’, it shall be considered to be stateless.

(5) (a) Subject to paragraphs (b) and (c), where a constituent entity is regarded as located in 2 jurisdictions, and those jurisdictions have a tax treaty, the constituent entity shall be deemed to be located in the jurisdiction where it is considered to be resident for tax purposes under that tax treaty.

(b) Where the tax treaty referred to in paragraph (a) requires the competent authorities to reach a mutual agreement on the deemed residence for tax purposes of the constituent entity, and no agreement is reached, subsection (6) shall apply.

(c) Where no relief from double taxation is available under a tax treaty as a consequence of the constituent entity being resident for tax purposes in both of the jurisdictions concerned, subsection (6) shall apply.

(6) (a) Subject to paragraphs (b) and (c), where a constituent entity is located in 2 jurisdictions and those jurisdictions do not have a tax treaty or where paragraph (b) or (c) of subsection (5) applies, as the case may be, the constituent entity shall be deemed to be located in the jurisdiction which charged the higher amount of covered taxes for the fiscal year.

(b) For the purpose of calculating the covered taxes referred to in paragraph (a), no account shall be taken of any tax paid in accordance with a controlled foreign company tax regime.

(c) Subject to paragraph (d), where the amount of covered taxes referred to in paragraph (a) is the same, or is zero, in both jurisdictions, then, the constituent entity shall be deemed to be located in the jurisdiction in which the greater substance-based income exclusion amount under section 111AE is calculated on an entity basis.

(d) Where the substance-based income exclusion amount referred to in paragraph (c) is the same, or is zero, in both jurisdictions, then—

(i) the constituent entity shall be considered to be stateless, or

(ii) where the constituent entity is an ultimate parent entity, the constituent entity shall be deemed to be located in the jurisdiction in which it is created.

(7) Where, on the application of paragraphs (5) and (6), a parent entity is deemed to be located in a jurisdiction where it is not subject to a qualified IIR, it shall be deemed to be subject to the qualified IIR of the other jurisdiction, unless a tax treaty prohibits the application of such rule.

(8) For the purpose of this Part, the location of a constituent entity, determined at the beginning of a fiscal year, shall remain the same throughout the fiscal year.

(9) For the purposes of Chapter 5, a stateless constituent entity shall be deemed to be located in a jurisdiction but not a jurisdiction where any other entity is located.

CHAPTER 2

IIR and UTPR

Ultimate parent entity in the State 111E. (1) An ultimate parent entity that—

(a) is a constituent entity located in the State, and

(b) owns directly or indirectly an ownership interest in a low-taxed constituent entity at any time during a fiscal year,

shall be subject to a top-up tax (in this section referred to as ‘IIR top-up tax’) in respect of that low-taxed constituent entity.

(2) Where an ultimate parent entity located in the State is a low-taxed constituent entity in a fiscal year, that ultimate parent entity shall be subject to IIR top-up tax for the fiscal year in respect of itself.

Intermediate parent entity in the State

111F. (1) Subject to subsection (3), an intermediate parent entity located in the State—

(a) whose ownership interests are owned directly or indirectly by an ultimate parent entity that is located in a third country jurisdiction or in a Member State that has not applied a qualified IIR to the ultimate parent entity, and

(b) that owns directly or indirectly an ownership interest in a low-taxed constituent entity at any time during a fiscal year,

shall be subject to a top-up tax (in this section referred to as ‘IIR top-up tax’) in respect of that low-taxed constituent entity for the fiscal year.

(2) Subject to subsection (3), where an intermediate parent entity located in the State, whose ownership interests are owned, directly or indirectly, by an ultimate parent entity that is located in a third country jurisdiction or in a Member State that has not applied a qualified IIR to the ultimate parent entity, is a low-taxed constituent entity in a fiscal year, the intermediate parent entity shall be subject to IIR top-up tax for the fiscal year in respect of itself.

(3) Subsections (1) and (2) shall not apply where—

(a) the ultimate parent entity of the intermediate parent entity is subject to a qualified IIR for that fiscal year, or

(b) another intermediate parent entity is located in a jurisdiction where it is subject to a qualified IIR for that fiscal year and owns, directly or indirectly, a controlling interest in the intermediate parent entity referred to in subsection (1) or (2), as the case may be.

Intermediate parent entity located in the State and held by excluded ultimate parent entity

111G. (1) Subject to subsection (3), an intermediate parent entity located in the State—

(a) whose ownership interests are owned directly or indirectly by an ultimate parent entity that is an excluded entity, and

(b) that owns directly or indirectly an ownership interest in a low-taxed constituent entity at any time during a fiscal year,

shall be subject to a top-up tax (in this section referred to as ‘IIR top-up tax’) in respect of that low-taxed constituent entity for the fiscal year.

(2) Subject to subsection (3), where an intermediate parent entity located in the State, whose ownership interests are owned, directly or indirectly, by an ultimate parent entity that is an excluded entity, is a low-taxed constituent entity in a fiscal year, the intermediate parent entity shall be subject to IIR top-up tax for the fiscal year in respect of itself.

(3) Subsections (1) and (2) shall not apply where another intermediate parent entity is located in a jurisdiction where it is subject to a qualified IIR for that fiscal year and owns, directly or indirectly, a controlling interest in the intermediate parent entity referred to in subsection (1) or (2), as the case may be.

Partially-owned parent entity in the State

111H. (1) Subject to subsection (3), a partially-owned parent entity located in the State that owns directly or indirectly an ownership interest in a low-taxed constituent entity at any time during a fiscal year shall be subject to a top-up tax (in this section referred to as ‘IIR top-up tax’) in respect of that low-taxed constituent entity for the fiscal year.

(2) Subject to subsection (3), where a partially-owned parent entity located in the State is a low-taxed constituent entity in a fiscal year, that partially-owned parent entity shall be subject to IIR top-up tax for the fiscal year in respect of itself.

(3) Subsections (1) and (2) shall not apply where the ownership interests of the partially-owned parent entity referred to in subsection (1) or (2), as the case may be, are wholly owned, directly or indirectly, by another partially-owned parent entity that is subject to a qualified IIR for that fiscal year.

Allocation of top-up tax under IIR

111I. (1) IIR top-up tax due by a parent entity in respect of a low-taxed constituent entity for a fiscal year pursuant to section 111E(1), 111F(1), 111G(1) or 111H(1), as the case may be, shall be equal to an amount calculated as—

A x B

where—

A is the top-up tax of the low-taxed constituent entity, as calculated in accordance with section 111AD, and

B is the parent entity’s allocable share in that top-up tax for the fiscal year.

(2) (a) A parent entity’s allocable share in the top-up tax with respect to a low-taxed constituent entity is the proportion of the parent entity’s ownership interest in the qualifying income of the low-taxed constituent entity, calculated as—

(A B) / C

where—

A is the qualifying income of the low-taxed constituent entity for the fiscal year,

B is the amount of qualifying income attributable to ownership interests held by owners other than the parent entity as determined by paragraph (b), and

C is the qualifying income of the low-taxed constituent entity for the fiscal year.

(b) The amount of qualifying income attributable to ownership interests in a low-taxed constituent entity held by owners other than the parent entity shall be the amount that would have been treated as attributable to such owners under the principles of the acceptable financial accounting standard used in the ultimate parent entity’s consolidated financial statements if the low-taxed constituent entity’s net income was equal to its qualifying income, and—

(i) the parent entity had prepared consolidated financial statements in accordance with that accounting standard (in this subsection referred to as the ‘hypothetical consolidated financial statements’),

(ii) the parent entity owned a controlling interest in the low-taxed constituent entity such that all of the income and expenses of the low-taxed constituent entity were consolidated on a line-by-line basis with those of the parent entity in the hypothetical consolidated financial statements,

(iii) all of the low-taxed constituent entity’s qualifying income was attributable to transactions with persons that are not members of an MNE group or large-scale domestic group, and

(iv) all ownership interests not directly or indirectly held by the parent entity were held by persons other than members of an MNE group or large-scale domestic group.

(3) In addition to the amount allocated to a parent entity in accordance with subsection (1), IIR top-up tax due by a parent entity pursuant to section 111E(2), 111F(2), 111G(2) or 111H(2), as the case may be, shall include, for the fiscal year, in accordance with section 111AD, the full amount of top-up tax calculated for that parent entity.

IIR offset mechanism

111J. Where a parent entity located in the State holds an ownership interest in a low-taxed constituent entity indirectly through an intermediate parent entity or a partially-owned parent entity that is subject to a qualified IIR for the fiscal year, the top-up tax due pursuant to section 111E(1), 111F(1), 111G(1) or 111H(1), as the case may be, shall be reduced by an amount equal to the portion of the first-mentioned parent entity’s allocable share of the top-up tax which is due by the intermediate parent entity or the partially-owned parent entity.

Effect of qualified domestic top-up tax

111K. (1) Notwithstanding section 111AI, where a Member State does not apply a qualified domestic top-up tax to collect any additional top-up tax arising in accordance with Article 29 of the Directive, additional top-up tax shall be computed pursuant to section 111AF and such additional top-up tax shall be considered to be jurisdictional top-up tax for the purposes of section 111AD(3).

(2) Where the amount of qualified domestic top-up tax in respect of a constituent entity for a fiscal year has not been paid within 4 fiscal years following the fiscal year in which it was due, the amount of qualified domestic top-up tax that was not paid shall be added to the jurisdictional top-up tax in respect of the jurisdiction where the constituent entity is located calculated in accordance with section 111AD(3).

(3) Where a qualified domestic top-up tax is applied by a Member State or a third country jurisdiction, for the purposes of determining the qualified domestic top-up tax in that jurisdiction, the financial accounting net income or loss of the constituent entities located in that Member State or third country jurisdiction may be determined in accordance with—

(a) an acceptable financial accounting standard, or

(b) an authorised financial accounting standard that is different from the financial accounting standard used in the consolidated financial statements of the ultimate parent entity, provided that such financial accounting net income or loss is adjusted to prevent any material competitive distortion.

(4) Where an amount of domestic top-up tax in respect of a qualifying entity (within the meaning of paragraph (a) or (b), as the case may be, of section 111AAB(1)) for a fiscal year has not been paid to and collected by the Collector-General within 4 fiscal years following the fiscal year in which it was due, that amount of domestic top-up tax shall no longer be due and payable to the Revenue Commissioners.

Application of UTPR across MNE group

111L. (1) Subject to subsection (2) and section 111AAL, where during a fiscal year—

(a) the ultimate parent entity of an MNE group is located in a jurisdiction that does not apply a qualified IIR, or

(b) the ultimate parent entity of an MNE group is an excluded entity,

a constituent entity of that MNE group that is located in the State shall be subject to a top-up tax (referred to in this section as ‘UTPR top-up tax’) calculated in accordance with section 111N.

(2) Subsection (1) shall not apply to a constituent entity that is an investment entity.

Application of UTPR in jurisdiction of ultimate parent entity

111M.(1) Subject to subsections (2) and (3) and sections 111AZ and 111AAL, where during a fiscal year, the ultimate parent entity of an MNE group is a low-taxed constituent entity that is not located in a Member State, a constituent entity of that MNE group that is located in the State shall be subject to a top-up tax (referred to in this section as ‘UTPR top-up tax’) calculated in accordance with section 111N.

(2) Subsection (1) shall not apply where the ultimate parent entity is subject to a qualified IIR in respect of itself and its low-taxed constituent entities.

(3) Subsection (1) shall not apply to a constituent entity that is an investment entity.

Calculation and allocation of UTPR top-up tax amount

111N. (1) (a) The UTPR top-up tax amount arising pursuant to section 111L(1), 111M(1) or 111AZ(1), as the case may be, of an MNE group allocated to a constituent entity for a fiscal year shall be calculated as follows:

A x B

where—

A is the UTPR top-up tax amount of an MNE group allocated to the State for a fiscal year as determined in accordance with subsection (2), and

B is the UTPR percentage in respect of the constituent entity for a fiscal year as determined in accordance with paragraph (b).

(b) The UTPR percentage in respect of a constituent entity for a fiscal year shall be calculated as follows:

((A / B) x 50 per cent) + ((C / D) x 50 per cent) where—

A is the total number of employees of the constituent entity,

B is the total number of employees of all the constituent entities of the MNE group located in the State,

C is the sum of the net book values of tangible assets of the constituent entity, and

D is the sum of the net book values of tangible assets of all constituent entities of the MNE group located in the State.

(2) The UTPR top-up tax amount of an MNE group allocated to the State for a fiscal year shall be calculated as follows:

A x B

where—

A is the total UTPR top-up tax of the MNE group for a fiscal year as determined in accordance with subsection (3), and

B is the UTPR percentage in respect of the MNE group located in the State for a fiscal year as determined in accordance with subsection (6).

(3) The total UTPR top-up tax of an MNE group for a fiscal year shall be equal to the sum of the top-up tax calculated for each low-taxed constituent entity of the MNE group for that fiscal year, in accordance with section 111AD, as adjusted by subsections (4) and (5).

(4) UTPR top-up tax of a low-taxed constituent entity for a fiscal year shall be equal to zero for the purposes of subsection (3) where all of the ultimate parent entity’s ownership interests in such low-taxed constituent entity are held directly or indirectly by one or more parent entities which are required to apply a qualified IIR in respect of that low-taxed constituent entity for that fiscal year.

(5) Where subsection (4) does not apply, UTPR top-up tax of a low-taxed constituent entity for a fiscal year shall be reduced, for the purposes of subsection (3), by a parent entity’s allocable share of the top-up tax of that low-taxed constituent entity that is brought into charge under a qualified IIR.

(6) Subject to subsection (8), the UTPR percentage in respect of an MNE group located in the State for a fiscal year shall be calculated as follows:

((A / B) x 50 per cent) + ((C / D) x 50 per cent) where—

A is the total number of employees of all the constituent entities of the MNE group located in the State,

B is the total number of employees of all constituent entities of the MNE group located in jurisdictions that have a qualified UTPR in force for the fiscal year,

C is the sum of the net book value of tangible assets of all constituent entities of the MNE group located in the State, and

D is the sum of the net book value of tangible assets of all constituent entities of the MNE group located in jurisdictions that have a qualified UTPR in force for the fiscal year.

(7) The following shall apply for the purposes of subsections (1)(b) and (6):

(a) the number of employees of a constituent entity in a jurisdiction shall be the number of employees employed on a full-time equivalent basis located in that jurisdiction, including independent contractors provided that they participate in the ordinary operating activities of the constituent entity;

(b) the tangible assets of a constituent entity in a jurisdiction shall include the tangible assets of that constituent entity located in that jurisdiction but shall not include—

(i) cash or cash equivalent,

(ii) intangible assets, or

(iii) financial assets;

(c) a constituent entity that is a permanent establishment shall be allocated the employees whose payroll costs are included in the separate financial accounts of that permanent establishment as determined by subsection (1) of section 111R adjusted in accordance with subsection (2) of that section;

(d) a constituent entity that is a permanent establishment shall be allocated the tangible assets included in the separate financial accounts of the permanent establishment as determined by subsection (1) of section 111R adjusted in accordance with subsection (2) of that section;

(e) the number of employees and the tangible assets allocated to the jurisdiction of a permanent establishment shall not be taken into account for the number of employees and the tangible assets, as the case may be, of the jurisdiction of the main entity;

(f) the number of employees and the net book value of tangible assets held by an investment entity shall be excluded from the calculations in accordance with subsections (1)(b) and (6) of the UTPR percentage in respect of a constituent entity and an MNE group, as the case may be, located in the State;

(g) the number of employees and the net book value of tangible assets of a flow-through entity shall be excluded from the calculation in accordance with subsections (1)(b) and (6) of the UTPR percentage in respect of a constituent entity and an MNE group, as the case may be, located in the State, unless they are allocated to a permanent establishment, or, in the absence of a permanent establishment, to a constituent entity that is located in the jurisdiction where the flow-through entity was created.

(8) Where an amount of tax allocated to a jurisdiction under a qualified UTPR in a prior fiscal year has not resulted in the constituent entities of an MNE group located in that jurisdiction having an additional cash tax expense equal, in total, to that amount of tax for that prior fiscal year allocated to that jurisdiction, then—

(a) the UTPR percentage for that MNE group in respect of that jurisdiction shall be deemed to be zero for the fiscal year, and

(b) the number of employees and the net book value of tangible assets of the constituent entities of that MNE group which are located in that jurisdiction shall be excluded from the calculation in accordance with subsection (6) of the UTPR percentage in respect of an MNE group located in the State.

(9) Subsection (8) shall not apply for a fiscal year if all jurisdictions with a qualified UTPR in force for the fiscal year have a UTPR percentage of zero for the MNE group for that fiscal year.

CHAPTER 3

Calculation of the qualifying income or loss

Determination of qualifying income or loss

111O. (1) Subject to subsection (2), ‘qualifying income or loss’, in respect of a fiscal year, means the financial accounting net income or loss of a constituent entity for a fiscal year, as adjusted in accordance with sections 111P, 111Q, 111R, 111S, 111W, 111AB, 111AM, 111AN, 111AQ, 111AR, 111AV and 111AW.

(2) Where it is not reasonably practicable to determine the financial accounting net income or loss, referred to in subsection (1), based on the acceptable financial accounting standard or authorised financial accounting standard used in the preparation of the consolidated financial statements of the ultimate parent entity, the financial accounting net income or loss of the constituent entity for the fiscal year may be determined using another acceptable financial accounting standard or an authorised financial accounting standard where—

(a) the financial accounts of the constituent entity are maintained based on that accounting standard,

(b) the information contained in the financial accounts is reliable, and

(c) permanent differences greater than €1,000,000 that arise from the application of a particular principle or financial accounting standard to items of income or expense or transactions, which differs from the principle or financial accounting standard used in the preparation of the consolidated financial statements of the ultimate parent entity, are adjusted to conform to the treatment required for that item or transaction under the financial accounting standard used in the preparation of the consolidated financial statements.

(3) Where the consolidated financial statements of an ultimate parent entity are prepared using financial accounting standards other than an acceptable financial accounting standard, the consolidated financial statements of the ultimate parent entity shall be adjusted to prevent any material competitive distortion for the purpose of determining qualifying income or loss.

(4) Where the application of a specific principle or procedure under a set of generally accepted accounting principles results in a material competitive distortion referred to in subsection (3), the accounting treatment of any item or transaction subject to that principle or procedure shall be adjusted to conform to the treatment required for that item or transaction under International Financial Reporting Standards.

Adjustments to determine qualifying income or loss

111P. (1) In this section—

‘accounting functional currency’ means the functional currency used to determine the constituent entity’s financial accounting net income or loss;

‘accrued pension expense’ means the difference between the amount of pension liability expense or pension liability income included in the financial accounting net income or loss in relation to a pension fund and the amount contributed by the constituent entity to a pension fund for the fiscal year and the amount of the adjustment referred to in subsection (2)(i) shall be based on the following formula—

((Accrued Income or Accrued Expense) + (Contribution)) x (-1) where—

Accrued Income	is the pension liability income of a constituent entity accrued for the fiscal year and is expressed as a positive amount,
Accrued Expense	is the pension liability expense of a constituent entity accrued for the fiscal year and is expressed as a negative amount, and
Contribution	is the amount contributed by the constituent entity to a pension fund for the fiscal year and is expressed as a positive amount;

‘additional tier one capital’ means an instrument issued by a constituent entity pursuant to prudential regulatory requirements;

‘arm’s length principle’ means the principle under which transactions between constituent entities must be recorded by reference to the conditions that would have been obtained between independent enterprises in comparable transactions and under comparable circumstances;

‘asymmetric foreign currency gain or loss’ means a foreign currency gain or loss of an entity whose accounting and tax functional currencies are different and that is—

(a) included in the calculation of the taxable income or loss of a constituent entity and attributable to fluctuations in the exchange rate between the accounting functional currency and the tax functional currency of the constituent entity,

(b) included in the calculation of the financial accounting net income or loss of a constituent entity and attributable to fluctuations in the exchange rate between the accounting functional currency and the tax functional currency of the constituent entity,

(c) included in the calculation of the financial accounting net income or loss of a constituent entity and attributable to fluctuations in the exchange rate between a third foreign currency and the accounting functional currency of the constituent entity, and

(d) attributable to fluctuations in the exchange rate between a third foreign currency and the tax functional currency of the constituent entity, irrespective of whether that third foreign currency gain or loss is included in the taxable income;

‘excluded dividend’ means, subject to subsection (14), a dividend or other distribution received or accrued in respect of an ownership interest, other than a dividend or other distribution received or accrued in respect of—

(a) an ownership interest—

(i) held by a group in an entity that carries rights to less than 10 per cent of the profits, capital or reserves, or voting rights of that entity at the date of the distribution or disposition (in this section referred to as a ‘portfolio shareholding’), and

(ii) that is economically owned by the constituent entity for less than one year at the date of the distribution,

or

(b) an ownership interest in an investment entity that is subject to an election pursuant to section 111AV,

but where a dividend or other distribution is received or accrued in respect of an ownership interest which is a financial instrument that has both equity and debt components under the acceptable financial accounting standard, only the amounts received or accrued in respect of the equity component of the ownership interest shall be treated as an excluded dividend;

‘excluded equity gain or loss’ means a gain or loss, included in the financial accounting net income or loss of a constituent entity, arising from—

(a) changes in the fair value of an ownership interest, other than a portfolio shareholding,

(b) an ownership interest that is included under the equity method of accounting, or

(c) the disposal of an ownership interest, other than the disposal of a portfolio shareholding;

‘included revaluation method gain or loss’ means a net gain or loss, increased or decreased by any associated covered taxes for the fiscal year, arising from the application of an accounting method or practice that, in respect of all property, plant and equipment—

(a) periodically adjusts the carrying value of such property, plant and equipment to its fair value,

(b) records the changes in value arising from the adjustment referred to in paragraph (a) in other comprehensive income as gain or loss, and

(c) does not subsequently report the gain or loss accrued in other comprehensive income referred to in paragraph (b) through profit and loss;

‘intra-group financing arrangement’ means a financing arrangement whereby one or more constituent entities directly or indirectly provide credit to, or otherwise makes an investment in, one or more other constituent entities of the same group;

‘net taxes expense’ means, in respect of a constituent entity and a fiscal year, the net amount of—

(a) covered taxes accrued as an expense and any current and deferred covered taxes included in the income tax expense, including covered taxes on income that is excluded from the qualifying income or loss calculation,

(b) deferred tax assets attributable to a loss accrued for the fiscal year,

(c) qualified domestic top-up taxes accrued as an expense,

(d) taxes arising pursuant to the rules of the Directive or, as regards third country jurisdictions, the OECD Model Rules, accrued as an expense,

(e) disqualified refundable imputation taxes accrued as an expense, and

(f) taxes accrued by an insurance company in respect of returns to policyholders to the extent that subsection (10)(a) applies in relation to those taxes,

in the financial accounting net income or loss;

‘policy disallowed expense’ means, in respect of a fiscal year, an expense accrued by the constituent entity for—

(a) illegal payments, or

(b) fines and penalties that are equal to or greater than €50,000, or an equivalent amount in the functional currency in which the financial accounting net income or loss of the constituent entity is calculated,

in the financial accounting net income or loss;

‘prior period errors and changes in accounting principles’ means a change in the opening equity of a constituent entity at the beginning of a fiscal year that is attributable to—

(a) a correction of an error in the determination of the financial accounting net income or loss of the constituent entity in a previous fiscal year that affected the income or expenses that may be included in the calculation of the qualifying income or loss of the constituent entity in that previous fiscal year, except to the extent such correction of an error resulted in a material decrease of a liability for covered taxes subject to section 111AB, or

(b) a change in accounting principles or policy that affected the income or expenses included in the calculation of the qualifying income or loss of the constituent entity;

‘tax functional currency’ means the functional currency used to determine the constituent entity’s taxable income or loss for a covered tax in the jurisdiction in which it is located;

‘third foreign currency’ means a currency that is not the constituent entity’s tax functional currency or accounting functional currency.

(2) To determine the qualifying income or loss of a constituent entity in respect of a fiscal year, the financial accounting net income or loss of that constituent entity shall be adjusted by the following:

(a) net taxes expense;

(b) excluded dividends;

(c) excluded equity gains or losses;

(d) included revaluation method gains or losses;

(e) gains or losses from the disposal of assets and liabilities excluded pursuant to section 111AN;

(f) asymmetric foreign currency gains or losses;

(g) policy disallowed expenses;

(h) prior period errors and changes in accounting principles;

(i) accrued pension expenses; and

(j) the net amount of the additions and reductions to qualifying income for the fiscal year as set out in section 111W.

(3) (a) On the making of an election by a filing constituent entity, a constituent entity shall, in the calculation of qualifying income or loss of the constituent entity in respect of a fiscal year, substitute the amount allowed as a deduction in the calculation of its taxable income in the jurisdiction where it is located for the amount expensed in its financial accounts for a cost or expense of such constituent entity that was paid with stock-based compensation.

(b) Where a stock-option granted by a constituent entity expires without being exercised, the amount of stock-based compensation cost or expense that has been deducted from the financial accounting net income or loss of the constituent entity in the calculation of its qualifying income or loss for all previous fiscal years in respect of that stock-option shall be included in the calculation of qualifying income or loss of the constituent entity in respect of the fiscal year in which that option has expired.

(c) Where part of the amount of stock-based compensation cost or expense has been recorded in the financial accounts of the constituent entity in fiscal years prior to the fiscal year in which the election referred to in paragraph (a) is made, an amount equal to the difference between the total amount of stock-based compensation cost or expense that has been deducted in the calculation of its qualifying income or loss in those previous fiscal years and the total amount of stock-based compensation cost or expense that would have been deducted in the calculation of its qualifying income or loss in those previous fiscal years if the election had been made in such fiscal years, shall be included in the calculation of the qualifying income or loss of the constituent entity for that fiscal year.

(d) The election referred to in paragraph (a) shall be made in accordance with section 111AAAD and shall apply to all constituent entities located in the same jurisdiction for the fiscal year in which the election is made and all subsequent fiscal years.

(e) Where the election referred to in paragraph (a) is withdrawn, the amount of unpaid stock-based compensation cost or expense deducted pursuant to the election that exceeds the financial accounting expense accrued shall be included in the calculation of the qualifying income or loss of the constituent entity in the fiscal year in which the election is withdrawn.

(4) (a) Any transaction between constituent entities of an MNE group located in different jurisdictions that is not—

(i) recorded in the same amount in the financial accounts of both constituent entities in the calculation of financial accounting net income or loss, or

(ii) consistent with the arm’s length principle,

shall be adjusted in the calculation of qualifying income or loss of the constituent entities so as to be in the same amount and consistent with the arm’s length principle.

(b) A loss from a sale or transfer of an asset between 2 constituent entities located in the same jurisdiction that is not recorded consistently with the arm’s length principle shall be adjusted in the calculation of qualifying income or loss of the constituent entities based on the arm’s length principle if that loss is included in the calculation of the qualifying income or loss of a constituent entity for a fiscal year.

(5) (a) A qualified refundable tax credit or marketable transferable tax credit shall be treated as income in the calculation of qualifying income or loss of a constituent entity for a fiscal year.

(b) A tax credit which is not a qualified refundable tax credit or a marketable transferable tax credit shall not be treated as income in the calculation of qualifying income or loss of a constituent entity for a fiscal year.

(c) Where a qualified refundable tax credit or marketable transferable tax credit is related to the acquisition, or construction, of an asset and the constituent entity which has the benefit of the tax credit—

(i) has an accounting policy of reducing the carrying value of the asset in respect of such a tax credit, or

(ii) recognises the tax credit as deferred income over the productive life of that asset,

then, the constituent entity concerned may follow the same accounting policy for the purposes of determining the qualifying income or loss of the constituent entity for a fiscal year.

(6) (a) On the making of an election by a filing constituent entity, gains and losses in respect of assets and liabilities that are subject to fair value or impairment accounting in the consolidated financial statements for a fiscal year shall be determined on the basis of the realisation principle in the calculation of qualifying income or loss of a constituent entity.

(b) Gains or losses which result from applying fair value or impairment accounting in respect of an asset or a liability shall be excluded from the calculation of the qualifying income or loss of a constituent entity for a fiscal year under paragraph (a).

(c) The carrying value of an asset or a liability for the purpose of determining a gain or a loss under paragraph (a) shall be the carrying value adjusted for accumulated depreciation on the later of—

(i) the time the asset was acquired, or the liability was incurred, or

(ii) the first day of the fiscal year in respect of which the election is made.

(d) The election referred to in paragraph (a) shall be made in accordance with section 111AAAD and shall apply to all constituent entities located in a jurisdiction to which the election is made unless the filing constituent entity chooses to limit the election to the tangible assets of the constituent entities or to investment entities.

(e) Where the election referred to in paragraph (a) is withdrawn in respect of a fiscal year, an amount equal to the difference between—

(i) the fair value of the asset or liability, and

(ii) the carrying value adjusted for accumulated depreciation of the asset or liability on the first day of the fiscal year in respect of which the withdrawal is made,

shall be—

(I) included, if the fair value exceeds the carrying value adjusted for accumulated depreciation, or

(II) deducted, if the carrying value adjusted for accumulated depreciation exceeds the fair value,

in the calculation of qualifying income or loss of the constituent entities in respect of that fiscal year.

(7) (a) On the making of an election by a filing constituent entity, the qualifying income or loss of a constituent entity arising from the disposal of local tangible assets by that constituent entity to entities other than entities who are members of the same group in respect of a fiscal year shall be adjusted in accordance with this subsection.

(b) The net gain arising from the disposal of local tangible assets referred to in paragraph (a) in the fiscal year in which the election referred to in that paragraph is made shall be offset against any net loss of a constituent entity located in the local tangible asset jurisdiction arising from the disposal of local tangible assets in the fiscal year in which the election is made and in the 4 fiscal years prior to that fiscal year (in this subsection referred to as ‘the 5 year period’).

(c) The net gain referred to in paragraph (b) shall be offset against the net loss, if any, referred to in that paragraph that has arisen in the earliest fiscal year of the 5 year period in priority to later fiscal years, with any remaining net gain being carried forward and offset against the net loss, if any, in subsequent fiscal years of the 5 year period.

(d) Where, after the application of paragraph (b), there is an amount of net gain which remains unrelieved, such amount shall be spread evenly over the 5 year period for the purpose of the calculation of the qualifying income or loss of each constituent entity located in the local tangible asset jurisdiction that has made a net gain from the disposal of local tangible assets in the fiscal year in which the election referred to in paragraph (a) is made.

(e) The amount of net gain referred to in paragraph (d) which is to be allocated to each constituent entity, shall be calculated as follows:

NG x (NGCE / NGCES)

where—

NG	is the amount of net gain referred to in paragraph (d),
NGCE	is the amount of the net gain from the disposal of local tangible assets of the constituent entity for the fiscal year in respect of which the election referred to in paragraph (a) is made, and
NGCES	is the amount of the net gain from the disposal of local tangible assets of all constituent entities that have a net gain from the disposal of local tangible assets for the fiscal year in respect of which the election referred to in paragraph (a) is made.

(f) Where no constituent entity that has made a net gain from the disposal of local tangible assets in the fiscal year for which the election referred to in paragraph (a) is made is located in the local tangible asset jurisdiction in a fiscal year that occurs during the 5 year period, the residual amount of net gain referred to in paragraph (d) shall be allocated equally to each constituent entity in that jurisdiction in that fiscal year.

(g) Any adjustments made pursuant to this subsection for a fiscal year preceding the fiscal year in respect of which the election referred to in paragraph (a) is made shall be subject to adjustments in accordance with section 111AF.

(h) The election referred to in paragraph (a) shall be made annually in accordance with section 111AAAD.

(8) Any expense related to an intra-group financing arrangement shall not be taken into consideration in the calculation of qualifying income or loss of a constituent entity for a fiscal year where—

(a) the constituent entity is a low-taxed constituent entity or would have been low-taxed if the expenses had not accrued to the constituent entity,

(b) it is reasonable to assume that, over the expected duration of the intra-group financing arrangement, the intra-group financing arrangement will increase the amount of expenses taken into account in the calculation of the qualifying income or loss of that constituent entity, without resulting in a commensurate increase in the taxable income of the constituent entity providing the credit or making the investment (in this subsection referred to as the ‘counterparty’), and

(c) the counterparty is located in a jurisdiction that is not a low-tax jurisdiction or in a jurisdiction that would not have been low-taxed if the income related to the expense had not been accrued to the counterparty.

(9) (a) On the making of an election by a filing constituent entity, an ultimate parent entity shall apply its consolidated accounting treatment to eliminate income, expense, gains and losses from transactions between constituent entities that are—

(i) located in the same jurisdiction, and

(ii) included in a tax consolidation group,

for the purpose of calculating the net qualifying income or loss of those constituent entities for a fiscal year.

(b) In the fiscal year in respect of which the election referred to in paragraph (a) is made or withdrawn, appropriate adjustments shall be made so that items of qualifying income or loss are not taken into consideration more than once or omitted as a result of such election or withdrawal.

(c) For the purposes of this subsection, constituent entities are included in a tax consolidation group if under the law of a jurisdiction the income, expenses, gains and losses of those constituent entities may for tax purposes be aggregated, surrendered to each other or otherwise shared or transferred between them as a result of a connection between those constituent entities.

(d) The election referred to in paragraph (a) shall be made in accordance with section 111AAAD.

(10) An insurance company shall—

(a) exclude from the calculation of its qualifying income or loss, any amount charged to policyholders for taxes paid by the insurance company in respect of returns to the policyholders, and

(b) include in the calculation of its qualifying income or loss any returns to policyholders that are not reflected in its financial accounting net income or loss to the extent that the corresponding increase or decrease in liability to the policyholders is reflected in its financial accounting net income or loss.

(11) (a) Any amount that is recognised as a decrease in the equity of a constituent entity for a fiscal year and is the result of distributions made or due in respect of additional tier one capital shall be treated as an expense in the calculation of its qualifying income or loss for that fiscal year.

(b) Any amount that is recognised as an increase in the equity of a constituent entity for a fiscal year and is the result of distributions received or due to be received in respect of additional tier one capital held by the constituent entity shall be included in the calculation of its qualifying income or loss for that fiscal year.

(12) (a) A financial instrument issued by one constituent entity and held by another constituent entity in the same MNE group or large-scale domestic group shall be classified as debt or equity consistently for both the issuer and holder of the financial instrument and accounted for accordingly in the calculation of their qualifying income or loss.

(b) Where constituent entities in the same MNE group or large-scale domestic group have classified a financial instrument differently, the classification adopted by the issuer of the financial instrument shall be applied by the issuer and the holder of the financial instrument and accounted for accordingly in the calculation of their qualifying income or loss.

(13) On the making of an election by a filing constituent entity, foreign exchange gains or losses included in a constituent entity’s financial accounting net income or loss shall be treated as an excluded equity gain or loss to the extent that—

(a) such foreign exchange gains or losses are attributable to hedging instruments that hedge the currency risk in ownership interests other than portfolio shareholdings,

(b) such foreign exchange gains or losses are recognised in other comprehensive income in the consolidated financial statements, and

(c) the hedging instrument is considered an effective hedge under the acceptable or authorised financial accounting standard used in the preparation of the consolidated financial statements.

(14) On the making of an election by a filing constituent entity, a constituent entity shall include in the calculation of its qualifying income or loss for a fiscal year all dividends received by the constituent entity with respect to a portfolio shareholding.

(15) (a) Where a movement in an insurance company’s reserves economically matches an excluded dividend, net of any investment management fee, from a security held by the insurance company on behalf of a policyholder, the movement in the insurance reserves shall not be allowed as an expense in the calculation of the constituent entity’s qualifying income or loss.

(b) Where a movement in an insurance company’s reserves is related to an excluded dividend or an excluded equity gain or loss from a security held by the insurance company on behalf of a policyholder, it shall not be allowed as a deduction in the calculation of the constituent entity’s qualifying income or loss.

(16) On the making of an election by a filing constituent entity, the amount of a debt release included in the financial accounting net income or loss of a constituent entity shall be excluded from the calculation of the constituent entity’s qualifying income or loss, where the debt release—

(a) is undertaken under statutorily provided insolvency or bankruptcy proceedings, that are supervised by a court or other judicial body in the relevant jurisdiction or where an independent insolvency administrator is appointed,

(b) arises pursuant to an arrangement where one or more creditors is a person not connected with the debtor, and it is reasonable to assume that the debtor would be insolvent within 12 months but for the release of the debt under the arrangement, or

(c) subject to subsection (17) and where paragraph (a) or (b) do not apply, occurs when the debtor’s liabilities are in excess of the fair market value of its assets determined immediately before the debt release.

(17) An amount of a debt release included in the financial accounting net income or loss of a constituent entity shall only be excluded from the calculation of the constituent entity’s qualifying income or loss in accordance with paragraph (c) of subsection (16) with respect to debts owed to a creditor that is a person that is not connected with the debtor and only to the extent of the lesser of—

(a) the excess of the debtor’s liabilities over the fair market value of its assets determined immediately before the debt release, or

(b) the reduction in the debtor’s attributes under the tax laws of the debtor’s jurisdiction resulting from the debt release.

International shipping income exclusion

111Q. (1) In this section—

‘bareboat charter terms’ has the same meaning as it has in section 697A;

‘international shipping activities’ means—

(a) transportation of passengers or cargo by ship in international traffic, whether the ship is owned, leased or otherwise at the disposal of the constituent entity,

(b) transportation of passengers or cargo by ship in international traffic under slot-chartering arrangements,

(c) leasing of a ship to be used for the transportation of passengers or cargo in international traffic on charter fully equipped, crewed and supplied,

(d) leasing of a ship used for the transportation of passengers or cargo in international traffic, on bareboat charter terms, to another constituent entity,

(e) participation in a pool, a joint business or an international operating agency for the transportation of passengers or cargo by ship in international traffic, and

(f) sale of a ship used for the transportation of passengers or cargo in international traffic provided that the ship has been held for use by the constituent entity for a minimum of one year;

‘international shipping income’ means the net income obtained by a constituent entity from international shipping activities, provided that the transportation is not carried out via inland waterways within the same jurisdiction;

‘qualified ancillary international shipping activities’ means—

(a) leasing of a ship, on a bareboat charter basis, to another shipping enterprise that is not a constituent entity, provided that the duration of the charter does not exceed 3 years,

(b) sale of tickets issued by other shipping enterprises for the domestic leg of an international voyage,

(c) leasing and short-term storage of containers,

(d) detention charges for the late return of containers, and

(e) provision of services to other shipping enterprises by engineers, maintenance staff, cargo handlers, catering staff and customer services personnel;

‘qualified ancillary international shipping income’ means—

(a) the net income obtained by a constituent entity from qualified ancillary international shipping activities, provided that such activities are performed primarily in connection with the transportation of passengers or cargo by ships in international traffic, and

(b) investment income, where the investment that generates the income is made as an integral part of carrying on the business of operating ships in international traffic.

(2) Where the strategic or commercial management of all ships concerned is effectively carried on from within the jurisdiction where the constituent entity is located then the international shipping income and the qualified ancillary international shipping income of that constituent entity shall be excluded from the calculation of its qualifying income or loss.

(3) Where the calculation of a constituent entity’s international shipping income or qualified ancillary international shipping income results in a loss, such loss shall be excluded from the calculation of the constituent entity’s qualifying income or loss.

(4) The aggregated qualified ancillary international shipping income of all constituent entities located in a jurisdiction shall not exceed 50 per cent of those constituent entities’ international shipping income.

(5) (a) The costs incurred by a constituent entity that are directly attributable to its international shipping activities and qualified ancillary international shipping activities shall be allocated to such activities for the purpose of calculating the international shipping income and the qualified ancillary international shipping income of the constituent entity.

(b) The costs incurred by a constituent entity that indirectly result from its international shipping activities and qualified ancillary international shipping activities shall be deducted from the constituent entity’s revenues from such activities to calculate the international shipping income and qualified ancillary international shipping income of the constituent entity on the basis of its revenues from such activities in proportion to its total revenues.

(6) All direct and indirect costs attributed to a constituent entity’s international shipping income and qualified ancillary international shipping income in accordance with subsection (5) shall be excluded from the calculation of its qualifying income or loss.

Allocation of qualifying income or loss between main entity and permanent establishment

111R. (1) (a) Subject to subsection (2), where a constituent entity is a permanent establishment to which paragraph (a), (b) or (c) of the definition in section 111A(1) of permanent establishment applies, the financial accounting net income or loss of the permanent establishment shall be the net income or loss reflected in the separate financial accounts of that permanent establishment.

(b) Where a constituent entity is a permanent establishment that does not have separate financial accounts, its financial accounting net income or loss shall be the amount that would have been reflected in its separate financial accounts if they had been prepared on a standalone basis and in accordance with the accounting standard used in the preparation of the consolidated financial statements of the ultimate parent entity.

(2) (a) Where a constituent entity is a permanent establishment to which paragraph (a) or (b) of the definition in section 111A(1) of permanent establishment applies, its financial accounting net income or loss shall be adjusted to reflect only the amounts and items of income and expense that are attributable to it in accordance with the applicable tax treaty or domestic law of the jurisdiction where it is located, regardless of the amount of income subject to tax and the amount of tax-deductible expenses in that jurisdiction.

(b) Where a constituent entity is a permanent establishment to which paragraph (c) of the definition in section 111A(1) of permanent establishment applies, its financial accounting net income or loss shall be adjusted to reflect only the amounts and items of income and expense that are attributable to it in accordance with Article 7 of the OECD Model Tax Convention on Income and Capital.

(c) Where a constituent entity is a permanent establishment to which paragraph (d) of the definition in section 111A(1) of permanent establishment applies, its financial accounting net income or loss shall be calculated based on—

(i) the amounts and items of income that are exempt from tax in the jurisdiction where the main entity is located and attributable to the operations conducted outside of that jurisdiction, and

(ii) the amounts and items of expense that are not deducted for tax purposes in the jurisdiction where the main entity is located that are attributable to those operations.

(3) Subject to subsection (4), the financial accounting net income or loss of a permanent establishment shall not be taken into account in determining the qualifying income or loss of the main entity.

(4) (a) A qualifying loss of a permanent establishment shall be treated as an expense of the main entity for the purposes of calculating the main entity’s qualifying income or loss to the extent that the loss of the permanent establishment is treated as an expense in the calculation of domestic taxable income of the main entity in the jurisdiction it is located in and is not set off against an item of the domestic taxable income that is subject to tax under the laws of both the jurisdiction of the main entity and the jurisdiction of the permanent establishment.

(b) Qualifying income that is earned by a permanent establishment, after a qualifying loss of the permanent establishment was treated as an expense of the main entity for the purposes of calculating the main entity’s qualifying income or loss in accordance with paragraph (a), shall be treated as qualifying income of the main entity up to the amount of the qualifying loss that was previously treated as an expense of the main entity under paragraph (a).

Allocation of qualifying income or loss of flow-through entity

111S. (1) The financial accounting net income or loss of a constituent entity that is a flow-through entity shall be reduced by the amount allocable to its owners that are not members of an MNE group or large-scale domestic group and that hold their ownership interest in that flow-through entity directly or indirectly through one or more tax transparent entities, unless—

(a) the flow-through entity is an ultimate parent entity, or

(b) the flow-through entity is held, directly or indirectly, through one or more tax transparent entities by an ultimate parent entity that is a flow-through entity.

(2) The financial accounting net income or loss of a constituent entity that is a flow-through entity shall be reduced by the financial accounting net income or loss that is allocated to another constituent entity.

(3) Where a flow-through entity wholly or partially carries out business through a permanent establishment, its financial accounting net income or loss which remains after the application of subsection (1) shall be allocated to that permanent establishment in accordance with section 111R.

(4) Subject to subsection (5), where a tax transparent entity is not an ultimate parent entity, the financial accounting net income or loss of the flow-through entity which remains after the application of subsections (1) and (3) shall be allocated to its constituent entity- owners in proportion to their ownership interests that carry rights to profits in the flow-through entity.

(5) Where a flow-through entity is a tax transparent entity that is an ultimate parent entity or a reverse hybrid entity, any financial accounting net income or loss of the flow-through entity which remains after the application of subsections (1) and (3) shall be allocated to the ultimate parent entity or the reverse hybrid entity.

(6) Subsections (3), (4) and (5) shall be applied separately with respect to each ownership interest that carries rights to profits in the flow-through entity.

CHAPTER 4

Calculation of adjusted covered taxes

Covered taxes

111T. (1) The covered taxes of a constituent entity shall include—

(a) taxes recorded in the financial accounts of a constituent entity with respect to its income or profits, or its share of the income or profits of a constituent entity in which it owns an ownership interest,

(b) taxes on distributed profits, deemed profit distributions, and non- business expenses imposed under an eligible distribution tax system,

(c) taxes imposed in lieu of a generally applicable corporate income tax, and

(d) taxes levied by reference to retained earnings and corporate equity, including taxes on multiple components based on income and equity.

(2) The covered taxes of a constituent entity shall not include—

(a) the top-up tax accrued by a parent entity under a qualified IIR,

(b) the top-up tax accrued by a constituent entity under a qualified domestic top-up tax,

(c) taxes attributable to an adjustment made by a constituent entity as a result of the application of a qualified UTPR,

(d) disqualified refundable imputation tax, and

(e) taxes paid by an insurance company in respect of returns to policyholders.

(3) Covered taxes in respect of any net gain or loss arising from the disposal of local tangible assets in the fiscal year in which the election referred to in section 111P(7)(a) is made shall be excluded from the calculation of the covered taxes.

Adjusted covered taxes

111U. (1) The adjusted covered taxes of a constituent entity for a fiscal year shall be determined by adjusting the sum of the current tax expense accrued in the financial accounting net income or loss with respect to covered taxes for the fiscal year by—

(a) the net amount of the additions and reductions to covered taxes for the fiscal year as set out in subsections (2) and (3),

(b) the total deferred tax adjustment amount as set out in section 111X,

(c) any increase or decrease in covered taxes recorded in equity or other comprehensive income relating to amounts included in the calculation of qualifying income or loss that will be subject to tax under local tax rules, and

(d) the net amount of the additions and reductions to covered taxes for the fiscal year as set out in section 111W.

(2) The additions to the covered taxes of a constituent entity for the fiscal year shall include—

(a) any amount of covered taxes accrued as an expense in the profit before taxation in the financial accounts of the constituent entity,

(b) any amount of qualifying loss deferred tax asset that has been used by the constituent entity pursuant to section 111Y(2),

(c) any amount of covered taxes relating to an uncertain tax position of the constituent entity previously excluded under subsection (3)(d) that is paid in the fiscal year, and

(d) any amount of credit or refund in respect of a qualified refundable tax credit, or marketable transferable tax credit, that was accrued as a reduction to the current tax expense in the financial accounts of the constituent entity.

(3) The reductions to the covered taxes of a constituent entity for the fiscal year shall include—

(a) the amount of current tax expense with respect to income excluded from the calculation of qualifying income or loss of the constituent entity under Chapter 3,

(b) any amount of credit or refund in respect of a non-qualified refundable tax credit, or non-marketable transferable tax credit, that was not recorded as a reduction to the current tax expense in the financial accounts of the constituent entity,

(c) any amount of covered taxes refunded or credited to a constituent entity, other than a qualified refundable tax credit, or marketable transferable tax credit, that was not treated as an adjustment to current tax expense in the financial accounts of the constituent entity,

(d) the amount of current tax expense of the constituent entity which relates to an uncertain tax position,

(e) any amount of current tax expense of the constituent entity that is not expected to be paid within 3 years after the end of the fiscal year,

(f) the amount received by the originator, as defined in section 111V of a non-marketable transferable tax credit in exchange for the credit,

(g) any excess received by the purchaser of the face value of a non-marketable transferable tax credit over its purchase price in proportion to the amount of the credit used to satisfy its liability for a covered tax, and

(h) the amount of any gain received by the purchaser on the transfer of a non-marketable transferable tax credit provided the transfer occurs during the fiscal year concerned.

(4) Where an amount of covered tax is described in more than one of subsection (1), (2) or (3), the current tax expense shall only be adjusted once in the calculation of adjusted covered taxes of a constituent entity for a fiscal year.

(5) Subsection (6) applies where, for a fiscal year—

(a) there is no net qualifying income in a jurisdiction, and

(b) the amount of adjusted covered taxes for that jurisdiction is—

(i) less than zero, and

(ii) less than an amount equal to the net qualifying loss multiplied by the minimum tax rate (in this section referred to as the ‘expected adjusted covered taxes’).

(6) Subject to subsection (9), an amount calculated as the difference between—

(a) the amount of adjusted covered taxes of a jurisdiction for a fiscal year, and

(b) the amount of expected adjusted covered taxes of a jurisdiction for a fiscal year,

shall be treated as an additional top-up tax for the fiscal year.

(7) The amount of additional top-up tax referred to in subsection (6) shall be allocated to each constituent entity in the jurisdiction in accordance with section 111AF(3).

(8) For the purposes of subsection (9), excess negative tax expense means—

(a) an amount equal to the amount calculated under subsection (6) in respect of a jurisdiction for a fiscal year in which an MNE group or large-scale domestic group has—

(i) no qualifying income, or

(ii) a qualifying loss, for that jurisdiction, or

(b) an amount equal to the negative adjusted covered taxes in respect of a jurisdiction for a fiscal year in which an MNE group or large-scale domestic group has qualifying income for that jurisdiction.

(9) On the making of an election by a filing constituent entity, or where the top-up tax percentage for a jurisdiction for a fiscal year as calculated in accordance with section 111AD(2) exceeds the minimum tax rate, an MNE group or large-scale domestic group shall exclude the excess negative tax expense from its adjusted covered taxes for a jurisdiction in respect of the fiscal year and establish an excess negative tax expense carry-forward.

(10) In each fiscal year, following a fiscal year in respect of which subsection (9) applied to the calculation of adjusted cover taxes for a jurisdiction, where an MNE group or large-scale domestic group has qualifying income and adjusted covered taxes for that jurisdiction, the MNE group or large-scale domestic group shall—

(a) reduce the adjusted covered taxes for the jurisdiction by the balance of the excess negative tax expense carry-forward but the amount of adjusted covered taxes after such reduction shall not be less than zero, and

(b) reduce the balance of the excess negative tax expense carry-forward by the same amount as the amount referred to in paragraph (a).

(11) Subsection (9) shall not apply to any excess negative tax expense attributable to an amount of a loss that is carried back and applied against income for prior taxable years for domestic tax purposes.

(12) (a) Where an MNE group or large-scale domestic group disposes of one or more constituent entities located in a jurisdiction in respect of which it has made the election in accordance with subsection (9), the excess negative tax expense carry-forward shall remain an attribute of that MNE group or large-scale domestic group, as the case may be.

(b) Where an MNE group or large-scale domestic group disposes of all constituent entities located in a jurisdiction, and re-acquires or establishes constituent entities located in that jurisdiction in a subsequent fiscal year, the balance of the excess negative tax expense carry-forward shall be taken into account in determining the adjusted covered taxes for the jurisdiction beginning with that fiscal year.

Meaning of marketable transferable tax credit

111V. (1) In this section—

‘marketable price floor’ means 80 per cent of the net present value of the tax credit, where the net present value is determined based on the yield to maturity on a debt instrument issued by the government that issued the tax credit with equal or similar maturity (and up to 5-year maturity) issued in the same fiscal year as the tax credit is transferred or if not transferred, the origination year;

‘marketable transferable tax credit’ means a tax credit, or portion of a tax credit, that—

(a) can be used by the holder of the credit to reduce its liability for a covered tax in the jurisdiction that issued the tax credit,

(b) meets the legal transferability standard, and

(c) meets the marketability standard;

‘non-marketable transferable tax credit’ means a tax credit that—

(a) if held by the originator, is transferable but is not a marketable transferable tax credit, or

(b) if held by the purchaser, is not a marketable transferable tax credit;

‘originator’ means the constituent entity that engages in the activities that generates the tax credit concerned;

‘origination year’ means the fiscal year in which the eligibility criteria for a tax credit is met by a constituent entity.

(2) For the purposes of subsection (1), a tax credit meets the legal transferability standard—

(a) in respect of the originator of the tax credit, where the originator may, under the laws governing the tax credit, transfer the tax credit to an entity that is not connected with the originator—

(i) in the origination year, or

(ii) within a period of 15 months beginning on the final date of the origination year,

and

(b) in respect of the purchaser of the tax credit, where the purchaser may, under the laws governing the tax credit, transfer the tax credit to an entity that is not connected with the purchaser in the fiscal year in which that purchaser purchased the tax credit.

(3) For the purposes of subsection (1), a tax credit meets the marketability standard—

(a) in respect of the originator of the tax credit—

(i) where the tax credit is transferred to an entity that is not connected with the originator within a period of 15 months beginning on the final date of the origination year for a price equal to, or exceeding, the marketable price floor, or

(ii) where the tax credit is not transferred, or is transferred between entities connected with the originator, similar tax credits trade between entities that are not connected within a period of 15 months beginning on the final date of the origination year,

and

(b) in respect of the purchaser of the tax credit, where that purchaser acquired the credit from an entity that is not connected with that purchaser at a price equal to or exceeding the marketable price floor.

Equity investment inclusion election and qualified flow-through tax benefits of qualified ownership interests

111W. (1) In this section—

‘expected tax benefits ratio’ means the ratio of—

(a) the amount of tax credits, and

(b) the amount of any tax-deductible losses multiplied by the statutory tax rate applicable to the owner of the qualified ownership interest,

that flowed through, or are received, in respect of the qualified ownership interest in the fiscal year to the total of such items that are expected to flow-through or be received in respect of the qualified ownership interest over the term of the investment;

‘proportional amortisation method of accounting’ means an accounting method whereby an investor adjusts its tax expense by the net benefit that flows through a qualified ownership interest each year, where—

(a) the net benefit is determined based on the excess of the tax benefits that flow-through the qualified ownership interest during the year, over the proportional amount of the investment, and

(b) the proportional amount of the investment is determined based on the total investment multiplied by the ratio of the tax benefits that flow-through the qualified ownership interest during the year to the total tax benefits expected to flow-through the qualified ownership interest over the term of the investment;

‘qualified flow-through tax benefit’ means any amount of—

(a) tax credits, other than qualified refundable tax credits, and

(b) tax-deductible losses multiplied by the statutory tax rate applicable to the owner of a qualified ownership interest,

that flow through a qualified ownership interest in a tax transparent entity to the extent that it reduces the owner’s investment in the qualified ownership interest pursuant to subsection (6);

‘qualified ownership interest’ means an investment in a tax transparent entity that—

(a) is treated as an equity interest for local tax purposes, or

(b) would be treated as an equity interest under an authorised financial accounting standard in the jurisdiction in which the tax transparent entity operates,

where the assets, liabilities, income, expenses, and cash flows of the tax transparent entity are not consolidated on a line-by-line basis in the consolidated financial statements of the MNE group, and—

(i) the total return with respect to that ownership interest, excluding tax credits other than qualified refundable tax credits, is, at the time the investment is entered into, expected to be less than the total amount invested by the owner of the ownership interest such that a portion of the investment will be returned in the form of tax credits other than qualified refundable tax credits, and

(ii) the investor has a bona-fide economic interest in the flow-through entity and is not protected from loss of its investment,

but shall not include an investment in a tax transparent entity where a jurisdiction only permits the benefits of a tax credit to be transferred through such investment when the entity that originates the tax credits or investor is subject to a qualified IIR or qualified UTPR.

(2) On the making of an election by a filing constituent entity, a constituent entity which holds an ownership interest other than a qualified ownership interest shall—

(a) include in its qualifying income or loss the accounting gain, profit, or loss, adjusted as required by section 111P other than subsection (2)(c) of that section, with respect to any—

(i) fair value gains and losses and impairments on that ownership interest, where the owner is taxable on a mark-to-market basis or on the impairment on the ownership interest, and the tax consequences of the mark-to-market movements or impairments on the ownership interest are reflected in income tax expense,

(ii) fair value gains and losses and impairments on that ownership interest, where the owner is taxable on a realisation basis and its income tax expense includes deferred tax expense on the mark- to-market movement or impairments on the ownership interest,

(iii) profit and loss attributable to that ownership interest, where the interest is in a tax transparent entity and the owner accounts for the interest using the equity method, or

(iv) dispositions of that ownership interest which give rise to gains or losses that are included in the owner’s domestic taxable income, excluding any gain fully offset, and the proportionate share of any gain partially offset, by any deduction or other similar relief on that gain,

and

(b) notwithstanding sections 111U(3)(a) and 111X(5)(a), include all current and deferred tax expense in respect of the amounts referred to in paragraph (a) in the calculation of its adjusted covered taxes, subject to the provisions of this Part.

(3) The election referred to in subsection (2) shall apply to all ownership interests, other than a portfolio shareholding within the meaning of section 111P(1), owned by constituent entities located in the jurisdiction with respect to which the election is made.

(4) Subsections (5) to (9) shall apply to the qualified flow-through tax benefits that flow-through a qualified ownership interest to a constituent entity to which an election under subsection (2) applies.

(5) Subject to subsection (8), where this subsection applies, qualified flow-through tax benefits shall be added to the adjusted covered taxes of a constituent entity that is the direct owner of a qualified ownership interest, or an indirect owner of such an interest held via tax transparent entities that are not constituent entities of the MNE group, to the extent that the qualified flow-through tax benefit was treated as reducing tax expense accrued in the financial accounting net income or loss of the constituent entity.

(6) Subject to subsection (8), a constituent entity’s investment in a qualified ownership interest shall be treated as being reduced by receipts with respect to the qualified ownership interest in respect of—

(a) the amount of tax credits that have flowed through to the constituent entity,

(b) the amount of any tax-deductible losses that have flowed through to the constituent entity multiplied by the statutory tax rate applicable to the constituent entity,

(c) the amount of any distributions to the constituent entity, including returns of capital, or

(d) the amount of proceeds from a sale of all or part of the qualified ownership interest,

but no amount shall be treated as reducing the investment to the extent that it would reduce the investment below zero.

(7) (a) Subject to paragraph (b), any amount referred to in subsection (6)(a), (b), (c) or (d) that flows through, or is received in respect of, a qualified ownership interest, after the constituent entity’s investment in the qualified ownership interest has been reduced to zero pursuant to that subsection, shall be subtracted in the calculation of that constituent entity’s adjusted covered taxes.

(b) An amount referred to in subsection (6)(c) or (d) or a qualified refundable tax credit, shall be subtracted in the calculation of a constituent entity’s adjusted covered taxes only to the extent of the amount of any qualified flow-through tax benefits that flowed through the qualified ownership interest and that were treated as an addition in the calculation of that constituent entity’s adjusted covered taxes.

(8) (a) Where a constituent entity uses the proportional amortisation method of accounting for its investment in a qualified ownership interest, then it shall apply that method of accounting such that any of the amounts specified in subsection (6) that flow-through or are received in respect of a qualified ownership interest shall be treated as a reduction to the investment in the qualified ownership interest in proportion to the expected tax benefits ratio.

(b) The amounts specified in subsection (6) that flow-through or are received in respect of the qualified ownership interest in excess of the reduction to the investment in the qualified ownership interest pursuant to paragraph (a) shall not be included as a positive amount in the constituent entity’s adjusted covered taxes.

(9) On the making of an irrevocable election by a filing constituent entity, where the entity concerned holds a qualified ownership interest but does not use the proportional amortisation method of accounting, it may apply subsection (8) as if it used the proportional amortisation method of accounting in respect of its qualified ownership interest.

Total deferred tax adjustment amount

111X. (1) In this section—

‘disallowed accrual’ means—

(a) any movement in deferred tax expense accrued in the financial accounts of a constituent entity which relates to an uncertain tax position, and

(b) any movement in deferred tax expense accrued in the financial accounts of a constituent entity which relates to distributions from a constituent entity;

‘recapture exception accrual’ means an amount of tax expense accrued in the financial accounts of a constituent entity that is attributable to changes in associated deferred tax liabilities in respect of—

(a) cost recovery allowances on tangible assets,

(b) the cost of a licence or similar arrangement from a government for the use of immovable property or exploitation of natural resources which entails significant investment in tangible assets,

(c) research and development expenses,

(d) de-commissioning and remediation expenses,

(e) fair value accounting on unrealised net gains,

(f) foreign currency exchange net gains,

(g) insurance reserves and insurance policy deferred acquisition costs,

(h) gains from the sale of tangible property located in the same jurisdiction as the constituent entity that are reinvested in tangible property in the same jurisdiction, or

(i) additional amounts accrued as a result of accounting principle changes with respect to any item referred to in subparagraphs (a) to (h);

‘unclaimed accrual’ means any increase in a deferred tax liability recorded in the financial accounts of a constituent entity for a fiscal year that is not expected to be paid within the period referred to in subsection (9), and for which the filing constituent entity elects, in accordance with section 111AAAD, not to include in total deferred tax adjustment amount for that fiscal year.

(2) Subject to subsections (3) to (8), where the tax rate applied for the purposes of calculating the deferred tax expense in the financial accounts of a constituent entity for a fiscal year is—

(a) equal to or less than the minimum tax rate, the total deferred tax adjustment amount to be added to the adjusted covered taxes of a constituent entity for a fiscal year pursuant to section 111U(1)(b) shall be the deferred tax expense accrued in its financial accounts for a fiscal year with respect to covered taxes, or

(b) greater than the minimum tax rate, the total deferred tax adjustment amount to be added to the adjusted covered taxes of a constituent entity for a fiscal year pursuant to section 111U(1)(b) shall be the deferred tax expense accrued in its financial accounts for a fiscal year with respect to covered taxes recalculated at the minimum tax rate.

(3) The total deferred tax adjustment amount of a constituent entity for a fiscal year shall be increased by—

(a) any amount of disallowed accrual or unclaimed accrual paid during the fiscal year, and

(b) any amount of recaptured deferred tax liability determined in a preceding fiscal year in accordance with subsection (9) which has been paid during the fiscal year.

(4) Where, for a fiscal year, a loss deferred tax asset is not recognised in the financial accounts of a constituent entity because the recognition criteria are not met, the total deferred tax adjustment amount shall be reduced by the amount that would have reduced the total deferred tax adjustment amount if a loss deferred tax asset for the fiscal year had been accrued.

(5) Subject to subsection (6), the total deferred tax adjustment amount of a constituent entity for a fiscal year shall not include—

(a) the amount of deferred tax expense with respect to items excluded from the calculation of qualifying income or loss of the constituent entity under Chapter 3,

(b) the amount of deferred tax expense with respect to disallowed accruals and unclaimed accruals,

(c) the impact of a valuation adjustment or accounting recognition adjustment with respect to a deferred tax asset,

(d) the amount of deferred tax expense arising from a re-measurement with respect to a change in the applicable domestic tax rate, and

(e) the amount of deferred tax expense with respect to the generation and use of tax credits.

(6) (a) Subsection (5)(e) shall not apply to an amount of deferred tax expense where a substitute loss carry-forward arises.

(b) A substitute loss carry-forward shall arise where all of the following conditions are met—

(i) the tax laws of a jurisdiction require that foreign source income offset domestic source losses before foreign tax credits may be applied against tax imposed on foreign source income,

(ii) the constituent entity has a domestic tax loss in that jurisdiction that is fully or partially offset by foreign source income, and

(iii) the tax laws in that jurisdiction allows foreign tax credits to be used to offset a tax liability in a subsequent year in relation to income that is included in the calculation of the constituent entity’s qualifying income or loss.

(7) (a) Where all of the conditions set out in subsection (6) are met, the deferred tax expense attributable to the substitute loss carry-forward deferred tax asset shall be included in the constituent entity’s total deferred tax adjustment amount in the fiscal year that it arises and in the fiscal years it reverses, but only to the extent that the foreign tax credit that gave rise to the substitute loss carry-forward deferred tax asset is used to offset a tax liability on income included in the constituent entity’s qualifying income or loss.

(b) Subject to paragraph (c), for the purposes of paragraph (a), the amount of substitute loss carry-forward deferred tax asset is equal to the lesser of—

(i) the amount of the foreign tax credit in respect of the foreign source income inclusion that, under the tax law of the jurisdiction, is allowed to be carried forward from the taxable period in which the constituent entity had a tax loss, before taking into account any foreign source income, to a subsequent fiscal year, and

(ii) the amount of the constituent entity’s tax loss for the taxable period, before taking into account any foreign source income, multiplied by the applicable domestic tax rate.

(c) Subsection (5)(a) and section 111AW(2) shall apply to the substitute loss carry-forward deferred tax asset.

(8) Where a deferred tax asset which is attributable to a qualifying loss of a constituent entity has been recorded for a fiscal year at a rate lower than the minimum tax rate, provided that the constituent entity can demonstrate that the deferred tax asset is attributable to a qualifying loss, it may be recalculated at the minimum tax rate in the same fiscal year and the total deferred tax adjustment amount shall be reduced accordingly.

(9) Subject to subsection (10), a deferred tax liability that is not reversed and has not been paid within 5 years of the end of the fiscal year in which it arose shall be recaptured to the extent that it was taken into account in the total deferred tax adjustment amount of a constituent entity, and for this purpose—

(a) the recaptured deferred tax liability for the current fiscal year is the amount of the increase in the category of deferred tax liability that was included in the total deferred tax adjustment amount in the fifth year preceding the current fiscal year that has not reversed by the end of the last day of the current fiscal year, and

(b) the amount of the recaptured deferred tax liability determined for the current fiscal year shall be treated as a reduction to the covered taxes in the fifth year preceding the current fiscal year and the effective tax rate and top-up tax of that fiscal year shall be recalculated in accordance with section 111AF.

(10) Where a deferred tax liability is a recapture exception accrual, it shall not be recaptured in accordance with subsection (9).

Qualifying loss election

111Y. (1) (a) Section 111X shall not apply where a filing constituent entity makes a qualifying loss election for a jurisdiction.

(b) Where a qualifying loss election is made for a jurisdiction, a qualifying loss deferred tax asset shall be determined for the jurisdiction for each fiscal year in which there is a net qualifying loss in that jurisdiction.

(c) For the purposes of paragraph (b), the qualifying loss deferred tax asset for a jurisdiction in respect of a fiscal year shall be calculated as—

NQL x MTR

where—

NQL is the net qualifying loss for a fiscal year for the jurisdiction, and

MTR is the minimum tax rate.

(d) A qualifying loss election shall not be made for a jurisdiction with an eligible distribution tax system within the meaning of section 111AS.

(2) An amount of qualifying loss deferred tax asset for a jurisdiction in respect of a fiscal year determined pursuant to subsection (1) shall be used in any subsequent fiscal year in which there is a net qualifying income for the jurisdiction calculated as the lesser of—

(a) NQI x MTR

where—

NQI is the net qualifying income for the fiscal year for the jurisdiction, and

MTR is the minimum tax rate, or

(b) the amount of the qualifying loss deferred tax asset that is available.

(3) The qualifying loss deferred tax asset for a jurisdiction, determined in accordance with subsection (1), shall be reduced by the amount that is used for a fiscal year and the balance remaining shall be carried forward to subsequent fiscal years.

(4) Where a qualifying loss election is withdrawn—

(a) any remaining qualifying loss deferred tax asset for a jurisdiction determined in accordance with subsection (1) shall be reduced to zero as of the first day of the first fiscal year in which the qualifying loss election is no longer applicable, and

(b) the deferred tax assets and deferred tax liabilities for the jurisdiction, if any, shall be taken into account as if they had been calculated in accordance with section 111X and 111AW for the prior fiscal year.

(5) (a) Subject to paragraph (b), the qualifying loss election shall be made in the top-up tax information return delivered, in accordance with section 111AAI, for the first fiscal year in which the MNE group or large-scale domestic group has a constituent entity located in the jurisdiction for which the election is made.

(b) Where an election has been made in respect of a jurisdiction by the MNE group or large-scale domestic group in accordance with section 111AJ(2), the qualifying loss election for that jurisdiction shall be made in the first top-up tax information return delivered, in accordance with section 111AAI, in respect of the MNE group or large-scale domestic group after the election made in accordance with section 111AJ(2) ceases to apply.

(6) Where a flow-through entity that is the ultimate parent entity of an MNE group or large-scale domestic group makes a qualifying loss election under this section, the qualifying loss deferred tax asset shall be calculated by reference to the qualifying loss of the flow-through entity after reduction pursuant to section 111AQ(3).

Specific allocation of covered taxes incurred by certain types of constituent entities

111Z. (1) In this section—

‘passive income’ means the following items of income included in qualifying income to the extent that a constituent entity-owner has been subject to tax under a controlled foreign company tax regime or as a result of an ownership interest in a hybrid entity—

(a) a dividend or dividend equivalents,

(b) interest or interest equivalents,

(c) rent,

(d) royalty,

(e) annuity, or

(f) net gains from assets of a type that produces income referred to in subparagraphs (a) to (e).

(2) A permanent establishment shall be allocated the amount of any covered taxes that are included in the financial accounts of a constituent entity and that relate to the qualifying income or loss of the permanent establishment.

(3) A constituent entity-owner shall be allocated the amount of any covered taxes that are included in the financial accounts of a tax transparent entity and that relate to qualifying income or loss allocated to a constituent entity-owner in accordance with section 111S(4).

(4) Subject to subsection (7), a constituent entity shall be allocated the amount of any covered taxes included in the financial accounts of its direct or indirect constituent entity-owners under a controlled foreign company tax regime, on the direct or indirect constituent entity-owners’ share of that constituent entity’s income.

(5) Subject to subsection (7), a constituent entity that is a hybrid entity shall be allocated the amount of any covered taxes included in the financial accounts of its constituent entity-owner which relates to qualifying income of the hybrid entity.

(6) A constituent entity that has made a distribution during the fiscal year shall be allocated the amount of any covered taxes accrued in the financial accounts of its direct constituent entity-owners on such distribution.

(7) (a) A constituent entity that was allocated covered taxes pursuant to subsection (4) or (5) in respect of passive income shall include such covered taxes in its adjusted covered taxes in an amount equal to the lesser of—

(i) the covered taxes allocated in respect of such passive income, or

(ii) TUTP x PI

where—

TUTP is the top-up tax percentage for the jurisdiction determined without regard to covered taxes incurred with respect to such passive income by the constituent entity-owner, and

PI is the amount of the constituent entity’s passive income that is included under a controlled foreign company tax regime or a fiscal transparency rule.

(b) Any covered taxes of the constituent entity-owner incurred with respect to such passive income as referred to in paragraph (a) that remains after the application of this subsection shall not be allocated under subsection (4) or (5).

(8) Where the qualifying income of a permanent establishment is treated as qualifying income of the main entity in accordance with section 111R(4), any covered taxes arising in the jurisdiction where the permanent establishment is located and associated with such income, shall be treated as covered taxes of the main entity for an amount not exceeding—

QIPE x HTR

where—

QIPE is the amount of qualifying income of the permanent establishment which is treated as qualifying income of the main entity in accordance with section 111R(4), and

HTR is the highest tax rate on ordinary income in the jurisdiction where the main entity is located.

Rules required for blended CFC regime

111AA. (1) In this section—

‘applicable rate’ means the rate at which foreign taxes on controlled foreign company income generally fully offset the controlled foreign company tax through the tax credit mechanism applicable to the controlled foreign company tax regime;

‘attributable income of the entity’ means the constituent entity-owner’s proportionate share of the income of the constituent entity in the jurisdiction in which the constituent entity is located as determined under the blended CFC tax regime;

‘blended CFC tax regime’ means a controlled foreign company tax regime that aggregates—

(a) income,

(b) losses, and

(c) creditable taxes,

of all the controlled foreign companies of a constituent entity-owner for the purposes of calculating the constituent entity-owner’s tax liability under the regime and that has an applicable tax rate of less than 15 per cent, but does not include a regime that takes into account income other than income of the controlled foreign companies except that it may allow losses incurred by the constituent entity-owner to reduce the controlled foreign company income inclusion;

‘jurisdictional ETR’ means the effective tax rate for a jurisdiction as calculated under section 111AC without regard to any covered taxes under a controlled foreign company tax regime, but including income tax expense attributable to a qualified domestic top-up tax of a jurisdiction where the blended CFC tax regime allows a foreign tax credit for the qualified domestic top-up tax on the same terms as any other creditable covered tax.

(2) For fiscal years that begin on or before 31 December 2025 but not including a fiscal year that ends after 30 June 2027, for the purposes of section 111Z(4), allocable blended CFC tax shall be allocated from a constituent entity-owner to a constituent entity in accordance with the following formula:

(blended CFC allocation key x allocable blended CFC tax)/(sum of all blended CFC allocation keys)

where—

allocable blended CFC tax is the amount of tax charge incurred by a constituent entity-owner under a blended CFC tax regime, and

blended CFC allocation key is calculated as follows:

attributable income of the entity x (applicable rate jurisdictional ETR)

(3) Where the jurisdictional ETR equals or exceeds the applicable rate or the minimum tax rate, the blended CFC allocation key for the constituent entity shall be deemed to be zero.

Post-filing adjustments and tax rate changes

111AB. (1) (a) Subject to paragraph (b), where a constituent entity records an adjustment to its covered taxes for a previous fiscal year in its financial accounts, such adjustment shall be treated as an adjustment to covered taxes in the fiscal year in which the adjustment is made, unless the adjustment relates to a fiscal year in which there is a decrease in covered taxes for the jurisdiction.

(b) Subject to paragraph (d), where a constituent entity records a decrease in covered taxes for a previous fiscal year in its financial accounts that were included in the constituent entity’s adjusted covered taxes for a previous fiscal year, the effective tax rate and top-up tax for that fiscal year shall be recalculated in accordance with section 111AF by reducing adjusted covered taxes by the amount of the decrease in covered taxes.