Covered taxes
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 as referred to in Article 16(7), first subparagraph, in the fiscal year in which the election referred to in that subparagraph is made shall be excluded from the computation of the covered taxes.
Adjusted covered taxes
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 its financial accounting net income or loss with respect to covered taxes for the fiscal year, by:
(a)
the net amount of its additions and reductions to covered taxes for the fiscal year as set out in paragraphs 2 and 3;
(b)
the total deferred tax adjustment amount as set out in Article 22; and
(c)
any increase or decrease in covered taxes recorded in equity or other comprehensive income relating to amounts included in the computation of qualifying income or loss that will be subject to tax under local tax rules.
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;
(b)
any amount of qualifying loss deferred tax asset that has been used pursuant to Article 23(2);
(c)
any amount of covered taxes relating to an uncertain tax position previously excluded under paragraph 3, point (d), that is paid in the fiscal year; and
(d)
any amount of credit or refund in respect of a qualified refundable tax credit that was accrued as a reduction to the current tax expense.
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 computation of qualifying income or loss under Chapter III;
(b)
any amount of credit or refund in respect of a non-qualified refundable tax credit that was not recorded as a reduction to the current tax expense;
(c)
any amount of covered taxes refunded or credited to a constituent entity that was not treated as an adjustment to current tax expense in the financial accounts, unless it relates to a qualified refundable tax credit;
(d)
the amount of current tax expense that relates to an uncertain tax position; and
(e)
any amount of current tax expense that is not expected to be paid within three years after the end of the fiscal year.
4. For the purpose of computing adjusted covered taxes, where an amount of covered tax is described in more than one point in paragraphs 1, 2 and 3, it shall only be taken into account once.
5. Where, for a fiscal year, there is no net qualifying income in a jurisdiction and the amount of adjusted covered taxes for that jurisdiction is negative and less than an amount equal to the net qualifying loss multiplied by the minimum tax rate (the ‘expected adjusted covered taxes’), the amount equal to the difference between the amount of adjusted covered taxes and the amount of expected adjusted covered taxes shall be treated as an additional top-up tax for that fiscal year. The amount of additional top-up tax shall be allocated to each constituent entity in the jurisdiction in accordance with Article 29(3).
Total deferred tax adjustment amount
1. For the purposes of this Article, the following definitions apply:
(a)
‘disallowed accrual’ means:
(i)
any movement in deferred tax expense accrued in the financial accounts of a constituent entity which relates to an uncertain tax position; and
(ii)
any movement in deferred tax expense accrued in the financial accounts of a constituent entity which relates to distributions from a constituent entity;
(b)
‘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 time period set out in paragraph 7 of this Article and which the filing constituent entity annually elects, in accordance with Article 45(2), not to include in the total deferred tax adjustment amount for such fiscal year.
2. Where the tax rate applied for the purpose of computing the deferred tax expense is equal or below 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 Article 21(1), point (b), shall be the deferred tax expense accrued in its financial accounts with respect to covered taxes, subject to the adjustments under paragraphs 3 to 6 of this Article.
Where the tax rate applied for the purpose of computing the deferred tax expense is above 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 Article 21(1), point (b), shall be the deferred tax expense accrued in its financial accounts with respect to covered taxes recast at the minimum tax rate, subject to the adjustments under paragraphs 3 to 6 of this Article.
3. The total deferred tax adjustment amount 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 that 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 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. The total deferred tax adjustment amount shall not include:
(a)
the amount of deferred tax expense with respect to items excluded from the computation of qualifying income or loss under Chapter III;
(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. Where a deferred tax asset that 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, it may be recast at the minimum tax rate in the same fiscal year, provided that the taxpayer is able to demonstrate that the deferred tax asset is attributable to a qualifying loss.
Where a deferred tax asset is increased pursuant to the first subparagraph, the total deferred tax adjustment amount shall be reduced accordingly.
7. A deferred tax liability that is not reversed and whose amount is not paid within the five subsequent fiscal years shall be recaptured to the extent it was taken into account in the total deferred tax adjustment amount of a constituent entity.
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 fiscal year preceding the current fiscal year, and the effective tax rate and top-up tax of that fiscal year shall be recomputed in accordance with Article 29(1). The recaptured deferred tax liability for the current fiscal year shall be 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 fiscal year preceding the current fiscal year that has not reversed by the end of the last day of the current fiscal year.
8. By way of derogation from paragraph 7, where a deferred tax liability is a recapture exception accrual, it shall not be recaptured even if it is not reversed or paid within the five subsequent years. A recapture exception accrual shall be the amount of tax expense accrued that is attributable to changes in associated deferred tax liabilities, in respect of the following items:
(a)
cost recovery allowances on tangible assets;
(b)
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; and
(i)
additional amounts accrued as a result of accounting principle changes with respect to items listed in points (a) to (h).
Qualifying loss election
1. By way of derogation from Article 22, a filing constituent entity may make a qualifying loss election for a jurisdiction according to which a qualifying loss deferred tax asset shall be determined for each fiscal year in which there is a net qualifying loss in that jurisdiction. For that purpose, the qualifying loss deferred tax asset shall be equal to the net qualifying loss for a fiscal year for the jurisdiction multiplied by the minimum tax rate.
A qualifying loss election shall not be made for a jurisdiction with an eligible distribution tax system under Article 40.
2. The qualifying loss deferred tax asset determined pursuant to paragraph 1 shall be used in any subsequent fiscal year in which there is net qualifying income for the jurisdiction in an amount equal to the net qualifying income multiplied by the minimum tax rate or, if lower, the amount of qualifying loss deferred tax asset that is available.
3. The qualifying loss deferred tax asset determined pursuant to paragraph 1 shall be reduced by the amount that is used for a fiscal year and the balance shall be carried forward to subsequent fiscal years.
4. Where a qualifying loss election is revoked, any remaining qualifying loss deferred tax asset determined pursuant to paragraph 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.
5. The qualifying loss election shall be filed with the first top-up tax information return referred to in Article 44 of the MNE group or large-scale domestic group that includes the jurisdiction for which the election is made.
6. Where a flow-through entity which is the ultimate parent entity of an MNE group or of a large-scale domestic group makes a qualifying loss election under this Article, the qualifying loss deferred tax asset shall be computed by reference to the qualifying loss of the flow-through entity after reduction pursuant to Article 38(3).
Specific allocation of covered taxes incurred by certain types of constituent entities
1. 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 qualifying income or loss of that permanent establishment.
2. 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 that constituent entity-owner in accordance with Article 19(4).
3. 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 their share of the controlled foreign company’s income.
4. 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 and which relate to qualifying income of the hybrid entity.
A ‘hybrid entity’ means an entity treated as a separate person for income tax purposes in the jurisdiction where it is located but as fiscally transparent in the jurisdiction in which its owner is located.
5. A constituent entity that 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.
6. A constituent entity that was allocated covered taxes pursuant to paragraphs 3 and 4 in respect of passive income shall include such covered taxes in its adjusted covered taxes in an amount equal to the covered taxes allocated in respect of such passive income.
By way of derogation from the first subparagraph, the constituent entity referred to in the first subparagraph shall include in its adjusted covered taxes the amount resulting from the multiplication of the top-up tax percentage for the jurisdiction by the amount of the constituent entity’s passive income that is included under a controlled foreign company tax regime or a fiscal transparency rule where the result is lower than the amount determined under the first subparagraph. For the purposes of this subparagraph, the top-up tax percentage for the jurisdiction shall be determined without regard to covered taxes incurred with respect to such passive income by the constituent entity-owner.
Any covered taxes of the constituent entity-owner incurred with respect to such passive income that remains after the application of this paragraph shall not be allocated under paragraphs 3 and 4.
For the purposes of this paragraph, ‘passive income’ means the following items of income included in qualifying income to the extent 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 property of a type that produces income described in points (a) to (e).
7. Where the qualifying income of a permanent establishment is treated as qualifying income of the main entity in accordance with Article 18(5), 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 such income multiplied by the highest tax rate on ordinary income in the jurisdiction where the main entity is located.
Post-filing adjustments and tax rate changes
1. 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.
Where there is a decrease in covered taxes 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 such fiscal year shall be recomputed in accordance with Article 29(1) by reducing adjusted covered taxes by the amount of the decrease in covered taxes. The qualifying income for the fiscal year and any previous fiscal years shall be adjusted accordingly.
At the annual election of the filing constituent entity, made in accordance with Article 45(2), an immaterial decrease in covered taxes may be treated as an adjustment to covered taxes in the fiscal year in which the adjustment is made. An immaterial decrease in covered taxes shall be an aggregate decrease of less than EUR 1 000 000 in the adjusted covered taxes determined for the jurisdiction for the fiscal year.
2. Where the applicable domestic tax rate is reduced below the minimum tax rate and such reduction results in a deferred tax expense, the amount of the resulting deferred tax expense shall be treated as an adjustment to the constituent entity’s liability for covered taxes that are taken into consideration pursuant to Article 21 for a previous fiscal year.
3. Where a deferred tax expense was taken into account at a rate lower than the minimum tax rate and the applicable tax rate is later increased, the amount of deferred tax expense that results from such increase shall be treated upon payment as an adjustment to a constituent entity’s liability for covered taxes claimed for a previous fiscal year in accordance with Article 21.
The adjustment under the first subparagraph shall not exceed an amount equal to the deferred tax expense recast at the minimum tax rate.
4. Where more than EUR 1 000 000 of the amount accrued by a constituent entity as current tax expense and included in adjusted covered taxes for a fiscal year is not paid within three years after the end of that fiscal year, the effective tax rate and top-up tax for the fiscal year in which the unpaid amount was claimed as a covered tax shall be recomputed in accordance with Article 29(1) by excluding such unpaid amount from the adjusted covered taxes.
Source: EUR-Lex (Publications Office of the EU), © European Union, reuse permitted under Commission Decision 2011/833/EU.
