Legislation – Finance (No. 2) Act 2023

Revised legislation carried on this site may not be fully up to date. At the current time any known changes or effects made by subsequent legislation have been applied to the text of the legislation you are viewing by the editorial team. Please see ‘Frequently Asked Questions’ for details regarding the timescales for which new effects are identified and recorded on this site.

Part 3Multinational top-up tax

Chapter 6Calculation of top-up amounts

193Calculation of top-up amounts

Take the following steps to determine if a standard member of a multinational group (“the member in question”) has a top-up amount for an accounting period and, if it does, the extent of it—

Step 1

Determine, under section 194, the total top-up amount for the accounting period for the territory the member in question is located in.
Step 2

If the total top-up amount for that territory is nil, the member in question does not have a top-up amount. Otherwise, proceed to Step 3.
Step 3

Determine the adjusted profits of the member in question for the period (in accordance with Chapter 4).
Step 4

If the member has not made a profit for the period (as determined by reference to its adjusted profits), the member in question does not have a top-up amount. Otherwise, proceed to Step 5.
Step 5

If there are no other standard members of the multinational group located in the same territory as the member in question, the member’s top-up amount is equal to the total top-up amount for that territory for the period. Otherwise, proceed to Step 6.
Step 6

Determine (in accordance with Chapter 4) the adjusted profits for the period of all of the other standard members of the group that are located in same territory as the member in question.
Step 7

Add together the adjusted profits of all standard members of the group in that territory that have profits (including those of the member in question).
Step 8

Divide the member in question’s adjusted profits by the result of Step 7.
Step 9

The member’s top-up amount is the result of multiplying the total top-up amount for the territory by the result of Step 8.

194Total top-up amount for a territory

(1)

Take the following steps to determine the total top-up amount for an accounting period for a territory—

Step 1

Subtract the effective tax rate of the standard members of the group in that territory for that period (as determined in accordance with section 132) from 15%.
Step 2

If the result of Step 1 is nil or less, the total top-up amount for that territory is nil. Otherwise, proceed to Step 3.
Step 3

Subtract the sum of the losses of those members of the group that made a loss for the period (as determined by reference to their adjusted profits) from the sum of the profits of those members of the group that made a profit in that period (as determined by reference to their adjusted profits).
Step 4

Subtract the substance based income exclusion for that period for that territory (if any) from the result of Step 3.
Step 5

If the result of Step 4 is nil or less, the total top-up amount for that territory is nil. Otherwise, proceed to Step 6.
Step 6

Multiply the result of Step 1 (which will be a percentage) by the result of Step 4.

(2)

But where those members have a QDT credit for that territory for the accounting period, the total top-up amount is to be reduced in accordance with subsections (4) to (7).

(3)

For the purposes of this Part, standard members of a multinational group in a territory have a “QDT credit” for a territory for an accounting period if qualifying domestic top-up tax (see F1sections 256 and 256A) is accrued by one or more of those members in that territory F2for that period.

(4)

Where—

(a)

the standard members do not have a collective additional amount under section 206 for the period, and

(b)

the result of Step 6 in subsection (1) is equal to or greater than the sum of amounts of qualifying domestic top-up tax accrued by those members in that period,

the total top-up amount is to be reduced by the sum of those amounts.

(5)

Where—

(a)

the standard members do not have a collective additional amount under section 206 for the period, and

(b)

the result of Step 6 in subsection (1) is less than the sum of amounts of qualifying domestic top-up tax accrued by those members in the period,

the total top-up amount is to be reduced to nil.

(6)

Where—

(a)

the standard members have a collective additional amount under section 206 for the period, and

(b)

the sum of the result of Step 6 in subsection (1) and that collective additional amount is less than the sum of amounts of qualifying domestic top-up tax accrued by those members in the period,

the total top-up amount is to be reduced to nil.

(7)

Where—

(a)

the standard members have a collective additional amount under section 206, and

(b)

the sum of the result of Step 6 in subsection (1) and that collective additional amount is equal to or greater than the sum of amounts of qualifying domestic top-up tax accrued by those members in the period,

the total top-up amount is to be reduced by the amount given by multiplying the sum of those amounts of qualifying domestic top-up tax by the amount given by dividing the result of Step 6 in subsection (1) by the sum of the result of that step and that collective additional amount.

195Substance based income exclusion

(1)

The substance based income exclusion for a period for a territory is calculated by taking the following steps—

Step 1

Determine the payroll carve-out amount for that period for each standard member of the group in that territory.
Step 2

Determine the tangible asset carve-out amount for that period for each standard member of the group in that territory.
Step 3

Add together the amounts determined at steps 1 and 2.

F3(2)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F4(3)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4)

The payroll carve-out amount for a member is 5% of the eligible payroll costs incurred by the member in the period.

(5)

The tangible asset carve-out amount for a member is 5% of the eligible tangible asset amount of the member in the period.

(6)

Section 196 sets out how to calculate the eligible payroll costs of a member.

(7)

Section 197 sets out how to calculate the eligible tangible asset amount of a member.

F5(7A)

Section 197A sets out the treatment of operating leases.

F6(8)

Section 198 supplements the rules in sections 196 and 197 in relation to a member that is a permanent establishment.

(9)

Section 198ZA supplements the rules in sections 196 and 197 in relation to a member that is a flow-through entity.

196Eligible payroll costs

(1)

The eligible payroll costs of a member for a period are all costs incurred by the member in the period in connection with the employment of an employee of that member, provided that—

(a)

the employee is an individual,

F7(b)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(c)

F8at least some of the work is carried out in the territory in which the member is located, F9…

(d)

the costs are not excluded costs F10, and

(e)

the filing member chooses to include those costs in calculating the substance based income exclusion for the period.

F11(1A)

But where—

(a)

an employee carries out the work in the period both in the territory in which the member is located and outside that territory, and

(b)

the proportion of the time spent carrying out the work in that territory in the period is 50% or less,

the payroll costs in respect of the employee are to be multiplied by that proportion to determine how much of those costs are eligible payroll costs.

(2)

The costs may include in particular—

(a)

salaries, wages and other expenditures that provide a direct and personal benefit to the employee,

(b)

payroll and other employment taxes payable by the member, and

(c)

social security contributions payable by the member.

(3)

F12In this section “employee” means—

(a)

a person regarded as an employee under the law of the territory in which the member is located, and

(b)

any other person while they are F13participating in the ordinary operating activities of the member (including on a part-time basis),

and “employment” is to be construed accordingly.

(4)

“Excluded costs” are the following—

(a)

costs taken into account in determining the underlying profits of a permanent establishment of the member;

(b)

costs taken into account in a carrying value used to calculate the eligible tangible asset amount (see section 197);

(c)

costs that are core international shipping costs (see section 157);

(d)

costs that are ancillary international shipping costs (see section 158), subject to subsections (5) and (6).

(5)

Where the member has an ancillary international shipping profit cap adjustment of more than nil for the period, only the eligible proportion of costs that are ancillary international shipping costs are excluded costs.

(6)

The eligible proportion is the proportion given by dividing—

(a)

the member’s ancillary international shipping profits for the period, by

(b)

the amount given by subtracting the member’s ancillary international shipping costs from the member’s ancillary international shipping revenue for the period.

F14(7)

A member of a multinational group that is a flow-through entity that is a responsible member of the group but which is not the ultimate parent is to be regarded as having nil eligible payroll costs (subject to the application of section 198ZA).

197Eligible tangible asset amount

F15(1)

To determine the eligible tangible asset amount of a member of a multinational group for an accounting period—

(a)

add together—

(i)

the sum of the recorded carrying values of each eligible tangible asset held by the member at the start of the period, and

(ii)

the sum of the recorded carrying values of each eligible tangible asset held by the member at the end of the period, and

(b)

divide the result of paragraph (a) by 2.

F16(2)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3)

“Recorded” means F17values recorded for the purposes of preparing the consolidated financial statements of the ultimate parent F18(and not values as substituted as a result of any other provision of this Part).

(4)

For the purposes of this section “carrying value” means the carrying value of the asset including—

(a)

accumulated depreciation, amortisation or depletion,

(b)

amounts attributable to the capitalisation of eligible payroll costs and costs that would be eligible payroll costs were they not excluded costs under section 196(4), F19…

(c)

amounts attributable to any purchase accounting adjustment relating to the asset,

F20(d)

any impairment loss, and

(e)

so much of the reversal of a previous impairment loss as does not cause the carrying value to exceed the value it would have been had the impairment loss not been recognised,

but not including any positive difference between the value of an asset recorded from time to time and the value of an asset when it was acquired by the member, where that difference is solely attributable to a revaluation.

(5)

An asset is an eligible tangible asset if F21…—

(a)

F22it is of a type referred to in subsection (6), F23…

(b)

F24it is not an excluded asset F25and,

(c)

the filing member chooses to include the asset in calculating the substance based income exclusion for the period.

(6)

The types of asset are—

(a)

property, plant or equipment located in the same territory as the member;

(b)

natural resources located in that territory;

(c)

a right to use a tangible asset located in that territory under a lease;

(d)

a license or similar right to use a tangible asset located in that territory, provided that—

(i)

the right is granted by a government of that territory, and

(ii)

it is expected in granting the right that the member will, in using that right, incur significant expenditure in enhancing the value of tangible assets in that territory (whether or not those assets are subject to the right).

F26(6A)

Where an asset falling within paragraph (a), (c) or (d) of subsection (6) is only located in the same territory as the member for part of the period—

(a)

it is to be regarded for the purposes of this section as located in that territory for the whole period, but

(b)

where the proportion of the period in which the asset (or in the case of a right, the asset to which the right relates) is located in the territory is 50% or less, the carrying values for the purposes of subsection (1)(a) and (b) are to be multiplied by that proportion.

(7)

An asset is an excluded asset if it is of one of the following types—

(a)

property (including land or buildings) that is held for sale, lease or investment (whether such sale, lease or investment is to be carried out in the period or not);

(b)

an asset used in the course of core international shipping activity (see section 157);

(c)

an asset used in the course of ancillary international shipping activity (see section 158), subject to subsections (8) and (9).

F27(7A)

Where part of an asset comprising property is held by a member of a multinational group for lease, but another part of that property is retained for use by the member—

(a)

the parts are to be treated as separate assets for the purposes of this section and section 197A, and

(b)

the carrying value of the asset is to be allocated between the separate parts on a just and reasonable basis.

(8)

Where the member has an ancillary international shipping profit cap adjustment of more than nil for the period, only the eligible proportion of an asset used in the course of ancillary international shipping activity is to be treated as an excluded asset.

(9)

The eligible proportion is the proportion given by dividing—

(a)

the member’s ancillary international shipping profits for the period, by

(b)

the amount given by subtracting the member’s ancillary international shipping costs from the member’s ancillary international shipping revenue for the period.

F28(10)

A member of a multinational group that is a flow-through entity that is a responsible member of the group but which is not the ultimate parent is to be regarded as having an eligible tangible asset amount of nil (subject to the application of section 198ZB).

F29197AOperating leases

(1)

Subsection (2) applies where—

(a)

a member of a multinational group holds property located in the same territory as the member in an accounting period,

(b)

that property is held for lease by the member, and

(c)

the lease is accounted for in the underlying profits accounts of the member as an operating lease for that period.

(2)

The operating lease is to be regarded as an eligible tangible asset of the member for that period (despite the exclusion in section 197(7)(a)).

(3)

But where the property is not a short-term rental asset for that period, any carrying value of the operating lease recorded at the start or the end of the period is to be reduced by the right-of-use amount for the property at that time for the purposes of carrying out the calculation in section 197(1).

(4)

In a case where the lessee is a member of the same multinational group as the lessor, the right-of-use amount in relation to the property at the start or the end of the period is the carrying value of the lessee’s right-of-use asset in relation to the property recorded at that time.

(5)

Where the lessee is not a member of the same multinational group as the lessor, the right-of-use amount in relation to the property at the start or end of the period is the undiscounted value of any outstanding payments under the lease at that time.

(6)

In determining the value of those outstanding payments—

(a)

apply the accounting standard used in determining the underlying profits of the member,

(b)

include the value of any outstanding payments that would be due under any extension to the lease that would fall to be accounted for in accordance with that standard.

(7)

For the purposes of this section, property held for lease is a short-term rental asset in an accounting period if—

(a)

the property was leased regularly during that period to different lessees, and

(b)

the average length of the periods for which it was leased does not exceed 30 days.

F30198Eligible payroll costs and eligible tangible asset amount: permanent establishments

(1)

Sections 196 and 197 apply in relation to permanent establishments with the following modifications.

(2)

In determining under section 196 the eligible payroll costs of a permanent establishment within section 232(2)(a) to (c), the only amounts to be taken into account are amounts that would be taken into account in determining the adjusted profits of the establishment.

(3)

In determining under section 197 the eligible tangible asset amount of a permanent establishment within section 232(2)(a) to (c), the only assets to be taken into account are assets used in the business of the establishment.

(4)

Both the eligible payroll costs and the eligible tangible asset amount of a permanent establishment within section 232(2)(d) are nil.

(5)

If but for this subsection—

(a)

an amount would be taken into account under section 196 in respect of both a permanent establishment and the main entity, or

(b)

an asset would be taken into account under section 197 in respect of both a permanent establishment and the main entity,

the amount or asset is only to be taken into account in respect of the permanent establishment.

198ZAEligible payroll costs: flow-through entities

(1)

A member of a multinational group that is a flow-through entity has a flow-through payroll amount for a territory for an accounting period if the member has costs that would be eligible payroll costs if the member were located in that territory and were not a flow-through entity and—

(a)

there is at least one other member of the group—

(i)

that is not a flow-through entity,

(ii)

that is located in that territory, and

(iii)

to whom a proportion of the underlying profits of the flow-through entity for the accounting period are allocated under section 168 (underlying profits of transparent entities) or, where the underlying profits of the entity are nil or less, would be so allocated if the flow-through entity had underlying profits of 100 euros, or

(b)

the entity—

(i)

is a flow-through entity to some extent for that period as a result of section 169 (certain non tax resident entities to be treated as flow-through entities),

(ii)

is not a flow-through entity to some extent for that period, and

(iii)

was created in that territory.

(2)

Section 196 applies for the purposes of determining a flow-through payroll amount of a flow-through entity for a territory as it applies for the purposes of determining eligible payroll costs but as if—

(a)

any reference in that section to the territory of the member were to the territory to which the flow-through payroll amount relates, and

(b)

subsection (7) of that section were omitted.

(3)

Where a member of a multinational group that is a flow-through entity has a flow-through payroll amount for a territory for an accounting period, the eligible payroll costs of each member of the group falling within subsection (1)(a) for that period (which may be nil) are to be increased by the amount given by multiplying the flow-through payroll amount by the relevant proportion in relation to that member for that period.

(4)

The relevant proportion in relation to a member for an accounting period is the proportion of the underlying profits of the flow-through entity for that period—

(a)

in a case where the flow-through entity has underlying profits that exceed nil for that period, that is allocated to that member under section 168, or

(b)

in a case where the underlying profits of the flow-through entity for that period are nil or less, that would be allocated to that member if the flow-through entity had underlying profits of 100 euros.

(5)

Where a flow-through entity—

(a)

is a flow-through entity to some extent for an accounting period as a result of section 169,

(b)

is not a flow-through entity to some extent for that period, and

(c)

was created in a territory for which it has a flow-through payroll amount for that period,

the eligible payroll costs of that entity for that period (which may be nil) are to be increased by the amount given by multiplying that flow-through payroll amount by the relevant proportion in relation to that entity for that period.

(6)

The relevant proportion in relation to that entity for an accounting period is the proportion of the underlying profits of the entity for that period—

(a)

in a case where the entity has underlying profits that exceed nil for that period, that are not allocated to any other entity under section 168, or

(b)

in a case where the underlying profits of the entity for that period are nil or less, that would not be allocated to any other entity under that section if the entity had profits of 100 euros.

(7)

For the purposes of applying this section in relation to a multinational group whose ultimate parent is a flow-through entity, the ultimate parent is to be treated as not being a flow-through entity.

198ZBEligible tangible asset amount: flow-through entities

(1)

A member of a multinational group that is a flow-through entity that is not the ultimate parent has a flow-through tangible asset amount for a territory for an accounting period if the member holds one or more assets in that territory and—

(a)

there is at least one other member of the group—

(i)

that is not a flow-through entity,

(ii)

that is located in that territory, and

(iii)

(b)

the entity—

(i)

is a flow-through entity to some extent for that period as a result of section 169 (certain non tax resident entities to be treated as flow-through entities),

(ii)

is not a flow-through entity to some extent for that period, and

(iii)

was created in that territory.

(2)

Sections 197 and 197A apply for the purposes of determining a flow-through tangible asset amount of a flow-through entity for a territory as they apply for the purposes of determining an eligible tangible asset amount but as if—

(a)

any reference in those sections to the territory of the member were to the territory to which the flow-through tangible asset amount relates, and

(b)

subsection (10) of section 197 were omitted.

(3)

Where a member of a multinational group that is a flow-through entity has a flow-through tangible asset amount for a territory for an accounting period, the eligible tangible asset amount of each member of the group falling within subsection (1)(a) for that period (which may be nil) is to be increased by the amount given by multiplying the flow-through tangible asset amount by the relevant proportion in relation to that member for that period.

(4)

The relevant proportion in relation to a member for an accounting period is the proportion of the underlying profits of the flow-through entity for that period—

(a)

in a case where the flow-through entity has underlying profits that exceed nil for that period, that is allocated to that member under section 168, or

(b)

(5)

Where a flow-through entity—

(a)

is a flow-through entity to some extent for an accounting period as a result of section 169,

(b)

is not a flow-through entity to some extent for that period, and

(c)

was created in a territory for which it has a flow-through tangible asset amount for that period,

the eligible tangible asset amount of that entity for that period (which may be nil) is to be increased by the amount given by multiplying that flow-through tangible asset amount by the relevant proportion in relation to that entity for that period.

(6)

The relevant proportion in relation to that entity for an accounting period is the proportion of the underlying profits of the entity for that period—

(a)

in a case where the entity has underlying profits that exceed nil for that period, that are not allocated to any other entity under section 168, or

(b)

in a case where the underlying profits of the entity for that period are nil or less, that would not be allocated to any other entity under that section if the entity had profits of 100 euros.

(7)

For the purposes of applying this section in relation to a multinational group whose ultimate parent is a flow-through entity, the ultimate parent is to be treated as not being a flow-through entity.

198ZCEligible payroll costs and eligible tangible asset amount: flow-through ultimate parent

(1)

In determining for an accounting period the eligible payroll costs or eligible tangible asset amount of a flow-through entity that is the ultimate parent of a multinational group, the amount given by section 196 or 197 is to be reduced by the section 170 proportion.

(2)

In subsection (1), “the section 170 proportion” means the proportion of the adjusted profits of the flow-through entity for the accounting period that—

(a)

in a case where subsection (1) of 170 (adjustments for ultimate parent that is a flow-through entity) applies, is excluded under that subsection, or

(b)

in a case where that subsection does not apply as a result of the entity having not made a profit for that period, would be excluded under that subsection if the entity had adjusted profits of 100 euros.

(3)

In subsection (2), “the adjusted profits” means the adjusted profits before the application of section 170.

F31198APower to make provision about treatment of payroll costs and assets

(1)

The Treasury may by regulations make provision about the treatment of payroll costs and tangible assets in specified circumstances.

(2)

Regulations may, in particular, provide that in determining the substance based income exclusion for a territory—

(a)

specified eligible tangible assets or eligible payroll costs are to be treated as having a different value;

(b)

specified eligible tangible assets or eligible payroll costs are to be attributed to a different member of a multinational group or to a different territory;

(c)

specified eligible tangible assets or eligible payroll costs are to be excluded from that determination;

(d)

specified assets that are not eligible tangible assets are to be treated as eligible tangible assets;

(e)

specified costs that are not eligible payroll costs are to be treated as eligible payroll costs.

(3)

In this section “specified” means specified or described in regulations.

199Election to treat F32certain top-up amounts as nil

(1)

The filing member of a multinational group may elect that the F33top-up amounts of the relevant members for an accounting period (“the current period”) for a territory F34are to be treated as nil.

(2)

An election under this section may be made only if—

(a)

the average revenue for an accounting period of the F35relevant members of the group in that territory is less than 10 million euros, and

(b)

the average of the adjusted profits of those members for an accounting period is less than 1 million euros.

F36(2A)

In this section, a member of a multinational group is a “relevant” member if it is—

(a)

a standard member of the group, or

(b)

a minority owned member of the group.

(3)

The average revenue for an accounting period of the F37relevant members of a multinational group in a territory is determined by adding together all of the revenue of those members in each qualifying accounting period, and dividing the result by the number of qualifying accounting periods.

(4)

The average of the sum of the adjusted profits of the F38relevant members of a multinational group in a territory is determined by taking the following steps—

Step 1

Determine the sum of the adjusted profits of each of those members for each qualifying accounting period.
Step 2

Add together the results of Step 1.
Step 3

Divide the result of Step 2 by the number of qualifying accounting periods.

(5)

The current period is a qualifying accounting period.

(6)

Each of the previous two accounting periods is a qualifying period unless—

(a)

none of the F39relevant members of the group in the territory had revenue in that period, and

(b)

none of the F40relevant members of the group in the territory made a loss in that period.

(7)

Where a qualifying period is longer or shorter than a year, the adjusted profits and revenue of the members are to be treated for the purposes of this section as the amounts given by multiplying the profits and revenue by the amount given by dividing 365 by the number of days in the period.

(8)

An election under this section may not be made in respect of the nominal territory of a stateless member of a multinational group.

(9)

Paragraph 2 of Schedule 15 (annual elections) applies to an election under this section.