Legislation – Finance (No. 2) Act 2023

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Part 4Domestic top-up tax

Chapter 3Application of multinational top-up tax provisions

272Determining top-up amounts of entity that is a member of a group

(1)

Subject as follows, Chapters 3 to 6, 8 and 9 of Part 3 apply for the purposes (“domestic purposes”) of determining whether a qualifying entity that is a member of a group has top-up amounts or additional top-up amounts, and the extent of those amounts, as they apply for the purpose of determining the same for the purposes of multinational top-up tax.

(2)

Where the group is not a multinational group, that Part has effect for domestic purposes as if any reference to a multinational group were to a group.

(3)

Part 3 has effect for those purposes as if the following provisions (which provide for reductions of top-up amounts where a qualifying domestic top-up tax is payable) were omitted—

(a)

in section 194, subsections (2) to (7);

(b)

in section 203, subsections (3) to (7);

(c)

in section 206, subsections (4) to (8).

F1(3A)

Part 3 has effect for those purposes as if the following sections were substituted for section 193—

“193Determination of top-up amounts of entity that is a member of a group

(1)

Subsection (2) sets out (for the purposes of Step 1 of section 270(A1)) how to determine in relation to an accounting period—

(a)

whether an entity which is a standard member of a group has a top-up amount, and

(b)

if so, what the amount is.

(2)

Take the following Steps—

Step 1

Determine for the period (in accordance with section 272) the sum of any top-up amounts and additional top-up amounts of standard members of the group (the “total top-up amount”).

Step 2

Determine for each such member—

(a)
the adjusted profits (if any);

(b)
the covered tax balance.

Step 3

For each standard member of the group in relation to which a positive amount of adjusted profits is determined under Step 2, determine the “effective tax rate” by dividing the amount found under Step 2(b) (covered tax balance) by the amount found under Step 2(a) (adjusted profits).

Step 4

For any standard member of the group whose effective tax rate (see Step 3) is less than 15%—

(a)
determine that member’s “top-up tax percentage” by subtracting the member’s effective tax rate from 15%, and

(b)
proceed to Step 5.

Step 5

Calculate for the member an amount (an “allocation key amount”) by multiplying—

(a)
the member’s top-up tax percentage (see Step 4(a)), by

(b)
the member’s adjusted profits.

Step 6

Determine the sum (the “group allocation key amount”) of all the allocation key amounts calculated under Step 5 for members of the group.

Step 7

Determine the “allocation key ratio” for each standard member of the group whose effective tax rate (see Step 3) is less than 15%, by dividing—

(a)
the member’s allocation key amount (see Step 5), by

(b)
the group allocation key amount (see Step 6).

Step 8

Determine each such member’s top-up amount by multiplying—

(a)
the sum of any top-up amounts and additional top-up amounts of standard members of the group for the period (see Step 1), by

(b)
the member’s allocation key ratio (see Step 7).

Step 9

If none of the standard members falls within Step 3, or none of them has an effective tax rate of less than 15%, each standard member has a top-up amount equal to—

(a)
the total top-up amount, divided by

(b)
the number of the standard members.

193ASection 193: supplementary

(1)

Section 193 and subsection (2) of this section apply to joint venture groups and their members as they apply to groups and their members.

(2)

Section 193 has effect in relation to a qualifying entity that is a standard member of a group as if the total top-up amount referred to in that section included any top-up amounts or additional top-up amounts of qualifying investment entities determined under sections 220 to 224.

(3)

See also subsections (9) to (11) of section 272, which—

(a)

define “qualifying investment entity” in relation to a qualifying entity, and

(b)

make further provision about top-up amounts (for the purposes of domestic top-up tax).”

(4)

The following provisions of Part 3 are of no practical application for domestic purposes and accordingly that Part has effect for those purposes as if they were omitted—

(a)

section 173(1)(b) and sections 189 to 192 (eligible distribution tax systems);

(b)

section 225 (attribution of top-up amounts of investment entities).

F2(c)

Chapter 9A (qualifying undertaxed profits tax).

(5)

Where—

(a)

an election is made under Part 3 in relation to a member of a multinational group (whether or not a qualifying entity) for the purposes of multinational top-up tax, and

(b)

if the election had effect for domestic purposes, it would affect the calculation of top-up amounts or additional top-up amounts,

that election has effect for domestic purposes.

(6)

For the purposes of subsection (5), a foreign IIR election is to be treated as an election made under Part 3.

(7)

A “foreign IIR election” means an election—

(a)

made in respect of a group in connection with a tax equivalent to multinational top-up tax in another Pillar Two territory;

(b)

contained in an information return—

(i)

submitted to a qualifying authority in that territory, and

(ii)

in relation to which information in the return about the election has been shared with HMRC.

(8)

For domestic purposes—

(a)

section 134 (underlying profits as determined for statements of ultimate parent) has effect as if, after subsection (3), there were inserted—

“(3A)

The conditions in subsection (3) are not required to be met if—

(a)

the alternative accounting standard is UK GAAP,

(b)

all members of the group are located in the United Kingdom, and

(c)

the filing member of the group has made an election in a self-assessment return that the underlying profits of all members of the group are to be determined on the basis of UK GAAP.

(3B)

Paragraph 1 of Schedule 15 (long term elections) applies to an election under subsection (3A), and has effect for that purpose as if references to an information return or overseas return notification were to a self-assessment return or below-threshold notification.”;

(b)

section 176 (amounts to be reflected in covered tax balance) has effect as if, for subsection (2)(i) (amounts allocated from another member of the group), there were substituted—

“(i)

any amount allocated to the member from another member of the group under section 178(1) (reallocation of tax expense).”;

(c)

section 178 (reallocation of tax expense) has effect as if—

(i)

F3for subsection (1A) there were substituted—

“(1A)

But qualifying tax expense in respect of tax imposed by a territory other than the United Kingdom is not to be allocated to O as a result of the allocation of profits under section 167 (hybrids).”;

(ii)

subsection (2) (restriction on allocation of tax expense in respect of mobile income) were omitted;

(d)

section 179 (controlled foreign companies) has effect as if subsection (2) (restriction on allocation to CFC) were omitted;

F4(da)

in section 182(2)(e), after “credits”, in the first place it occurs, there were inserted “other than qualifying refundable tax credits”;

F5(e)

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

F6(9)

An investment entity is a qualifying investment entity in relation to a qualifying entity if it is

(a)

a member of the same group as the qualifying entity, and

(b)

located in United Kingdom.

(10)

Subsection (11) applies to qualifying entities that are standard members of a group for an accounting period where—

(a)

the total top-up amount referred to in section 193 for that period is greater than nil as a result of the modification of that section set out in subsection (8)(e), and

(b)

none of those members have made a profit for that period (and accordingly will not, ignoring subsection (11), have top-up amounts).

(11)

Where this subsection applies, each of those members has a top-up amount (for the purposes of domestic top-up tax) equal to the total top-up amount divided by the number of qualifying entities that are standard members of the group.

F7272ATreatment of covered bond vehicles

(1)

This section applies where—

(a)

a covered bond vehicle that is a member of a group would, ignoring this section, have a top-up amount or an additional top-up amount for an accounting period, and

(b)

at least one of the other members of the group in that period—

(i)

is located in the United Kingdom, and

(ii)

is not a covered bond vehicle.

(2)

For domestic purposes, section 193 (calculation of top-up amounts) has effect for the purpose of determining the top-up amounts (and additional top-up amounts) of—

(a)

the covered bond vehicle, and

(b)

the other members of the group that are located in the United Kingdom,

as if the adjusted profits of the covered bond vehicle were nil.

(3)

But subsection (4) applies if none of the members of the group that are located in the United Kingdom, and are not covered bond vehicles, have made a profit for that period (and accordingly will not, ignoring that subsection, have top-up amounts).

(4)

Each of those members has a top-up amount equal to the amount given by dividing—

(a)

the sum of the top-up amounts and additional top-up amounts that, ignoring subsection (2), each covered bond vehicle located in the United Kingdom would otherwise have, by

(b)

the number of those members.

(5)

For the purposes of this section “covered bond vehicle” has the meaning given by paragraph 53(7) of Schedule 19 to FA 2011.

273Determining top-up amounts of entity that is not a member of a group

(1)

Chapters 3 to 6, 8 and 9 of Part 3 apply for the purposes (“domestic entity purposes”) of determining whether a qualifying entity that is not a member of a group has top-up amounts or additional top-up amounts, and the extent of those amounts, as they apply for the purpose of determining the same for the purposes of multinational top-up tax.

(2)

Chapter 3 of that Part has effect for domestic entity purposes as if for section 132 there were substituted—

“132Effective tax rate

The effective tax rate of a qualifying entity that is not a member of a group is determined as follows—

Step 1

Determine, in accordance with Chapter 4 of Part 3, the adjusted profits for that period of that member.

Step 2

If, on determining those adjusted profits, the member has not made a profit, the effective tax rate is to be treated as 15%. Otherwise, proceed to Step 3.

Step 3

Determine the covered tax balance of the member for the period (which may be negative) in accordance with Chapter 5 of Part 3.

Step 4

If that balance is nil the effective tax rate is 0%. Otherwise, proceed to Step 5.

Step 5

Divide the covered tax balance by the adjusted profits.

Step 6

Except where Step 2 or 4 applies, the effective tax rate of the entity is X%, where X (which will be negative if the covered tax balance is negative) is the result of Step 5 multiplied by 100.”

(3)

That Part has effect for domestic entity purposes as if—

(a)

references to “member of a multinational group” (however framed and including references to multiple members) were to “qualifying entity”;

(b)

any reference (however framed) to the consolidated financial statements of the ultimate parent were to the qualifying financial statements of the entity;

F8(ba)

in section 182(2)(e), after “credits”, in the first place it occurs, there were inserted “other than qualifying refundable tax credits”;

(c)

in section 194 (total top-up amount), subsections (2) to (7) were omitted;

(d)

in section 203 (additional top-up amounts: covered taxes less than expected), subsections (3) to (7) were omitted;

(e)

in section 206 (additional top-up amounts: recalculations), subsections (4) to (8) were omitted.

(4)

Part 3 has effect for those purposes as if the following provisions (which are only relevant to groups or have no relevance for domestic F9entity purposes) were omitted—

(a)

in section 134 (underlying profits as determined for statements of ultimate parent), subsections (2) to (9);

(b)

section 135 (permanent establishments);

(c)

section 139 (consolidation adjustments);

(d)

section 140 (purchase accounting adjustments);

(e)

in section 141 (general exclusion of dividends), F10subsection (3)(c);

(f)

section 149 (arm’s length requirement);

(g)

section 150 (transactions between group members);

(h)

section 154 (exclusion of qualifying intra-group financing arrangement expenses);

(i)

sections 159 and 160 (adjustments applicable to permanent establishments);

(j)

in section 163 (election to spread capital gains), subsection (3);

(k)

section 164 (election to exclude intra-group transactions);

(l)

section 167 (underlying profits of member of group seen as transparent);

(m)

in section 168 (underlying profits of flow-through entities), subsection (8);

(n)

section 169 (non-tax resident entities to be treated as flow-through entities);

(o)

section 170 (adjustments for ultimate parent that is flow-through entity);

(p)

section 172 (ultimate parent subject to deductible dividend regime);

F11(pa)

in section 173 (covered taxes), subsection (1)(b);

(q)

section 177 (allocation of covered taxes: permanent establishments);

(r)

section 178 (reallocation of tax expense);

(s)

sections 179 and 180 (controlled foreign company tax regimes);

(t)

section 181 (distributions from other group members);

(u)

section 183 (qualifying foreign tax credits);

(v)

sections 189 to 192 (deemed distribution tax election);

(w)

sections 208 to 212 (restructuring of groups);

(x)

sections 213 to 215 (elections in relation to investment entities);

(y)

in section 216 (election where assets and liabilities adjusted to fair value), subsection (6);

(z)

sections 226 to 229 (joint venture groups, minority owned members and multi-parent groups).

F12z1

Chapter 9A (qualifying undertaxed profits tax).

F13273AReferences to Pillar Two rules

(1)

The provisions mentioned in subsection (2) apply to a qualifying entity, for domestic or domestic entity purposes, as if the references to the first accounting period for which the Pillar Two rules apply were to the first accounting period for which the entity is a qualifying entity.

(2)

Those provisions are—

(a)

section 185;

(b)

section 187;

(d)

sub-paragraph (4) of paragraph 2 of Schedule 16 (but see also section 276(c)(iii) which omits that paragraph in the case of a qualifying entity that is not a member of a group).

F13273BEffect of becoming subject to Pillar Two rules

(1)

This section applies where the Pillar Two rules did not apply to a qualifying entity for one or more accounting periods (each a “pre-Pillar Two period”).

(2)

Where—

(a)

the entity has a recaptured deferred tax liability arising as a result of section 184 (recaptured deferred tax liabilities),

(b)

the initial period, in relation to that liability, is a pre-Pillar Two period, and

(c)

the first accounting period in which the Pillar Two rules apply to the entity is earlier than the sixth accounting period after the initial period,

section 184(2) (recalculation in initial period taking account of recaptured deferred tax liability) does not apply in relation to that recaptured deferred tax liability.

(3)

Where an election under section 187 (election for losses to be treated as special loss deferred tax assets) applied to the entity in a pre-Pillar Two period—

(a)

the election ceases to have effect for the first accounting period in which the Pillar Two rules apply, and

(b)

subsection (2)(b) of section 187 does not apply to prevent the making of an election under section 187 that applies to the entity and that has effect for that period, but

(c)

no remaining amount of special loss deferred tax assets that arose in a pre-Pillar Two period may be used in that first accounting period or any subsequent accounting period.

(4)

Subsection (5) or (6) (as the case may be) applies where—

(a)

a deferred tax asset arises to the entity in a pre-Pillar Two period,

(b)

section 185(7)—

(i)

applies to that asset for the purposes of multinational top-up tax, or

(ii)

would, ignoring subsection (5) below, apply to that asset for those purposes, and

(c)

the asset is reflected in a collective additional amount for the purposes of domestic top-up tax.

(5)

Where—

(a)

an election has been made under section 205 (election to carry forward) in relation to the collective additional amount,

(b)

the subtraction required by subsection (2)(a) of that section has not occurred in a pre-Pillar Two period,

the amount to be subtracted as a result of that subsection is to be reduced by so much of that amount as reflects the asset.

(6)

Otherwise, section 185(7) does not apply to the asset for the purposes of multinational top-up tax to the extent it was reflected in a collective additional amount for the purposes domestic top-up tax.

F14273CDividends from protected cell companies

(1)

This section applies to a dividend or other distribution made by a protected cell company that is received or accrued by—

(a)

a qualifying entity that is not a member of a group, or

(b)

a member of a group that has no members located outside of the United Kingdom.

(2)

A dividend or other distribution to which this section applies is to be treated as an excluded dividend (see section 141) for domestic purposes and domestic entity purposes.

F15274Application of section 262

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

275Application of Schedule 14

Schedule 18—

(a)

applies Schedule 14 for the purpose of the administration of domestic top-up tax;

(b)

makes related amendments.

276Application of transitional provision

The transitional provision in Schedule 16 applies in relation to domestic top-up tax as it applies in relation to multinational top-up tax as if—

(a)

references in that Schedule to a multinational group were to a group;

F16(aa)

where a qualifying member is a member of a group, for paragraph 3(2)(c) there were substituted—

“(c)

the election has been made in respect of the territory for each preceding accounting period that commenced on or after 31 December 2023—

(i)

in which the Pillar Two rules would, ignoring any transitional safe harbour election, have applied to any member of the group in the territory, and

(ii)

in which any member of the group is a qualifying entity for the purposes of domestic top-up tax,”,

(b)

where a qualifying entity is a member of a group and all members of the group are located in the United Kingdom, the following provisions of that Schedule (which have no relevance in such a case) were omitted—

(i)

paragraph 3(2)(b) and (d), and 3(7) F17to (9) (country-by-country reporting);

(ii)

the words “that are used for preparation of the group’s country-by-country report” in paragraph 4(2);

(iii)

paragraph 4(5) (use of statements used for preparation of country-by-country report);

(iv)

in paragraph 9(2), the words from “ignoring” to the end.

(c)

where a qualifying entity is not a member of a group—

(i)

references in that Schedule to a member of a group (however framed and including references to multiple members) were to a qualifying entity;

(ii)

references in that Schedule (however framed) to the consolidated financial statements of the ultimate parent were to the qualifying financial statements of the entity;

(iii)

paragraph 2 were omitted;

F18(iiia)

for paragraph 3(2)(c) there were substituted—

“(c)

the election has been made in respect of the territory for each preceding accounting period that commenced on or after 31 December 2023 in which the member was a qualifying entity for the purposes of domestic top-up tax,”,

(iv)

the provisions mentioned in paragraph (b)(i) to (iv) were omitted.

277Index of defined expressions

See the table in Schedule 17 for a list of terms defined for Part 3, but which also contains some terms defined for this Part, and the provisions that define or explain them.

278Domestic top-up tax to apply from 31 December 2023

This Part has effect in relation to accounting periods commencing on or after 31 December 2023.