Finance (No. 2) Act 2023

Allocation of covered taxes U.K.

177 Permanent establishments U.K.

(1) Any amount of qualifying current tax expense included in the underlying profits accounts of a member of a multinational group that is in respect of profits of a permanent establishment is to be allocated to the permanent establishment.

(2) Where profits of a permanent establishment are treated as income of the main entity as a result of section 160(5), covered taxes on those profits are to be allocated to the main entity.

(3) But the amount allocated in accordance with subsection (2) is not to exceed the amount given by multiplying the amount of those profits by the highest corporate tax rate on ordinary income in the territory where the main entity is located.

(4) Any deferred tax asset with respect to a loss arising in the territory of a permanent establishment that is treated as an expense of the main entity as a result of section 160(2) is to be ignored in determining the covered tax balance of either the main entity or the permanent establishment.

178 Reallocation of tax expense U.K.

(1) Where—

(a) profits have been allocated to a member of a multinational group (“O”) under section 167 or 168 (allocation of profits of hybrid, transparent and reverse hybrid entities), and

(b) the member from whom the profits have been allocated has an amount of qualifying current tax expense in respect of those profits,

that qualifying tax expense is to be allocated to O.

(2) But the amount of qualifying current tax expense in respect of mobile income allocated to O is not to exceed the amount given by taking the following steps—

• Step 1

  Determine the effective tax rate of the members of the multinational group in the territory of O for the accounting period to which the qualifying current tax expense relates, ignoring that expense.

• Step 2

  Subtract the result of Step 1 from 15%.

• Step 3

  Multiply the result of Step 2 by the amount of mobile income to which the qualifying tax expense relates.

(3) For the purposes of this section and section 179, “mobile income” means income of a type mentioned in subsection (4) in respect of which a member of a multinational group is subject to tax—

(a) under a controlled foreign company tax regime (see section 179(4)), or

(b) as a result of an ownership interest in an entity regarded as tax transparent in the territory the member is located in but not so regarded in the territory in which that entity is located.

(4) Those types of income are—

(a) dividends or dividend equivalents,

(b) interest or interest equivalent,

(c) rent,

(d) a royalty,

(e) an annuity, or

(f) net gains from property of a type that produces income described in paragraphs (a) to (e).

179 Controlled foreign company tax regimes U.K.

(1) Where—

(a) a member of a multinational group (“C”) is subject to a controlled foreign company tax regime, and

(b) C has an ownership interest in another member of the group (“F”) that is a controlled foreign company in relation to C,

any amount of qualifying current tax expense included in C’s underlying profits accounts with respect to tax on C’s share of the profits of F are to be allocated to F (to the extent it has not already been allocated as a result of another provision of this Part).

(2) But the amount of qualifying current tax expense in respect of mobile income allocated to F is not to exceed the amount given by taking the following steps—

• Step 1

  Determine the effective tax rate of the members of the multinational group in the territory of F for the accounting period to which the qualifying current tax expense relates, ignoring that expense.

• Step 2

  Subtract the result of Step 1 from 15%.

• Step 3

  Multiply the result of Step 2 by the amount of mobile income to which the qualifying current tax expense relates.

(3) Subsection (1) does not apply to a controlled foreign company tax regime that is a blended CFC regime in accounting periods commencing on or before 31 December 2025 that end on or before 30 June 2027.

(4) In this Part—

• “controlled foreign company tax regime” means a set of tax rules (other than multinational top-up tax or any tax equivalent to multinational top-up tax) under which an entity with an ownership interest in another entity located in a different territory (“the controlled foreign company”) is subject to current taxation on its share of part or all of the income earned by the controlled foreign company, irrespective of whether that income is distributed currently to it;

• “blended CFC regime” means a controlled foreign company tax regime—

  (a)

  under which the income, losses and creditable taxes of all of the controlled foreign companies of the entity with ownership interests in them are aggregated for the purposes of calculating the entity’s tax liability under the regime,

  (b)

  that does not take into account the income of the entity, or members of a consolidated group of which the entity is a member, that arises in the location of the entity, apart from to the extent the entity may use its losses arising in that location to reduce its liability under the regime, and

  (c)

  which operates by reference to a rate which reflects a threshold for low taxation.

180 Blended CFC regimes U.K.

(1) This section applies to accounting periods commencing on or before 31 December 2025 that end on or before 30 June 2027.

(2) Subsection (3) applies where—

(a) a member of a multinational group (“C”) is subject to a blended CFC regime in an accounting period (“the relevant period”),

(b) C has an ownership interest in an entity (“F”) that is a blended CFC entity in relation to C, and

(c) the blended CFC allocation key of F is greater than nil.

(3) The appropriate proportion of tax charged to C under that regime (after all deductions and use of any losses) is—

(a) where F is a member of the same multinational group as C, to be allocated to F, or

(b) where F is not a member of that group, to be excluded from the covered tax balance of C.

(4) The appropriate proportion is the proportion given by dividing the blended CFC allocation key for F for the relevant period by the sum of all blended CFC allocation keys for that period of blended CFC entities in which C has an ownership interest.

(5) The blended CFC allocation key for the relevant period of a blended CFC entity that C has an ownership interest in is the amount given by multiplying—

(a) the attributable income of C, by

(b) the percentage given by subtracting the applicable effective tax rate of the blended CFC entity for the relevant period from the applicable CFC rate for that period.

(6) But where—

(a) the result of subsection (5)(b) in relation to a blended CFC entity is less than nil, or

(b) the applicable effective tax rate of that entity is greater than 15%,

the blended CFC allocation key for that entity is to be treated as nil.

(7) The attributable income of C means C’s share of the income of F for the relevant period determined as it would be determined for the purposes of the blended CFC regime.

(8) The applicable effective tax rate of a blended CFC entity for the relevant period is—

(a) where it is located in a territory in which the effective tax rate of members of the multinational group of which C is a member is calculated for that period, that effective tax rate as it would be calculated if—

(i) any tax arising under a blended CFC regime were ignored, and

(ii) where the blended CFC regime permits foreign tax credit in respect of a qualifying domestic top-up tax on the same basis it would be permitted for covered taxes, that qualifying domestic top-up tax were a covered tax, or

(b) where it is not located in such a territory, the effective tax rate that would be calculated for the relevant period for the blended CFC entities located in that territory in which C has an ownership interest if—

(i) those entities were members of a multinational group whose ultimate parent’s accounting period is the same as the relevant period,

(ii) the consolidated financial accounts of that ultimate parent represented the aggregate income and taxes shown in the financial accounts of those companies,

(iii) any tax arising under a blended CFC regime were ignored, and

(iv) where the blended CFC regime permits foreign tax credit in respect of a qualifying domestic top-up tax on the same basis it would be permitted for covered taxes, that qualifying domestic top-up tax were a covered tax.

(9) The applicable CFC rate for the relevant period means the rate which reflects the threshold for low taxation by reference to which the blended CFC regime is generally operated, taking into account any credit for foreign taxes available under the regime.

(10) In this section “blended CFC entity” in relation to a member of a multinational group subject to a blended CFC regime means—

(a) a controlled foreign company in relation to that member,

(b) a permanent establishment of such a controlled foreign company,

(c) an entity whose profits are treated, for the purposes of the regime, as the profits of such a controlled foreign company.

181 Distributions from other members of a group U.K.

(1) Where qualifying current tax expense in respect of covered taxes accrued in an accounting period in the underlying profits accounts of a member of a multinational group (“R”) is in respect of a distribution received from another member of the group (“D”) in which R has a direct ownership interest, that expense is to be allocated to D.

(2) Reference in subsection (1) to a distribution received is to be treated as including deemed distributions taken account of for the purposes of taxes on a shareholder of an entity in respect of undistributed earnings or capital of the entity.