MTT25600 - Calculating the effective tax rate: Covered tax balance: Carry-forward of negative covered tax balance where there is an adjusted profit
Source: gov.uk (2025-08-05)


When calculating the effective tax rate for a territory, it is possible that there may be a negative covered tax balance even though there is a positive figure for adjusted profits. This can arise because of a difference between the tax bases of MTT and the local tax regime.

For example, an expense that is allowed for local tax purposes may be disallowed for MTT purposes. If this expense produces a loss for local tax purposes, the covered tax balance may be negative but the adjusted profits will be positive.

A special provision is required in such a case to prevent a negative effective tax rate being recorded for the territory for the period. The effect of the provision is that the negative covered tax balance will be carried forward to a subsequent period.

This is set out in section 202 of Finance (No.2) Act 2023.

Conditions

The special provision is required if:
- when determining the adjusted profits for the territory for the period, there is not an adjusted loss (see MTT21000 (https://www.gov.uk/hmrc-internal-manuals/multinational-top-up-tax-and-domestic-top-up-tax/mtt21000)), and
- there is a negative covered tax balance for the territory.
When assessing whether there is a negative covered tax balance, it is necessary to first carry forward any amounts from a previous period:
- as a result of the application of this provision to that period, and
- as a result of an election to carry forward and reduce a collective additional amount (see MTT33120 (https://www.gov.uk/hmrc-internal-manuals/multinational-top-up-tax-and-domestic-top-up-tax/mtt33120)).
Effect of the provision

Where the above conditions apply, the covered tax balance for the territory for the period is to be added to the combined covered tax balance in the next period in which there is not an adjusted loss for the territory. (This will reduce the covered tax balance in that period, because it is a negative figure.)

For the current period, the covered tax balance for the territory is to be treated as nil. Consequently, the effective tax rate will be nil for the period.

Example

In 2051, the adjusted profits of a qualifying group in a territory is 15 and its covered tax balance in that territory is negative 10. The covered tax balance is to be carried forward because:
- there is a positive figure for adjusted profits, and
- there is a negative covered tax balance.
In 2052, the group makes an adjusted loss of 30 in the territory. The negative covered tax balance is not added to the covered tax balance for this period because there is an adjusted loss.

In 2053, the group makes an adjusted profit of 20 and has a covered tax balance of 5. The covered tax balance carried forward from 2051 is to be added to the covered tax balance in the 2053 period because there is not an adjusted loss.

The carried-forward covered tax balance of negative 10 is added to arrive at a covered tax balance of negative 5. This amount will be carried forward again because amounts carried forward from a previous period as a result of this provision are to be added before the conditions are assessed.