MTT27300 - Calculating the effective tax rate: Covered tax balance: Deferred tax: Treatment of deferred tax assets and liabilities on entry into regime
Source: gov.uk (2025-08-05)


In the first period in which the MTT rules apply to a member, its deferred tax expenses or credits may include movements in respect of the existing deferred tax assets and liabilities that are reflected in its underlying profits accounts at the beginning of that period. This effectively allows the group to include existing deferred tax assets and liabilities when calculating the covered tax balance to prevent distortions in the calculation of the effective tax rate upon entry into MTT. The simplified approach in the first period is designed to prevent a group having to undertake complex calculations as if the member had been subject to MTT rules in prior years.

The adjustments set out at MTT27100 (https://www.gov.uk/hmrc-internal-manuals/multinational-top-up-tax-and-domestic-top-up-tax/mtt27100) do not apply.

Instead, the following adjustments are made, in accordance with section 185 of Finance (No.2) Act 2023.

Valuation of deferred tax assets and liabilities

An existing deferred tax asset or liability is to be taken into account in the calculation of the deferred tax expense or credit for MTT purposes either:
- at 15%, if the nominal tax rate to which it relates is 15% or above, or
- at the nominal tax rate, if that rate is below 15%.
The impact of any valuation adjustment or accounting recognition adjustment in respect of a deferred tax asset is ignored. Deferred tax assets which are not recognised (or not fully recognised) in the accounts due to such adjustments are recognised in full for MTT purposes.

The nominal tax rate is the tax rate in the territory in which the member is located which has been used to calculate the deferred tax expense accrued in the underlying profits accounts.

Valuation of deferred tax assets which relate to a loss

An exception to the ordinary valuation rule above applies if:
- a deferred tax asset is calculated based on a nominal tax rate below 15%
- the asset arose as the result of a loss, and
- the member can demonstrate that the loss would have been taken into account when determining the adjusted profits, had the adjusted profits been determined for that period.
In this case, the asset will be calculated based on a rate of 15%.

This ensures that, where a loss is made prior to entry into the regime, and that loss is relieved against profits made after entry into the regime, top-up tax does not arise as a result of a valuation below 15%. This is a comparable outcome to that which would arise if the loss were made after entry into the regime.

Deferred tax assets which relate to a tax credit arising prior to the transition year

In the year of transition to MTT, and subsequent years, the reversal of pre-regime deferred tax assets relating to tax credits are taken into account in computing deferred tax expense. Since the deferred tax amount arose in a pre-GloBE year, the creation of the deferred tax asset will not have an impact on the GloBE calculations. The exclusion at s182(2)(e) does not apply to deferred tax assets relating to tax credits arising prior to the transition year.

The amount of deferred tax expense on reversal recorded for MTT purposes will be calculated as follows:
- using the formula: deferred expense in the accounts in respect of that deferred tax asset divided by the nominal tax rate, multiplied by 15%, or
- using the tax rate applied in the financial accounts, if it is below 15%.
For example, if you assume that in a pre-Pillar Two period a member of a group incurs an expense of 100 which generates a tax credit of 40, 15 of which is used in the period, resulting in tax credit of 25 being carried forward and the recognition of deferred tax asset of 25. When the group enters the Pillar Two rules, the carried forward tax credit is unused so there is a deferred tax asset of 25 upon entry into the regime. Subsequently the member generates profits of 100 which are subject to tax at nominal rate of 25% utilising the tax credit in full (and reversing the deferred tax asset in full) and resulting in a deferred tax expense of 25 in the underlying profits accounts. Accordingly, under section 185(5), the deferred tax expense that is reflected in the total deferred tax adjustment amount (and also in determining the covered tax balance) for the accounting period in which the reversal occurs is 15 (being the actual deferred expense of 25/0.25 x 15%). Put another way, section 185(5) requires the actual deferred tax expense arising on use of the tax credit to be grossed-up at the nominal tax rate applying when the deferred tax asset relating to the tax credit reverses, and then multiplying it by 15%.

Exclusion of certain deferred tax assets arising after 30 November 2021

A deferred tax asset is to be excluded from the deferred tax expense if:
- it arose as a result of transactions after 30 November 2021 but before the commencement of the first accounting period for which the Pillar Two rules apply to the member, and
- it relates to an item which produces a mismatch between the member’s taxable income and its adjusted profits (had those been determined for MTT purposes).
Such a mismatch will arise where the item is included in the member’s taxable income but not in the adjusted profits, or the item is included in the adjusted profits but not in taxable income.

For example, a “super-deduction” granted on an expense would be reflected in a member’s taxable income but would not be reflected in the adjusted profits for MTT purposes. If the super-deduction resulted in a tax loss, the consequent deferred tax asset would be excluded.

Deferred tax assets and liabilities arising under a blended CFC regime

A deferred tax asset or liability arising under a blended CFC regime will not be included upon entry into the Pillar 2 regime. Any such asset or liability will be ignored when determining the deferred tax expense.

Amendment in Finance Act 2025

Section 185 was amended by FA25. This guidance page reflects the current version of the legislation. Consult FA25 for legislation applicable to prior periods if the retrospection election does not apply (see MTT09490 (https://www.gov.uk/hmrc-internal-manuals/multinational-top-up-tax-and-domestic-top-up-tax/mtt09490)).