Taxes Consolidation Act 1997 section 111P

Adjustments to determine qualifying income or loss

Section 111P sets out the adjustments that must be made to a constituent entity's financial accounting net income or loss in order to arrive at its "qualifying income or loss" for the purposes of calculating top-up tax under the Pillar Two rules.

• The financial accounting net income or loss is adjusted for items including net taxes expense, excluded dividends, excluded equity gains or losses, revaluation gains or losses, asymmetric foreign currency gains or losses, policy disallowed expenses, prior period errors, accrued pension expenses, and certain additions and reductions under section 111W.
• Various elections are available to the filing constituent entity — including elections to use the tax deduction for stock-based compensation instead of the accounting expense, to apply the realisation principle for fair value or impairment accounting, to spread gains on disposal of local tangible assets over five years, and to eliminate intra-group transactions within a tax consolidation group.
• Intra-group transactions between constituent entities in different jurisdictions must be recorded at the same amount and on an arm's length basis; expenses from intra-group financing arrangements may be disallowed where they artificially reduce qualifying income in a low-tax jurisdiction without a corresponding increase in the counterparty's taxable income.
• Special rules apply to insurance companies (regarding policyholder returns and reserve movements), additional tier one capital instruments (treated as income or expense rather than equity movements), financial instrument classification (which must be consistent between issuer and holder), and debt releases (which may be excluded from qualifying income or loss in insolvency or near-insolvency situations).

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