1. For the purpose of this Article, the following definitions apply:
(a) ‘disallowed accrual’ means the movement in deferred tax expense accrued in the financial accounts of a constituent entity that relates to an uncertain tax position and distributions from a constituent entity;
(b) ‘unclaimed accrual’ means the increase in a deferred tax liability accrued in the financial accounts of a constituent entity for a fiscal year that is not expected to be paid within the time period set forth in paragraph 7 that the filing constituent entity elects not to include in total deferred tax adjustment amount for such fiscal year.
2. Where the domestic tax rate in a jurisdiction is below the minimum effective tax rate, the total deferred tax adjustment amount to be added to the adjusted covered taxes of a constituent entity for a fiscal year pursuant to point (b) of Article 20, Paragraph 1 shall be the deferred tax expense accrued in its financial accounts with respect to covered taxes, subject to the adjustments under paragraphs 3 to 6.
Where the domestic tax rate in a jurisdiction is above the minimum tax rate, the total deferred tax adjustment amount to be added to the adjusted covered taxes of a constituent entity for a fiscal year pursuant to point (b) of Article 20, Paragraph 1 shall be the deferred tax expense accrued in its financial accounts with respect to covered taxes recast at the minimum tax rate, subject to the adjustments under paragraphs 3 to 6.
3. The total deferred tax adjustment amount shall be increased by:
(a) the amount of disallowed accrual or unclaimed accrual paid during the fiscal year; and
(b) the amount of recaptured deferred tax liability determined in a preceding fiscal year, which has been paid during the fiscal year.
4. Where, for a fiscal year, a loss deferred tax asset is not accrued in the financial accounts because the recognition criteria are not met, the total deferred tax adjustment amount shall be reduced by the amount that would have reduced the total deferred tax adjustment amount if a loss deferred tax asset for the fiscal year had been accrued.
5. The total deferred tax adjustment amount shall not include:
(a) the amount of deferred tax expense with respect to items excluded from the computation of qualifying income or loss under Chapter III;
(b) the amount of deferred tax expense with respect to disallowed accruals and unclaimed accruals;
(c) the amount impact of a valuation adjustment or accounting recognition adjustment with respect to a deferred tax asset;
(d) the amount of deferred tax expense arising from a re-measurement with respect to a change in the applicable domestic tax rate; and
(e) the amount of deferred tax expense with respect to the generation and use of tax credits.
6. Where a deferred tax asset, which is attributable to a qualifying loss of a constituent entity, has been accrued for a fiscal year at a rate lower than the minimum rate, it may be recast at the minimum rate in the same fiscal year.
Where a deferred tax asset is increased pursuant to the first subparagraph, the total deferred tax adjustment amount shall be reduced accordingly.
7. A deferred tax liability that is not paid or reversed within the five subsequent fiscal years shall be recaptured to the extent it was taken into account in the total deferred tax adjustment amount of a constituent entity.
The amount of the recaptured deferred tax liability determined for the fiscal year shall be treated as a reduction to the covered tax of the fifth preceding fiscal year and the effective tax rate and top-up tax of such fiscal year shall be recomputed in accordance with Article 28, Paragraph 1.
8. By way of derogation from paragraph 7, where a deferred tax liability that is not paid within the five subsequent year is a recapture exception accrual, it shall not be recaptured. A recapture exception accrual shall be an amount of tax expense accrued that is attributable to changes in associated deferred tax liabilities, in respect of the following items:
(a) cost recovery allowances on tangible assets;
(b) the cost of a licence or similar arrangement from a government for the use of immovable property or exploitation of natural resources which entails significant investment in tangible assets;
(c) research and development expenses;
(d) de-commissioning and remediation expenses;
(e) fair value accounting on unrealized net gains;
(f) foreign currency exchange net gains;
(g) insurance reserves and insurance policy deferred acquisition costs;
(h) gains from the sale of tangible property located in the same jurisdiction as the constituent entity that are reinvested in tangible property in the same jurisdiction; and
(i) additional amounts accrued as a result of accounting principle changes with respect to items listed under points (a) through (h).
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