Article 12 - Adjustments to Determine Constituent Entity Income or Loss

For the purposes of applying the provisions of Paragraph A of Article 6 of the Law, the Constituent Entity Income or Loss for a Fiscal Year shall be the Financial Accounting Net Income or Loss adjusted for all of the following as applicable:

1. Net Taxes Expense.

2. Excluded Dividends.

3. Excluded Equity Gains and Losses.

4. Included Revaluation Method Gains or Losses.

5. Gains or losses from the disposal of assets and liabilities excluded under Article 39 of these Regulations.

6. Asymmetric Foreign Currency Gains or Losses.

7. Illicit Expenditure, Fines and Penalties.

8. Prior Period Errors and Changes in Accounting Principles.

9. Accrued Pension Expense.

10. Adjustments in relation to the Arm's Length Principle as specified under Article 13 of these Regulations.

11. Any transaction between Constituent Entities that is not recorded in the same amount in the financial accounts of such Constituent Entities.

12. Stock-based compensation where an election has been made in accordance with Paragraph A of Article 14 of these Regulations.

13. Foreign exchange gains or losses attributable to hedging instruments where an election has been made in accordance with Paragraph A of Article 15 of these Regulations.

14. Gains and losses in respect of assets and liabilities that are subject to fair value or impairment accounting where an election has been made in accordance with Paragraph A of Article 16 of these Regulations.

15. Net gains arising from the disposal of immovable property located in the Kingdom where an election has been made in accordance with Article 17 of these Regulations.

16. Expenses attributable to an Intra-group Financing Arrangement in accordance with Article 18 of these Regulations.

17. Debt releases where an election has been made in accordance with Paragraph A of Article 19 of these Regulations.

18. Dividends from Portfolio Shareholdings where an election has been made in accordance with Paragraph A of Article 20 of these Regulations.

19. Financial instruments in accordance with Article 22 of these Regulations.

20. Marketable Transferable Tax Credits and Qualified Refundable Tax Credits in accordance with Article 23 of these Regulations.

21. Income or Losses attributable to a Permanent Establishment in accordance with Article 10 of these Regulations.

22. Income or Losses attributable to a Flow-through Entity in accordance with Article 11 of these Regulations.

23. Consolidation adjustments where an election has been made in accordance with Article 24 of these Regulations.

24. Additional Tier One Capital in accordance with Article 25 of these Regulations.

25. Adjustments in respect of transactions specified in Chapter Five of these Regulations.

Where a Constituent Entity located in the Kingdom is an insurance company, its Constituent Entity Income or Loss shall also be adjusted in accordance with Article 26 of these Regulations.

Where a Constituent Entity located in the Kingdom derives income from international shipping, its Constituent Entity Income or Loss shall also be adjusted in accordance with Article 27 of these Regulations.

For the purposes of Clause 1 of Paragraph A of this Article, Net Taxes Expense means the net amount, if any, of all of the following where applicable:

1. Any Covered Taxes accrued as an expense and any current and deferred Covered Taxes included in the income tax expense, including Covered Taxes on income that is excluded from the Constituent Entity Income or Loss computation.

2. Any deferred tax asset attributable to a loss for the Fiscal Year.

3. Any Qualified Domestic Minimum Top-up Tax accrued as an expense.

4. Any taxes arising pursuant to the Model Rules accrued as an expense.

5. Any Disqualified Refundable Imputation Tax accrued as an expense.

6. Taxes accrued by an insurance company in respect of returns to policyholders.

For the purposes of Clause 4 of Paragraph A of this Article, an Included Revaluation Method Gain or Loss means the net gain or loss, increased or decreased by any associated Covered Taxes, for the Fiscal Year in respect of all property, plant and equipment that arises under an accounting method or practice that meets all of the following:

1. The accounting method or practice periodically adjusts the carrying value of such property to its fair value.

2. The accounting method or practice records the changes in value in Other Comprehensive Income.

3. The accounting method or practice does not subsequently report the gains or losses recorded in Other Comprehensive Income through profit and loss.

For the purposes of Clause 6 of Paragraph A of this Article, an Asymmetric Foreign Currency Gain or Loss means a foreign currency gain or loss of a Constituent Entity where the Accounting Functional Currency and Tax Functional Currency used by that Constituent Entity are different and where all of the following apply:

1. The foreign currency gain or loss is included in the Taxable Profit or Loss of the Constituent Entity in the jurisdiction in which it is located and attributable to fluctuations in the exchange rate between its Accounting Functional Currency and its Tax Functional Currency.

2. The foreign currency gain or loss is included in the computation of a Constituent Entity's Financial Accounting Net Income or Loss and attributable to fluctuations in the exchange rate between its Tax Functional Currency and its Accounting Functional Currency.

3. The foreign currency gain or loss is included in the computation of a Constituent Entity's Financial Accounting Net Income or Loss and attributable to fluctuations in the exchange rate between a Third Foreign Currency and its Accounting Functional Currency.

4. The foreign currency gain or loss is attributable to fluctuations in the exchange rate between a Third Foreign Currency and the Constituent Entity's Tax Functional Currency, whether or not such foreign currency gain or loss is included in the Taxable Profit or Loss of the Constituent Entity in the jurisdiction in which it is located.

For the purposes of Clause 7 of Paragraph A of this Article, Illicit Expenditure, Fines and Penalties includes any of the following:

1. Expenses accrued by the Constituent Entity for illegal payments, such as bribes and kickbacks.

2. Expenses accrued by the Constituent Entity for fines and penalties that equal or exceed EUR 50,000 (or an equivalent in the Functional Currency in which the Constituent Entity's Financial Accounting Net Income or Loss was calculated).

For the purposes of Paragraphs F and G of this Article, the Functional Currency is the currency of the primary economic environment in which the Entity operates.

For the purposes of Clause 8 of Paragraph A of this Article, Prior Period Errors and Changes in Accounting Principles means all changes in the opening equity at the beginning of the Fiscal Year of a Constituent Entity attributable to any of the following:

1. A correction of an error in the determination of the Financial Accounting Net Income or Loss of the Constituent Entity in a previous Fiscal Year that affected the income or expenses that may be included in the calculation of the Constituent Entity Income or Loss for such Fiscal Year, except to the extent that Article 36 of these Regulations applies to such error or corrections.

2. A change in accounting principle or policy that affected the income or expenses included in the calculation of the Constituent Entity Income or Loss.

For the purposes of Clause 9 of Paragraph A of this Article, an Accrued Pension Expense means the difference between the amount of pension liability expense included in the Financial Accounting Net Income or Loss and the amount contributed to a Pension Fund for the Fiscal Year.

For the purposes of applying the provisions of Paragraph J of this Article, the adjustment to the Financial Accounting Income or Loss for the Accrued Pension Expense shall be computed in accordance with the formula :

For the purposes of this Article, all of the following shall apply:

1. The Tax Functional Currency is the functional currency used to determine a Constituent Entity's taxable income or loss for a Covered Tax in the jurisdiction in which it is located.

2. The Accounting Functional Currency is the functional currency used to determine a Constituent Entity's Financial Accounting Net Income or Loss.

3. A Third Foreign Currency is a currency that is not the Constituent Entity's Tax Functional Currency or Accounting Functional Currency.