Supporting the Pillar: UK consultation on global minimum corporate tax

The UK has been a strong supporter of BEPS 2.0. Now the UK Government is consulting on domestic implementation of the Pillar Two rules.

The UK has been a strong supporter of BEPS 2.0. Now the UK Government is consulting..

Death and taxes are certain, said Benjamin Franklin. But while the existence of taxation may be certain, the details are not. The world evolves and, if they are to remain effective, tax rules must follow. Faced with the challenges of globalisation and international commerce, not least online business, the OECD and G20 have led a global effort to restore the effectiveness of the international taxation system. The UK has been a strong contributor to and supporter of this effort. Now, over 130 countries have reached agreement that large multinational groups should be subject to an effective tax rate of at least 15 percent in each country in which they operate. How will the UK give effect to this this minimum tax? HM Treasury is consulting on the details. In a separate article in this edition of Tax Matters Digest we discuss Pillar Two and the prognosis for UK tonnage tax.

The Model Rules for the 15 percent global minimum tax (Pillar Two of the BEPS 2.0 project) were published by the OECD just before Christmas 2021, following lengthy development (see our earlier article). On 11 January 2022, HM Treasury and HM Revenue and Customs published a consultation on the UK’s implementation of the Pillar Two rules.

The basic design of the rules is not closely addressed: this has already been agreed at an international level. Nonetheless, implementation will require domestic legislation and the consultation takes the opportunity to ask for any strong reasons why the UK should not follow the Model Rules as closely as possible. It seems unlikely that any major divergence would be countenanced at this late stage. The reallocation of taxing rights under ‘Pillar One’ of BEPS 2.0 is also left aside for now. The focus of this consultation is how the Pillar Two rules should be implemented in the UK.

The consultation covers 37 questions such as:

  • Whether the consolidated revenue threshold of €750 million should be applied to UK-parented groups (the international agreement allows countries to apply a lower, but not higher, threshold);
  • Are the proposed exclusions for certain categories of entities (e.g. Governmental or non-profit entities) or for international shipping activity appropriate for the UK?;
  • Will the detailed computational rules be effective in the UK, or would modifications be beneficial (while still respecting the agreed international objectives)? Is the proposed safe harbour based on Country-by-Country Reporting data helpful?;
  • Are the transitional and administrative rules suitable from a UK perspective?; and
  • What are respondents’ views on the proposed introduction of a Domestic Minimum Tax in the UK (this being a new measure in the Model Rules allowing low-tax jurisdictions to collect any additional tax themselves, rather than having it flow to the parent’s jurisdiction – in this case enabling the UK to collect top-up tax on undertaxed UK profits)?

The intention is that the main ‘Income Inclusion Rule’ will take effect in the UK from 1 April 2023. The backstop ‘Undertaxed Payments (or Profits) Rule’ and the Domestic Minimum Tax would be introduced from 1 April 2024 at the earliest. This is a tight timetable, in line with the international timeframe, but political momentum remains strong and going by previous milestones there seems every chance of it being achieved. Although the OECD is yet to consult on implementation, the UK Government is seeking views now, with responses requested by 4 April 2022.

We would encourage affected companies to consider as soon as possible how the rules might affect them and whether the UK proposals are appropriate. If you would find it helpful to discuss the proposals, or the best avenue for responding, please do not hesitate to contact us. Taxation is certain; now is the chance to shape the new rules.