Use it wisely: a short delay to Pillar Two in the UK

UK companies have some welcome breathing space before Pillar Two takes effect. They should make the most of the opportunity.

UK companies have some welcome breathing space before Pillar Two takes effect.

The UK Government has announced that the implementation of Pillar Two in the UK will now take effect for Accounting Periods beginning on or after 31 December 2023. Pillar Two, the international agreement to establish a global minimum tax of 15 percent for large multinationals, was previously to come into effect in the UK in stages from 1 April 2023. HM Treasury consulted on the domestic implementation of Pillar Two earlier this year and the delay reflects a “consistent and forceful” theme of the responses. Concerns over the work needed to ensure compliance, along with ongoing OECD technical and policy discussions and a recognition of the risk to UK competitiveness from early adoption, have led HM Treasury to act.

The Pillar Two rules are complex and novel in many respects. Taxpayers, tax authorities and advisers have been working to assess how the rules will apply to their groups and countries. The OECD’s publication of the model rules at the end of 2021 provided much detail, but a number of matters remained unclear and subject to interpretation, despite over 200 pages of commentary. These include the design of safe harbours.

It is clear that compliance with the new rules will present a major challenge to businesses. Accounting systems will require review to ensure they can capture and analyse the information required. Finance and tax teams may be required to adopt new and unfamiliar processes. The group structure itself may need to be revisited, potentially affecting multiple stakeholders. Many groups may also see their overall effective tax rate increase.

The response of jurisdictions to the planned 2023 timetable has been mixed. Some have pushed forward, so far, with preparing for 2023 commencement. Others have expressed scepticism that this will be possible under their domestic legislative processes. While the US has not announced an intention to delay implementation, achieving political consensus may be difficult in light of other pressing demands on the time of the Administration and Congress (albeit no other country is indicating this as a reason to themselves delay). The EU’s draft Directive for Pillar Two is not yet agreed, although that may occur in the next months. Poland has now indicated agreement but Hungary has now vetoed. Once agreed, the Directive mandates a start of no later than 1 January 2024. Other countries (e.g. Switzerland) have confirmed a 2024 target

For a time, the UK was among those countries working towards 2023 (1 April) implementation of the main Income Inclusion Rule (IIR), with the ‘backup’ Undertaxed Profits Rule (UTPR) and 15 percent Domestic Minimum Tax (DMT) scheduled for 1 April 2024. The Treasury announcement does not mention the UTPR or DMT, and hence the start date for these is now unclear, but the IIR will now not take effect until, essentially, 2024 (the 31 December commencement is curious: perhaps it reflects a desire to retain a 2023 official date, analogous to the EU’s proposal).

HM Treasury has recognised the lead-in time necessary for business to implement systems and processes that will be required for Pillar Two compliance. We recommend that in-scope groups take full advantage of this opportunity. Although the additional breathing space will be welcomed, it is not all that long given the challenges. ‘Substantive enactment’ of the legislation (hence financial reporting implications) remains likely for early 2023.

Time remains short. Businesses need to use it effectively.