L-Day: Draft legislation to implement Pillar Two published
The UK has published draft legislation and accompanying detailed explanatory notes to implement Pillar Two into UK law.
The UK has published draft legislation and accompanying detailed explanatory notes
As part of ‘L-day’ on 20 July 2022, the UK Government published draft legislation together with over 200 pages of detailed explanatory notes to implement Pillar Two into UK law. A summary of the responses to the public consultation that took place earlier this year was also published. In line with the delay announced on 14 June 2022, the Income Inclusion Rule (IIR) will first take effect for accounting periods beginning on or after 31 December 2023. There was limited further information on the introduction of the Under Taxed Payments Rule (UTPR) or a Domestic Minimum Tax, but the publications did provide some detail on the UK’s pragmatic approach to the co-existence of Pillar Two with the US Global Intangible Low-Tax Income (GILTI) rules.
Pillar Two is part of the OECD’s BEPS 2.0 project and establishes a global minimum tax of 15 percent for multinational enterprises with a turnover of at least €750 million.
The original timetable for implementation in the UK was based on the OECD mandate that the IIR would take effect from 1 April 2023, with the UTPR and the Domestic Minimum Tax introduced from 1 April 2024 at the earliest.
This led to some uncertainty on the timing of any UTPR, originally slated for 2024. The response document confirms the Government will introduce a UTPR, but a decision on timing will be made at a later date when the progress and extent of Pillar Two implementation in other jurisdictions can be assessed. Under the current EU Directive proposals before the EU, the default position is that the UTPR would be applied in the EU for fiscal years beginning on or after 31 December 2024.
The Government is also still considering whether to implement a Domestic Minimum Tax (DMT) with a decision dependent on factors such as implementation of IIRs and UTPRs in other countries, the process for determining whether a DMT is qualified, and whether there will be a safe harbour when a country has a qualified DMT.
The response document also confirms that payment dates for the top-up tax will be aligned with filing obligations. Previously the Government had proposed a payment date of nine months after the end of the accounting period, which would have led to complex estimates needing to be made before the relevant returns had been filed. The Government has moved to one annual instalment for the top-up tax due 15 months after the end of the accounting period (18 months in the transition year).
One notable point in the consultation responses is that the UK Government expects that tax paid in the United States under the current GILTI regime would be included in the adjusted covered taxes of a US group’s controlled foreign corporations for the purposes of both the IIR and UTPR. This approach recognises the uncertainty for US-headed groups facing potential double taxation under the current model rules in the absence of reform to the GILTI regime.
It will be interesting to see the response to this position, both by the US Congress in their consideration of reforms to the GILTI rules to accommodate the global minimum tax, but also by other countries seeking to implement the Pillar Two rules. The UK may lead the way in an attempt to find a pragmatic way to accommodate GILTI coexistence with the Pillar Two rules.
The release of the draft legislation indicates strong UK Government commitment to the adoption of Pillar Two on the global stage.
The documents acknowledge that some key policy and administration matters still need to be agreed within the OECD Inclusive Framework, and as part of the Administrative Guidance. In addition, there will be some ongoing uncertainty as to the detailed aspects of integrating Pillar Two into UK legislation.
Once the legislation is substantively enacted (expected in Spring 2023) the impact of the rules needs to be incorporated into UK financial reporting. In advance of this, groups reporting under IFRS should consider narrative disclosures of the status of analysis and work done on the impact of Pillar Two during 2022, which means that initial assessments should not be deferred to 2023. Pillar Two should be a priority for businesses, with the time being used to ensure that the impacts are fully assessed, managed and communicated, whilst process, compliance and system enhancements are implemented in time.
In the meantime, the draft legislation is subject to technical consultation until 14 September 2022 and HM Treasury has also indicated its willingness to have meetings with interested stakeholders.