Finance Bill: The UK legislates for Pillar Two minimum taxation

Parliament will debate legislation to implement Pillar Two in the UK. Companies need to be ready for its entry into force.

The global minimum tax is before Parliament

The scaffolding has come down and we can see the Pillar standing. The Spring Finance Bill includes the legislation governing the UK’s implementation of ‘top-up’ taxes - the OECD/G20 agreed ‘Pillar Two’ imposing minimum taxation for large multinational groups. Affected groups are broadly those with worldwide consolidated revenues of at least €750 million in two of the prior four years. There are two main components: the multinational top-up tax, mainly chargeable on UK-parented multinationals and certain UK intermediate holding companies in respect of their worldwide operations; and the domestic top-up tax, putting a 15 percent effective tax rate floor under UK members of large groups, wherever headquartered. The rules are complex but appear consistent with expectations and with the OECD’s Pillar Two Model Rules. Groups should continue to prepare for the first affected Accounting Period – beginning on or after 31 December 2023.

The Finance Bill provisions take a similar form to the draft UK legislation issued last year, with a number of changes to clarify certain points or to complete aspects not previously set out. Notable developments include the rules for the UK’s domestic top-up tax (DTT) (computed on broadly the same principles as the multinational top-up tax), provisions for safe harbours based on country-by-country reporting data, and incorporation of the OECD’s recent Administrative Guidance as specific provisions. The ‘backstop’ Undertaxed Profits Rule remains outstanding, with the UK Government having previously stated that it will take effect no earlier than Accounting Periods beginning on or after 31 December 2024. The treaty-based Subject to Tax Rule, as well as the Pillar One rules, remain in progress. Many countries worldwide are also legislating for Pillar Two, or have announced their intention to do so.

The DTT will, where necessary, impose a top-up to a 15 percent jurisdictional effective tax rate on UK chargeable persons, including partnerships. Where there are multiple UK entities within the group, liability to the DTT will be joint and several. Any additional DTT liability will take precedence over the multinational top-up tax, other countries’ Pillar Two taxes, head office taxation of permanent establishment (PE) profits and other countries’ CFC taxes (including the US GILTI regime) in respect of UK entities.

The Finance Bill incorporates the transitional safe harbours that were previously announced by the OECD. Inclusion of these in primary legislation (rather than in guidance) confirms that, once the legislation is substantively enacted, they can be used in preparing financial reporting disclosures. These measures will reduce the compliance burden in many cases, enabling a relatively simple determination of nil liability to top-up tax in de minimis cases or those where profits are already taxed at a sufficient rate or result from personnel or tangible assets in the jurisdiction. But the safe harbours operate jurisdiction-by-jurisdiction. Quirks of existing tax rules may, from time to time, result in effective rates below the minimum in circumstances which are not always obvious in advance. Groups should not assume that they will be relieved of the need for extensive calculations. The safe harbours are also dependent on the preparation of a ‘qualifying country-by-country’ report for the period, so groups should ensure they can compile the data required for this.

Preparation will be critical. The OECD has published a template for the ‘GloBE Information Return’ for groups to demonstrate compliance with the new rules. The information requirements are extensive and not all readily available from accounting systems as they are currently configured. If not already secured, now is the time for tax teams to ensure they have established the Pillar Two reporting process by:

  • Obtaining the budget and resources (possibly including additional staff);
  • Identifying systems configuration changes;
  • Conducting a safe harbour health check; and
  • Seeking data gap analyses and other compliance support from advisers.

Keeping on top of the Pillar could be a complicated task.