Draft guidance published - HMRC unpacks the UK’s Pillar Two rules

Draft guidance provides additional information on administration, chargeability and scope for Multinational and Domestic Top-up Taxes

Draft UK’s Pillar Two HMRC guidance

HMRC have published draft partial guidance for consultation in relation to the UK's implementation of the OECD's Pillar Two rules. This technical guidance broadly covers certain aspects of the Multinational Top-up Tax (MTT), the Domestic Top-up Tax (DTT), the transitional Country by Country reporting (CbCR) safe harbour and administration of the regime. It also clarifies when there is a different application of the DTT as compared to the MTT. Additionally, the draft guidance provides a helpful 'map' showing how the existing UK draft legislation cross-references to the OECD GloBE Model Rules, the OECD Commentary and the OECD Agreed Administrative Guidance. This mapping table will be updated by HMRC to reflect any further changes/ additions to be made by the OECD subsequently. Comments are invited by 12 September 2023, and HMRC will update and add to the draft guidance in future.

The purpose of the draft guidance is to provide HMRC’s interpretation of certain areas of the MTT and DTT, which are set to be implemented in the UK for accounting periods beginning on or after 31 December 2023 following the enactment of the Spring Finance Bill 2023. 

The draft guidance does not take precedence over the OECD documents. Instead, HMRC officers may consult the OECD documents as an aid if the application of the law to a particular set of facts is unclear. 

This draft guidance is the first tranche amongst many further updates to be issued by HMRC and consists of the following three chapters discussed further below:

  • Overview of the MTT and the DTT and guidance on chargeability;
  • Scope and the transitional CbCR safe harbour; and
  • Administration.

Overview of the MTT, DTT and guidance on chargeability

Apart from providing general clarifications in relation to applicability of the MTT and the DTT to multinational/ domestic groups, the guidance includes a summary of the differences between them.

The guidance clarifies that the substance-based income exclusion (SBIE) will apply under the DTT as it applies under the MTT rules.

The DTT is designed to be treated as a Qualified Domestic Minimum Top-up Tax (QDMTT) by the OECD Inclusive Framework. Thereby any DTT liability will be fully offset against any Pillar Two liabilities that may arise in other jurisdictions.

The DTT is calculated and administered in a largely similar way to MTT, with some exceptions.

The draft guidance clarifies that the UK does not have an eligible distribution tax system, so the deemed distribution tax election will not be relevant for the DTT, and eligible distribution taxes will not feature in covered taxes for the DTT.

Scope and the transitional CbCR safe harbour

The draft guidance provides a clear distinction of the ‘qualifying group’ for the purposes of the MTT and the DTT and clarifies certain definitions such as ‘multinational group’, ‘ultimate parent’, ‘entity’, ‘permanent establishment’, etc.

The draft guidance also provides examples of entities that would meet the criteria to be an ‘Excluded Entity’ for Pillar Two purposes.

Special rules apply if there have been mergers (including acquisitions) or demergers in the tested period or the prior periods.

The effect of meeting the conditions of safe harbours for a particular jurisdiction have been clearly listed out and the emphasis remains on having the right sources of data (such as Qualifying CbCR) to meet such tests.

The draft guidance clarifies the safe harbour will also apply for DTT purposes with some adjustments required for wholly domestic groups and entities.


The MTT is applied to groups, but administration can be simplified by the selection of a single member of the group as the point of contact for compliance. Guidance has been provided on which entity could be the filing member for the group and its obligations.

The draft guidance also includes information on registration/ de-registration, the GloBE information return, the self-assessment return (but noting that the structure and format are yet to be finalised) and the overseas return notification.

Furthermore, the draft guidance sets out below-threshold notifications that can be filed to HMRC provided certain conditions are met. Its effect is to disapply the obligation to submit a self-assessment return. Such notification will only need to be submitted once and will remain in place until it becomes invalid.

Additional information on the payment dates, interest, group payment notices and relief of overpaid taxes have been clarified.

There are various penalties listed based on the type of failure to meet with the MTT and DTT requirements. 

Key takeaways

As noted above, this is a first tranche of the draft guidance issued by HMRC and more is to follow in due course (both on a short-term basis and intermittently going forwards as necessary clarifications arise during the bedding-down of the rules).

These clarifications are very helpful for businesses that are currently evaluating what is the best course of action to be undertaken in order to be ready for the UK’s implementation of Pillar Two. This may range from impact assessments, through planning for data collection and management, compliance and reporting.

The draft guidance also notes that although the MTT legislation has been designed to implement the OECD Model Rules, there may be some (unintended) deviations in the UK legislation when it adapts the Model Rules into UK legislation and structure. Therefore, it is important for businesses to identify such deviations early and assess both their specific context as well as the impact of such deviations on the group.

Please contact the authors or your usual KPMG in the UK contact if there are any points you would like us to consider reflecting in any submissions that we make.