Over 130 countries have signed up to implement the Organisation for Economic Cooperation and Development (OECD) global minimum tax, or 'Pillar 2' rules. The OECD’s Model Rules and Commentary were released in December 2021 and March 2022 respectively. The implementation framework remains in consultation at OECD level.
The global minimum tax rules seek to ensure multinational enterprises are paying tax at an effective rate of 15% or higher in every jurisdiction they operate, regardless of the local headline tax rate or the impact of local tax reliefs. These rules will apply to multinational businesses with consolidated global revenue in excess of EUR 750 million.
Where the effective rate of tax is below 15% in any jurisdiction (and subject to a number of exceptions) the tax must be 'topped up' by the group, usually in the jurisdiction of the ultimate parent entity. In addition, certain territories may also implement a domestic minimum tax to complement the Pillar 2 rules.
These rules would need to be be implemented into local law in each territory and therefore will come into effect at different times globally.
The UK government announced a delay to its originally proposed implementation date in June. The Pillar 2 rules, specifically the income inclusion rule (IIR), will apply for accounting periods beginning on or after 31 December 2023.
The Treasury and HMRC have now released the full outcome of the consultation and proposed UK legislation. It's clear from the consultation response that the government remains committed to implementing the global minimum tax rules as intended. There are areas where the UK will seek to clarify certain points in its domestic legislation, however, and some issues where the UK will advocate for change or clarity at an international level before the rules come in.
1 The UK legislation will follow as closely as possible the OECD Model Rules, but it has been drafted in a manner to ensure the rules are as clear and understandable as possible.
2 There are some areas of the OECD Model Rules, in particular complex areas of the effective tax rate calculation, that present significant technical challenges, and the UK will seek further discussion on these at an international level.
3 The government has provided some clarification on what should be treated as a covered tax for the purposes of Pillar 2, but doesn't intend to produce an exhaustive list.
4 The government appreciates that deferred tax accounting presents particular complexity within the Pillar 2 rules and will discuss certain concerns raised at an international level.
5 The UK remains committed to bringing in the undertaxed profits rule (UTPR) – one of the rules under which the top-up tax may be collected, but has not agreed any timings on this yet. The government has also not concluded on the mechanism for collecting tax under the UTPR.
6 The UK has confirmed its intentions to simplify as far as possible the administration and compliance requirements for businesses under Pillar 2. Specifically:
The UK also remains committed to discussing simplifications at the international level, in particular in relation to the Pillar 2 safe harbours. Some examples of the safe harbours under discussion are:
7 The government has pledged to undertake a broader review of its international corporate tax rules following the introduction of Pillar 2 to identify areas where simplification could be achieved.
In advance of the rules coming into effect in the UK at the end of 2023, it's important that businesses ready themselves. Some key questions to address include the following: