Pillar 2 tax rules: UK releases draft legislation

The UK has now released the consultation outcome on Pillar 2 rules on global minimum tax rates, along with draft legislation. Yvonne Chappell sets out the key themes and what it could mean for your business.

What are the Pillar 2 rules?

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.

What does the consultation outcome mean for the UK?

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.

Seven themes arising from Pillar 2 consultation

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:

• a one-time requirement for multinationals to register when they first come into the scope of Pillar 2 – registration will be made digital and require minimal information
• a single entity will register (and file) on behalf of the whole multinational enterprise
• where the main Pillar 2 return – the Global Anti-Base Erosion (GloBE) information return – isn't filed in the UK, there will be an annual notification requirement to inform HMRC of where the return has been filed
• should a Pillar 2 tax liability arise in the UK, a short domestic Pillar 2 return will be required by HMRC to ensure the liability can be collected correctly
• the filing date for the domestic Pillar 2 return will be aligned with the filing date of the GloBE information return (15 months after the end of the accounting period or 18 months under the transitional rules)
• any top-up tax payments arising in the UK will be aligned with the filing date of the relevant returns
• the government will continue to consider the introduction of a domestic minimum tax to complement the Pillar 2 rules – to ensure that any top-up tax that would otherwise be collected overseas could instead be collected in the UK

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:

• a country by country reporting (CBCR) safe harbour – broadly using data already collected for CBCR purposes to calculate a simplified effective tax rate
• a qualifying domestic minimum tax (QDMT) safe harbour – broadly 'switching off' the Pillar 2 rules for countries that implement a QDMT into domestic legislation alongside the Pillar 2 rules

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.

How to prepare now

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:

• What accounting and tax data will we need for the Pillar 2 calculation, what gaps might there be and how can we close these?
• What's the tax footprint of our structure and is it appropriate post-Pillar 2 implementation?
• What's the estimated level of top-up tax that our business could be exposed to under these rules?
• What could our compliance obligations under the Pillar 2 and domestic minimum tax rules be?
• Which other territories are proposing to implement Pillar 2 and when, and will any of these territories also implement a domestic minimum tax?

To discuss Pillar 2 in any more detail, contact Matt Stringer, Yvonne Chappell or Dan Dickinson.