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UK delays implementation of Pillar 2 tax rules

Matt Stringer Matt Stringer

The UK is delaying implementation of Pillar 2 rules, but is committed to pushing draft legislation forwards. Matt Stringer explains what this might mean for business. 

HM Treasury announced that the UK will delay the implementation of the Pillar 2 rules so that they'll first apply to accounting periods beginning on or after 31 December 2023, ie, 2024 calendar year ends. Nevertheless, the UK has also confirmed that draft UK legislation for Pillar 2 is in progress and will be released over the summer.

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 businesses 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 Euro 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 will be implemented into local law in each territory and therefore will come into effect at different times globally.

What’s been the UK consultation process so far?

The UK concluded its consultation process on the Pillar 2 rules in April 2022. As part of this, the UK represented that the intention was to bring in these rules on 1 April 2023. The UK also intends to implement a domestic minimum tax to complement these rules.

We provided some detailed commentary as part of the consultation, one our key recommendations being to delay implementation; in order to give businesses sufficient time to ready themselves for these rules. We also suggested a number of ways in which the rules could be simplified and where clarity will be needed for effective implementation.

What should you be doing now and how can we help?

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 that we can assist you in answering include: 

  • What accounting and tax data will we need to collate in order to undertake the Pillar 2 calculation, and how can we better organise our systems to ensure the data collation exercise is efficient? 
  • 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 / or 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?

If you would like to discuss Pillar 2 in any more detail, contact Matt Stringer.