On 23 March 2023, HM Treasury published draft legislation and an explanatory note in respect of the UK’s domestic implementation of an income inclusion rule (“multinational top-up tax”) and a qualified domestic minimum top-up tax, in line with the?OECD/G2O Inclusive Framework on BEPS?(“inclusive framework”) global minimum tax rules (“Pillar Two”).
This follows the statement on the components of global tax reform, agreed by more than 135 members of the inclusive framework in October 2021, and the subsequent publication by the inclusive framework of model rules for Pillar Two, commentary, safe harbours, and administrative guidance.
The draft legislation is included in?Finance (No.2) Bill 2023-24?presented to the House of Commons on 23 March 2023 and which is proceeding through parliamentary processes. Once enacted, the multinational top-up tax and qualified domestic top-up tax will have effect in the UK in respect of accounting periods beginning on or after 31 December 2023.
A Deloitte Tax Alert can be found?here.
- The Pillar 2 model rules apply to entities which are consolidated as part of large multinational groups with annual consolidated group revenue of at least EUR 750 million.
- The UK government has released updated draft legislation for an IIR and new draft legislation for a QDMTT in line with the OECD’s global minimum tax rules under Pillar Two.
- These will, as set out previously, apply from 2024 (accounting periods beginning on or after 31 December 2023). As previously announced, the QDMTT applies not only to multinational groups but also to UK domestic groups and UK standalone entities that meet the size threshold (annual revenues of more than EUR 750 million).
- The UK government has advised that the UTPR will not apply in the UK earlier than from 2025 (accounting periods beginning on or after 31 December 2024), with draft legislation to be released at a later date.
- Businesses will be closely following the progress of the draft legislation to determine when it is “substantively enacted” or “enacted” for financial statements purposes. Substantive enactment seems likely (based on previous legislation) to occur in June or July 2023 but there is no set timetable at this stage.
- The UK draft legislation is broadly aligned with the OECD Pillar Two framework (although it uses UK-specific legislative terms and is structured differently), with powers for HM Treasury to amend it to “ensure consistency” with the OECD model rules, the OECD commentary, and future guidance published by the OECD.
- It would be helpful if the UK definitions could provide a “map” of the OECD model rules to the UK legislation to help businesses with their interpretation. It is clear that the UK government intends the UK domestic minimum top-up tax to be a “qualified” domestic minimum top-up tax, with a view to the inclusive framework recognizing it as such and for it to be subject to peer review and monitoring.
- The draft legislation includes updates for areas that were missing from the first draft of the IIR (e.g., in respect of transfers of assets or liabilities). It also reflects the latest administrative guidance from the OECD, such as temporary rules setting out the treatment of US global intangible low-taxed income and other blended controlled foreign company regimes.
- There is a specific provision confirming that protected cells which are part of a protected cell company will be treated as distinct entities.??The fact an entity is a part of a protected cell company is irrelevant to determining whether it is a member of a consolidated group, and furthermore, the accounts of the protected cell company are not to be regarded as consolidated financial statements.
- Helpfully, the updated draft legislation sets out that payments made by one company to another group company to compensate them for settling the first company’s UK multinational top-up tax or UK QDMTT liability will not be taken into account for UK tax purposes (including corporation tax and income tax).
- For many businesses the biggest challenge remains compliance with the global new rules and collection of the necessary data. Both the UK IIR and QDMTT rule include temporary safe harbours in line with those agreed at the end of 2022 by the inclusive framework. These will be helpful to reduce the compliance burden for many groups for the first three years.
Certain countries, including the UK and the 27 Member States of the European Union, now have to introduce the income inclusion rule with effect for years beginning on or after 31 December 2023. Businesses will want to understand the data required to be included within the information returns on a real-time basis when the rules take effect in 2024. Jersey and Guernsey based companies within UK or EU headed MNE Groups may be impacted by the above and may therefore want to consider the impact of any data collection requirements on their local business.?
At the current time, neither Jersey or Guernsey have committed to the introduction of the income inclusion rule (or other specific aspects of Pillar Two), with the Jersey government consultation released last year noting that 31 December 2023 would be the earliest any such introduction would be likely to happen.?It is expected that Jersey and Guernsey will be talking to each other about the options and any potential Pillar 2 implementation process.?We expect that both Islands will reach broadly the same conclusions as to next steps.??We can expect further information on this in the coming months, including whether the proposals would include some form of domestic tax on the profits of local entities which are part of the relevant large multi-national groups (as defined above).?
If you have any questions about how any aspects of the OECD two-pillar initiative may apply to you or any clients, please feel free to reach out to your usual Deloitte contact.
