The UK government has launched a consultation on the implementation and administration in the UK of the OECD pillar two framework, following publication of the OECD pillar two model rules in December 2021.
The consultation focuses on two charging and collection mechanisms:
the UK income inclusion rule (IIR) which would apply to MNEs with consolidated annual revenues over €750m headquartered in the UK and would impose a top-up tax where the MNE has entities located in jurisdictions where the effective tax rate (ETR) is below 15%; and
the UK undertaxed profits rule (UTPR) which would also apply to groups with revenue over €750m, but would be limited to UK entities of groups headquartered outside the UK and would apply in relation to the group’s overseas profits which are not subject to a minimum level of tax.
The consultation also outlines the principle of consistent implementation of the rules, to ensure that all jurisdictions ‘respect the nature of the pillar 2 agreement’ and to avoid the potential risks of double taxation or double non-taxation where different countries adopt different rules. The government therefore aims to implement the pillar two rules in the UK ‘as closely to the OECD model rules as possible’.
The consultation asks a number of questions on the scope of the rules including:
whether there are strong reasons why the UK legislation should not follow the OECD model rules as closely as possible; and
whether the calculation of the €750m revenue threshold is appropriate, whether the IIR should only apply to groups that meet the threshold, and whether certain entities should be excluded.
Consultation questions on calculation of the effective tax rate ask for views on the following:
the practicalities of computing a constituent entity’s accounting profit, and the various adjustments made to accounting profit (included in chapter 3 of the model rules);
rules on the allocation of profits between jurisdictions; and
rules on timing differences where, for example, profits are taxed in different periods in different jurisdictions.
The consultation also requests views on calculating top-up tax, transitional rules, and reporting and payment.
Chapter 12 of the consultation sets out proposals for a domestic minimum top-up tax (DMT) in the UK which would be closely based on the pillar two rules but, rather than allowing a foreign jurisdiction to charge top-up taxes in relation to any low-taxed profits of a group’s entities in the UK, the UK would instead impose that top-up tax. The government considers this would not only protect revenue for the UK exchequer, but would also reduce the compliance burden for UK-headquartered groups by preventing them from being subject to the undertaxed profits rules in multiple countries in respect of their UK operations – in effect, a simplification measure.
The consultation document also includes a summary of the pillar two framework, setting out the basic steps involved in calculating the ETR and top-up tax payable for in-scope multinational groups and determining how the top up will be charged.
The income inclusion rule is intended to come into effect from 1 April 2023, while the backup undertaxed profits rule will take effect from 1 April 2024.
The consultation closes on Monday 4 April 2022, and the government intends to publish draft legislation in summer 2022.
Bezhan Salehy, tax policy specialist at Macfarlanes, said that the announcement, made only a few weeks after the OECD model rules, ‘demonstrates the government’s intent to implement the rules at the earliest opportunity – even if that means bending the normal policy-making process.’
‘The document makes clear that stakeholders shouldn’t expect material changes to the substantive policy in the OECD model rules, which is settled,’ he said. ‘Where there are open policy questions they are about aspects that aren’t prescribed in the model rules such as administration and the possible adoption of safe harbours.’
Commenting on the proposed new DMT, Salehy added: ‘this would avoid the possibility of other countries charging pillar two top-up taxes on groups’ UK profits. Partly that protects the UK exchequer’s interests – why forgo collecting tax only for another country to do it? - but it also has potential benefits for businesses, which may prefer to pay the minimum tax directly to the UK rather than to an assortment of other countries,’ he added.
The UK government has launched a consultation on the implementation and administration in the UK of the OECD pillar two framework, following publication of the OECD pillar two model rules in December 2021.
The consultation focuses on two charging and collection mechanisms:
the UK income inclusion rule (IIR) which would apply to MNEs with consolidated annual revenues over €750m headquartered in the UK and would impose a top-up tax where the MNE has entities located in jurisdictions where the effective tax rate (ETR) is below 15%; and
the UK undertaxed profits rule (UTPR) which would also apply to groups with revenue over €750m, but would be limited to UK entities of groups headquartered outside the UK and would apply in relation to the group’s overseas profits which are not subject to a minimum level of tax.
The consultation also outlines the principle of consistent implementation of the rules, to ensure that all jurisdictions ‘respect the nature of the pillar 2 agreement’ and to avoid the potential risks of double taxation or double non-taxation where different countries adopt different rules. The government therefore aims to implement the pillar two rules in the UK ‘as closely to the OECD model rules as possible’.
The consultation asks a number of questions on the scope of the rules including:
whether there are strong reasons why the UK legislation should not follow the OECD model rules as closely as possible; and
whether the calculation of the €750m revenue threshold is appropriate, whether the IIR should only apply to groups that meet the threshold, and whether certain entities should be excluded.
Consultation questions on calculation of the effective tax rate ask for views on the following:
the practicalities of computing a constituent entity’s accounting profit, and the various adjustments made to accounting profit (included in chapter 3 of the model rules);
rules on the allocation of profits between jurisdictions; and
rules on timing differences where, for example, profits are taxed in different periods in different jurisdictions.
The consultation also requests views on calculating top-up tax, transitional rules, and reporting and payment.
Chapter 12 of the consultation sets out proposals for a domestic minimum top-up tax (DMT) in the UK which would be closely based on the pillar two rules but, rather than allowing a foreign jurisdiction to charge top-up taxes in relation to any low-taxed profits of a group’s entities in the UK, the UK would instead impose that top-up tax. The government considers this would not only protect revenue for the UK exchequer, but would also reduce the compliance burden for UK-headquartered groups by preventing them from being subject to the undertaxed profits rules in multiple countries in respect of their UK operations – in effect, a simplification measure.
The consultation document also includes a summary of the pillar two framework, setting out the basic steps involved in calculating the ETR and top-up tax payable for in-scope multinational groups and determining how the top up will be charged.
The income inclusion rule is intended to come into effect from 1 April 2023, while the backup undertaxed profits rule will take effect from 1 April 2024.
The consultation closes on Monday 4 April 2022, and the government intends to publish draft legislation in summer 2022.
Bezhan Salehy, tax policy specialist at Macfarlanes, said that the announcement, made only a few weeks after the OECD model rules, ‘demonstrates the government’s intent to implement the rules at the earliest opportunity – even if that means bending the normal policy-making process.’
‘The document makes clear that stakeholders shouldn’t expect material changes to the substantive policy in the OECD model rules, which is settled,’ he said. ‘Where there are open policy questions they are about aspects that aren’t prescribed in the model rules such as administration and the possible adoption of safe harbours.’
Commenting on the proposed new DMT, Salehy added: ‘this would avoid the possibility of other countries charging pillar two top-up taxes on groups’ UK profits. Partly that protects the UK exchequer’s interests – why forgo collecting tax only for another country to do it? - but it also has potential benefits for businesses, which may prefer to pay the minimum tax directly to the UK rather than to an assortment of other countries,’ he added.
