July’s Finance Bill included details of the proposed ‘multinational top-up tax’. What exactly is it, who will it affect and what will UK insurers need to do?
In 2021, 136 of the 140 countries in the OECD Inclusion Framework agreed to the proposal to implement a 15% global minimum Corporation Tax rate. This aimed to set a ‘floor’ for the level of tax competition between jurisdictions. The plan was to implement the rules from 2023. The primary measure agreed was the Income Inclusion Rule (IIR).
Although the regime framework has been internationally agreed by member countries, each needs to incorporate the rules into domestic tax legislation. In the UK, the proposals to adopt the IIR have been subject to consultation by HM Treasury. The Finance Bill 2022-23, released on 20 July, includes the relevant provisions (to be known in the UK as the ‘multinational top-up tax’) and is subject to further consultation. The conclusions are expected to be announced in the Autumn Budget, for inclusion in the 2023 Finance Act.
A secondary Pillar Two measure (the Undertaxed Profits Rule) will act as a backup to prevent profit shifting to low tax jurisdictions. As in most jurisdictions, its implementation has not yet been announced by the UK – and will follow later.
What are the principles of the multinational top-up tax?
UK parent companies within the scope of the regime will need to consider, subsidiary by subsidiary (whether held directly or indirectly), the accounting profit for each overseas subsidiary (or overseas permanent establishment) against the current tax charge applied to those profits in the financial statements. Where a subsidiary has an effective tax rate of less than 15%, the UK parent will pay the new tax to make up the difference.
It’s important that each jurisdiction is considered separately. Where the combined entities in one jurisdiction pay more than 15% effective tax rate, these ‘overpayments’ cannot be offset to reduce the exposure from subsidiaries in other jurisdictions paying less than 15%.
A number of adjustments to both the profits and tax base for each subsidiary must be made to determine the scale of any potential charge. The chief aim is to remove the effect of intra-group dividends or equity sales. The calculations will be complex, even if not quite so challenging as under the existing UK CFC regime, where overseas profits need to be rebased to UK Corporation Tax principles.
What is its scope?
The tax will apply to UK parented groups with global annual revenues over €750m in at least two of the previous four years. But the multinational nature of the regime means that purely UK domestic groups will not be captured. Bear in mind, though, that a single overseas permanent establishment within the group will be enough to bring the whole group into the regime.
However, ‘small’ subsidiaries can be excluded from the calculation for companies within the scope of the rules, where average revenue in the given jurisdiction is less than €10m and average profits lower than €1m.
Implementation and requirements
Although initially planned to take effect from 1 April 2023, the new tax regime is so complex that the legislation will only be implemented for accounting periods starting on or after 31 December 2023. For most insurance groups, therefore, the first period covered by the new tax will be the year ending 31 December 2024.
There will be a one-time requirement to register with HMRC when they first come into the regime. After that, groups will have 15 months from the accounting period end to report their top-up tax liabilities. It will also be the payment date. This is much simpler than the originally proposed nine-month window. For the first year a group is in the regime, the 15-month window is extended to 18 months.
This all means that in-scope insurance groups should mark 30 June 2026 in their calendar as the date for the first submission of a return, together with payment of associated top-up tax liabilities.
What is the impact for UK insurers?
Insurance carriers have long argued that the benefits of operating in low-tax jurisdictions, such as group reinsurance vehicles in Bermuda, are secondary to the wider regulatory, commercial and operation benefits the group derives from these structures. In fact the unilateral base erosion tax measures implemented in recent years, such as ‘diverted profits tax’ in the UK, or BEAT in the US, will, for many, have reduced or cancelled out the benefits of purely tax motivated structures.
Regardless, and despite the long-lead time for implementation of the new charge and reporting requirements, all insurers operating internationally must review their global tax structure and potential exposures in the UK or other jurisdictions regarding the top-up tax (which will be implemented globally). Their systems must adequately capture the required data, both for the top-up tax and for forthcoming changes.
Any such review should be considered against a shifting tax landscape, with low-tax jurisdictions changing their approach in light of these global changes.
Several no-tax jurisdictions have already announced new Corporation Tax regimes, imposing the tax for the first time on local entities of groups exceeding the €750m revenue threshold. Their justification is that if the tax benefits of operating from their jurisdiction are eroded, they should benefit locally, rather than the overseas parent company.
Indeed, the UK Treasury too is considering the merits of a domestic minimum tax rate, to capture within the UK tax net liabilities that may otherwise accrue to other jurisdictions.
If you would like more information or support on any of the issues raised in this article, please contact Chris Riley.
