TaxTalk – September 2023
UK Pillar 2 minimum tax legislation applies to companies/groups with annual consolidated turnover > €750m for accounting periods that begin on or after 31 December this year. So, what are the important considerations and reporting requirements that they need to consider?
Pillar 2 has been designed to set a global minimum tax rate for large companies and groups. Here is a reminder of the background:
- In 2021, 136 of the 140 countries in the OECD Inclusion Framework agreed to implement a 15% global minimum Corporation Tax rate for multinationals with consolidated global turnover of €750m or more.
- Where a subsidiary has an effective tax rate of less than 15%, the group will pay additional tax to make up the difference.
- Although the regime framework has been internationally agreed by member countries, each one needs to incorporate the rules into domestic tax legislation. The OECD published its model rules and commentary for Pillar 2 in December 2021 and March 2022, respectively.
- The OECD published its model rules and commentary for Pillar 2 in December 2021 and March 2022, respectively.
What updates have there been in the UK in 2023?
11 July: UK Pillar 2 legislation received royal assent as part of Finance (No. 2) Act 2023. This legislation included an income inclusion rule (IIR) (multinational top-up tax) and a qualified domestic minimum top-up tax (QDMTT) (domestic top-up tax). These will be effective for accounting periods beginning on or after 31 December 2023. They are applicable to relevant groups where consolidated revenues are €750m or more in at least two of the last four years.
18 July: Draft legislation was issued to introduce the Undertaxed Payments rule (UTPR), the second multinational top-up tax after the IIR. A UTPR would work in a similar way to the IIR, being a top-up tax rather than a denial of a deduction. IIR would take precedence over UTPR. It is expected the UTPR would apply for accounting periods beginning on or after 31 December 2024.
What are the OECD Pillar 2 rules?
The IIR in most cases is calculated and paid by the ultimate parent company to its tax authority and applies on a top-down basis. The payment of the top-up tax ensures that the overall tax on profits is brought up to a minimum effective tax rate of 15% in each of the countries in which the group operates.
The UK QDMTT applies to all UK businesses, not just multinationals that meet the Pillar 2 turnover threshold. This will impose a UK top-up tax on low taxed UK profits. Many other jurisdictions have introduced (or plan to introduce) a domestic minimum tax for companies operating in their jurisdiction, to ensure that they benefit locally from any increased tax rate, rather than the parent jurisdiction.
Transitional safe harbours
Using the information from qualifying country-by-country reports and financial data, there are three transitional safe harbour tests available in the first three years of the regime (until periods beginning on or before 31 December 2026). This allows entities in a jurisdiction to be exempted from Pillar 2 calculations and liabilities if one of the following tests is satisfied:
- The threshold test. This is met where the members in that territory have aggregate revenue below €10m and the aggregate profit before tax is less than €1m.
- The simplified effective tax rate (SER) test. This is met if the SERs of the members of the group in that territory are at least 15% for periods beginning before 1 January 2025, at least 16% for periods beginning in 2025 or at least 17% for periods beginning after 1 January 2026.
- The routine profits test. This is met if:
- the qualified substance-based income exclusion amount for that territory is equal to, or greater than, the aggregate profit/loss before tax for that period of the members of the group in that territory, or
- the aggregate profit/loss before tax for those members is nil or a loss.
If a group is found to not pass any of the tests for a period, it must prepare the full calculations for that period and any subsequent periods. This is the ‘once out, always out’ feature of the safe harbour provisions. The safe harbour provisions are designed to reduce the compliance obligations when entering the Pillar 2 regime for the first time. But note they do not exempt the group from relevant reporting requirements.
Transitional penalty relief regime
Another measure over the first three-year period is that no penalties or sanctions should apply in connection with non-compliance if it can be demonstrated that “reasonable measures” have been taken.
What are the reporting requirements?
The proposed UK reporting requirements and timeline of filings for the IIR and QDMTT for groups with a year end of 31 December are as follows:
| Financial year end | Filing deadline |
| Financial year end 31 December 2024 | |
| One time requirement to register with HMRC when the group first comes into scope for the rules | 30 June 2025 |
| An annual UK Self Assessment return to provide HMRC with details of the UK top-up tax liability – in the first year, all returns have an 18-month deadline which is reduced to a 15-month deadline in subsequent periods | 30 June 2026 |
| A or B | |
| A – ultimate parent company to file Pillar 2 information return tax calculations made by the group to determine the groups’ top-up tax liability or justify the absence of such a liability | 30 June 2026 |
| B – if ultimate parent company is overseas, UK entities to notify HMRC annually of the group member filing | 30 June 2026 |
| Payment of UK top-up tax | 30 June 2026 |
| Financial year end 31 December 2025 and thereafter | |
| Subsequent information returns, Self Assessment returns and annual notifications have a 15-month deadline | 31 March 2027 |
| Payment of UK top-up tax | 31 March 2027 |
What are your next steps?
- With less than six months until the QDMTT and IIR measures come into effect, it’s important that businesses are prepared. You should continue monitoring both UK and global developments and ensure the necessary processes are in place to capture the relevant data.
- The new safe harbour provisions require the group’s country-by-country report to be “qualifying”. Considering this and the expected increased attention from EU public disclosures (please refer to our ESG article in this issue), groups should review existing processes for country-by-country reporting.
- Your business should determine potential exposure to Pillar 2 and assess your eligibility for the safe harbour provisions.
- You’ll need to identify the data required for reporting and Pillar 2 calculations and have it readily available.
- It’s important to communicate with stakeholders through modelling tax cash flows and effective tax rates, so that increased tax liabilities arising under Pillar 2 do not come as a surprise.
If you would like further advice and support on any issues raised in this article, please contact Mimi Chan.
