UK moves closer to a Pillar Two reality
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News: 20 November 2023
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Pillar Two is the series of rules designed and agreed by OECD Inclusive Framework jurisdictions with a view to setting an effective global minimum corporation tax rate of 15% for certain multinational groups of companies. They are constituted by the OECD’s Model Rules, published in December 2021, which broadly contemplate an Income Inclusion Rule (IIR) and a backstop, the Undertaxed Profits Rule (UTPR).
Further details are also set out in the OECD Commentary and Agreed Administrative Guidance. For further background and additional detail on Pillar Two, read our 20 questions on Pillar Two and the GloBE rules, and view our OECD Pillar Talk campaign.
From early on in the development of the rules, the UK has been part of the vanguard of design and implementation. Its commitment to prompt implementation continues with legislative progress and the publication of draft guidance.
UK parliamentary progress
The UK’s Pillar Two legislation is included in the Finance (No.2) Bill 2023, and includes a multinational top-up tax (MTT), together with a domestic top-up tax (DTT). The DTT is intended to constitute a “Qualified Domestic Minimum Top-up Tax” for the purposes of the OECD rules (and so creditable in full against the MTT). The UK government has been clear that its intention is that the UK legislation should reflect the OECD Model Rules, and both the MTT and the DTT will apply to large multinational enterprises for accounting periods beginning on or after 31 December 2023.
However, the reforms have not been welcomed by all, and some members of parliament have continued to lobby (unsuccessfully) for the government to include additional restraints on the timing of the taxing provisions.
Although the Bill has not yet been finally enacted, it completed its parliamentary passage in the House of Commons on 20 June 2023 and had its first hearing by the House of Lords (the second chamber of UK Parliament) on 21 June 2023. Because the Bill is classed as a “money bill” (strictly, a bill of “aids and supplies”), the House of Lords has no power to amend its content and the Bill must now proceed in its current form. The Bill will then receive Royal Assent and become law.
New HMRC draft guidance
On 15 June 2023, the UK government also published (partial) guidance to the draft legislation.
The guidance is set out in three parts: (i) Introduction, (ii) Scope (including guidance on excluded entities, the revenue threshold test and the transitional country-by-country reporting (CbCR) safe harbour) and (iii) Administration. The intention is that the guidance, together with additional guidance to be published “in due course”, will form a separate, standalone HMRC manual. The new draft guidance is intended to cover both the MTT and the DTT, and stipulates the instances in which there is a difference in approach.
As discussed, the UK government has repeatedly committed to implementing Pillar Two framework in a way that is consistent with the OECD principles. (In keeping with this approach, the draft guidance also includes a section which maps the UK legislation to the corresponding sections of the OECD Model Rules and relevant guidance.) However, the OECD material has no legal standing in the UK, which raises interesting questions about the relationship of UK domestic law with third party materials. The point is expressly recognised by HMRC in the draft guidance, which includes the following statements:
“The OECD documents do not have legal effect. Nonetheless, Section 121(1) [of the draft Finance (No. 2) Bill 2023] establishes that the purpose of MTT is to implement those documents into domestic law.
“Consequently, HMRC officers may consult the OECD documents as an aid if the application of the law to a particular set of facts is unclear. For example, as with the Model Rules, the MTT legislation does not define certain terms, and these terms should take their ordinary meaning. The OECD documents may provide additional understanding of the purpose of the rules which they set out (and by extension, the MTT legislation, which is intended to give effect to those rules).”
In its current form, the draft guidance does not address the computational aspects of the draft legislation, some of which may be more controversial in their application than the provisions already addressed. However, HMRC has committed to publishing further guidance on the calculation of the top-up tax, to include the effective tax rate, adjusted profits and underlying profits and covered taxes, as well as particular types of entity, structure and adjustments. HMRC is also inviting comments about the topics that might benefit from guidance.
However, it is also understood that the government does not necessarily intend to publish guidance in relation to every aspect of the legislation. Rather, it has been suggested that it will do so only where the guidance will add value (rather than simply re-stating OECD language).
The UK consultation on the draft guidance is open until 12 September.
Please do not hesitate to get in touch with your usual Allen & Overy contact to discuss these developments and their impact on your business.