On 23 March 2023 as set out in the Spring Finance Bill, updated draft UK legislation was released for an income inclusion rule (“IIR”) and new draft legislation for a domestic minimum top-up tax, as part of the latest installment of the UK’s implementation of the OECD’s Pillar Two project.
Both the UK IIR (“multinational top-up tax”) and the UK domestic minimum tax (“DTT”) apply for accounting periods beginning on or after 31 December 2023.
The UK legislation is generally aligned with the OECD Model rules, commentary and administrative guidance, and the legislation includes provision for future amendment to ensure consistency with additional guidance to be published by the OECD.
Multinational top-up tax (“UK IIR”)
Draft UK multinational top-up tax legislation was previously issued in July 2022. The updated legislation includes additional provisions which were left as placeholders in the previous draft, as well as new provisions to incorporate the OECD Administrative Guidance (“AG”) issued in February 2023. Key items included in the AG (and reflected in the updated UK legislation) include the treatment of Blended CFC Regimes (e.g. US GILTI), treatment of debt releases and updates to the transitional provisions regarding deferred tax assets and intra group transfers.
Domestic top-up tax (“DTT”)
The Spring Finance Bill also included new draft legislation for a UK DTT. It is clear from the legislation that the UK DTT is intended to be a “qualifying domestic minimum tax (“QDMTT”)” meaning that it should operate to prevent further calculations being required (and tax being paid) under an overseas IIR or UTPR regime. The qualifying status is dependent on the OECD Inclusive Framework recognising it as such which will be subject to peer review and monitoring.
The good news is that the UK DTT appears to largely follow the UK IIR rules and is effective for the same periods beginning on or after 31 December 2023. There are some specific adjustments that are required in order for the UK rules to qualify as a QDMTT, including confirmation that there is no allocation to the UK of taxes paid on UK profits under overseas CFC regimes and no allocation of overseas head office taxes to UK branches. Similarly, taxes paid in respect of overseas profits under the UK CFC regime are fully excluded from the calculations.
As previously announced, the UK DTT applies not only to multinational groups but also to UK domestic groups and UK standalone entities of sufficient size (annual revenues of more than €750 million).
Transitional safe harbor
The draft legislation confirms that the transitional safe harbour provisions will apply to both the UK IIR and DTT. This is important as it means that detailed IIR/DTT calculations will not be required if one of the three safe harbour tests are met in respect of a group’s operations in a jurisdiction for the first 3 years of the regime.
Critical to the application of the safe harbour is the requirement for an MNE group’s CbC Report to be “qualifying” and in practice we expect this may require changes to many groups’ existing processes and methodology for CbCR preparation and reporting. CbCR is coming more and more into the spotlight due to both the potential to reduce Pillar Two compliance obligations, as well as the forthcoming EU public CbCR disclosures.
Administration and compliance
The proposed UK reporting processes for the UK IIR and UK DTT includes a one-time requirement for the “filing member” of in-scope groups to register with HMRC within 6 months of the end of the first accounting period when they first come into scope of the rules. The filing member is the ultimate parent entity of the group, unless a nomination is made in respect of another group company. Notably any such nomination must apply for the purpose of both the UK IIR and the UK DTT.
Both an information return and a self assessment return must be filed (and top-up tax paid) within 15 months of the end of the accounting period (18 months for the first period). As with the IIR, an information return is not required in the UK if a return has already been submitted to an overseas tax authority which has an information sharing agreement with HMRC.
The updated draft legislation confirms that the UK IIR and DTT will apply for accounting periods beginning on or after 31 December 2023, which is now less than 9 months away.
UK groups will be closely monitoring the progress of the draft legislation to determine when it is ‘substantively enacted’ for financial statements purposes. This is likely to be June or July 2023 (prior to the UK parliament’s summer recess) although no set timetable has been published.
The UK’s implementation of the Pillar Two rules is fast approaching and groups within scope should take action now to understand the potential impact on their group, as well as ensure their current data model, systems, technology and processes are able to deal with the requirements of the new regime. Please refer to our Pillar Two Data Input Catalogue for further insights.