Update on UK’s Pillar Two rules

Legislation day earlier this month featured changes to the UK’s Pillar Two draft legislation and specifically how the Under Taxed Profits Rule (“UTPR”) will be implemented in the UK.

At Autumn Statement 2022, the Government announced that it intended to introduce the multinational top-up tax and the domestic top-up tax for accounting periods beginning on or after 31 December 2023, and that it would also implement the UTPR with effect no earlier than accounting periods beginning on or after 31 December 2024.

Draft UTPR legislative provisions have now been published to reflect this and these will not take effect until they have been included in the next Finance Bill and Regulations have been laid by HM Treasury to set a commencement date, which will not be before accounting periods beginning on or after 31 December 2024. 

As part of the draft legislation published earlier this month, the Government has also set out amendments to the multinational and domestic top up taxes, which implement the Income Inclusion Rule (“IIR”) and Qualified Domestic Minimum Top-up Tax (“QDMTT”) in the OECD’s Pillar 2 rules. These amendments aim to respond to stakeholder observations and ensure consistency with the OECD model rules and administrative guidance. This draft legislation is available here. HMRC is seeking representations on all the draft legislation by 12 September 2023. 

Earlier this month, the OECD published new administrative guidance on the Pillar 2 IIR and QDMTT and an update to the Globe Information Return. The administrative guidance includes:  

• A safe harbour for domestic minimum taxes which aims to protect the UK tax base and reduce administrative burdens for business by removing the need to make multiple calculations;  
• Agreement on the information to be reported to tax authorities, including provisions to protect taxpayer confidentiality and options for reducing burdens;  
• Further provisions for the treatment of tax credits, which include technical amendments to ensure UK businesses can better access the rules, and clarification of the treatment for marketable tax credits;
• A time limited safe harbour from the UTPR (the backstop rule), where a country’s nominal tax rate is above 20 percent; and 
• Detailed guidance on currency conversion rules and substance-based income exclusion (“SBIE”). 

The Government is committed to ensuring the UK rules are consistent with the globally agreed approach hence future amendments to the legislation are likely to reflect this new guidance.