UK legislates for OECD Pillar Two rules

BDO reviews the first draft of UK legislation to implement a global minimum tax rate.

As part of the ongoing efforts towards global tax reform, the UK government has issued draft legislation to implement parts of the OECD model Pillar Two rules. This will affect any group with international operations, which has global revenues which do or will exceed EUR 750m per year.


Following political consensus on the components of global tax reform by the G20 and the 136 Members of the Inclusive Framework in October 2021, the OECD published model rules for Pillar Two (the ‘Model Rules’) in December 2021, and accompanying commentary in March 2022.

The Model Rules form part of the OECD’s two-pillar solution to address the tax challenges arising from the digitalisation of the economy and have wide-reaching implications for many international businesses. Their main purpose is to limit tax competition among countries, by ensuring that large multinational groups pay a minimum level of tax on the profits arising in each jurisdiction where they operate.

Pillar Two seeks to establish a 15% global minimum tax rate through the introduction of two interlocking rules, the income inclusion rule (IIR) and the under-taxed payments rule (UTPR), collectively referred to as the GloBE rules.

Under the IIR, where an entity’s effective tax rate in any jurisdiction is below the minimum 15% rate, the ultimate parent entity is primarily liable for a ‘top-up tax’ to bring the rate up to 15%. As a backstop, the UTPR can apply, by way of a denial of a tax deduction for payments which give rise to income taxed at less than 9%, which is not otherwise brought into charge under the IIR.

UK draft legislation

Earlier this year, the UK government announced that it would defer the implementation of Pillar Two until 2024 (to first apply for accounting periods beginning on or after 31 December 2023). This decision was made in recognition of the complexity of the rules, the remaining policy and administrative issues still being discussed within the OECD Implementation Framework, and the need for businesses to build systems to ensure compliance with the rules. Nevertheless, on 20 July 2022, the UK government released draft legislation to implement the Pillar Two global minimum tax in the UK as part of Finance Bill 2022/2023.

What is included?

The draft legislation introduces an IIR, referred to as the ‘multinational top-up tax’. The IIR will apply to multinational enterprises (MNEs) with global revenues exceeding EUR 750m in two of the previous four years, for accounting periods beginning on or after 31 December 2023. The UK commencement date is aligned with the draft EU directive commencement date.

It is clear that the UK government has sought to follow the intent of the Model Rules as closely as possible, both from a policy perspective, and also to ensure that the UK’s regime is recognised as a ‘qualifying’ regime by other territories introducing the rules.

Unsurprisingly, the draft legislation is very detailed (116 pages of new law) – partly because the UK has endeavoured to draft potential practical solutions to some of the technical and administrative issues which are still being discussed in detail at the OECD level. For example, the draft UK legislation sets out clear and detailed steps for calculating effective tax rates and top-up taxes, expanding on the formulae set out in the OECD Model Rules.

Finally, to ensure the GloBE rules are as targeted as possible, and to avoid disproportionate compliance and administrative costs, we expect the final UK legislation to include safe harbour provisions. These would effectively ‘switch off’ the requirement to demonstrate compliance with the Pillar Two rules in certain circumstances: for example, for entities located in countries which implement a qualifying domestic minimum tax at a certain rate, or entities which can demonstrate an effective tax rate above a certain rate using their existing Country-by-country reporting data). However, it appears that the UK government is awaiting the publication of the OECD Implementation Framework, expected in October or November 2022, before seeking to include such clauses into its own domestic law.

Reporting requirements

The UK draft legislation sets out the following reporting framework:

  • A one-time requirement for relevant groups to register with HMRC when they first come into scope of the rules (ie MNEs with consolidated global revenues exceeding EUR 750m in two of the previous four years, for accounting periods beginning on or after 31 December 2023).
  • An annual domestic information return/overseas return notification, to confirm entities’ UK top-up tax liabilities, to be submitted to HMRC within 15 months after the end of the accounting period (extended to 18 months for a group’s first return).
  • Payment of the UK top-up tax liability in a single instalment due 15 months after the end of the accounting period (18 months for a group’s first return).

What is still to come?

While the draft legislation does not currently contain provisions to implement the UTPR, the UK government is preparing to introduce such clauses.

Similarly, the draft legislation does not yet include provisions setting forth a Qualifying Domestic Minimum Tax (‘QDMT’), although the government’s response to its earlier consultation indicates that it is very likely that one will be introduced. If introduced, it is envisaged that the threshold would be EUR 750m to mirror the Pillar Two rules, and that it would apply to both UK-headed and foreign-headed MNEs. In addition, the government will consider the costs and merits of application of the QDMT to wholly domestic groups, to prevent economic distortions.

It is also expected that the UK government may introduce simplifications or suitable safe harbour rules, to the extent that these are supported by the wider international community. Further details on these are likely to follow the publication of the OECD’s Inclusive Framework later this year.

What should impacted groups do next?

1. Monitor developments globally, as more territories publish similar draft rules.

2. Undertake an impact assessment to determine the potential impact of the global minimum tax rules on:

  • The group’s book and cash tax rates. This should include determining where incremental cash tax obligations are likely to arise, whether existing tax incentives will continue to be available, and the impact on the group’s cash and working capital requirements
  • The increase to the group’s compliance burden. This includes assessing whether the existing tax function has the resource and expertise to manage the changes, as well as assessing the adequacy of the group’s operating systems to capture the additional data which will be required.

3. Ensure the impact of the Pillar Two rules is appropriately communicated to the organisation’s board of directors and other stakeholders, including consideration of whether early disclosure in the group’s financial statements is required.

4. Identify the need for any remedial action in the next 12-18 months (if required), including restructuring, renegotiation of intercompany agreements, and/or simplification of the existing legal and operating structure.

5. Consider responding to the draft legislation prior to the end of the consultation period, which runs until 14 September – see the draft legislation and explanatory notes.

 How can BDO help?

  • Identifying data - BDO can provide support in identifying data requirements (eg whether the data exists within existing group systems), extracting, analysing, aggregating and automating process flows, including the development of bridging solutions from existing systems into Pillar Two tools that are under development by a number of vendors.
  • Impact assessments and modelling - BDO can assist organisations in understanding, evaluating and communicating appropriate Pillar Two responses. We help clients with modelling of ETR and cash tax impact and wider organisational and supply chain impact, identifying structuring options for the capital and operational supply chain, identifying data and compliance implications and roadmap for Pillar Two readiness, as well as assist with ongoing compliance needs.
  • Accounting and assurance support - The Pillar Two rules are based on the consolidated accounting profit, and a number of the required adjustments are based on the deferred tax rules. Early interaction between the accounting and tax teams is therefore crucial. We can assist with addressing specific accounting complexities and/or designing the Pillar Two compliance process.
  • Operational and legal restructuring and simplification - With the potential increase in ETR and compliance for organisations, the existing legal and operating structure may no longer be suitable. For some organisations, simplification of the legal structure may significantly reduce the complexity and cost of tax and accounting compliance. For other organisations, the rules may significantly reduce or eliminate the tax efficiency of existing structures (particularly those that deliver low tax outcomes), and alternative structures may be more appropriate. We regularly assist clients with legal and operational restructuring and simplification to address ETR impacts and additional compliance.
  • Communication with stakeholders - BDO can assist with preparation of board presentations and other internal and external communications, explaining the impact of Pillar Two on your organisation in plain English.

For help and advice on assessing the impact on your business please contact Claire McGuigan, Karen Doherty or Chris Hodgett.


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