Consultation on implementation of Pillar Two rules in the UK launched

Government seeks views on implementation of OECD global minimum tax model rules

12 January 2022

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On 11 January 2022, HMRC and HM Treasury published a new consultation on the implementation of the OECD Pillar Two minimum tax rules in the UK.

The consultation follows the publication of global minimum tax model rules by the G20/OECD Inclusive Framework on BEPS ("Inclusive Framework") on 20 December 2021 ("OECD model rules"). These rules are designed so that large multinational groups pay corporate income taxes at a minimum level of 15% in every country in which they operate. They include a main rule generally applied at the parent company level (the "income inclusion rule") and a backstop rule where the income inclusion rule is not applied (the "undertaxed payments rule").

The global political agreement by the inclusive framework is such that the OECD model rules are to be implemented by countries on a consistent basis. The UK consultation is therefore focused on how the policy design should be implemented and reflected in UK domestic legislation. The consultation document notes that there may be limited areas where the rules need to be adapted to reflect concepts in UK law, but any required changes will respect the intended outcomes agreed by the Inclusive Framework. In line with the OECD’s timetable, the UK’s income inclusion rule is anticipated to have effect from 1 April 2023, while the undertaxed payments rule is expected to be introduced from 1 April 2024.

The government also is exploring the possible introduction of a domestic minimum tax, that also would apply from 1 April 2024. A domestic minimum tax is an optional element of the OECD model rules. If introduced in the UK, this would lead to top-up tax arising on low-taxed UK profits being imposed by the UK rather than another country.

Views are sought on the administration of the rules in the UK, including whether information on tax liabilities should be reported through corporation tax returns or taken directly from Pillar Two information returns.

The inclusive framework are considering the possibility of safe harbours to reduce the number of detailed effective tax rate calculations required. The UK government is inviting views on how a safe harbour based on country-by-country reporting data could be designed.

The consultation document also considers how Pillar Two interacts with existing UK tax measures to address base erosion and profit shifting (“BEPS”). The government does not propose major reforms to wider BEPS measures.

The deadline for consultation responses is 4 April 2022. The government expects to publish draft legislation in summer 2022, with a view to legislation on the income inclusion rule being included in the finance bill later in the year.