Pillar Two: Multinational Top-up Tax and Domestic Top-up Tax amendments

The measure

The government has announced that amendments to the UK’s Multinational Top-up Tax and Domestic Top-up Tax will be made in Finance Bill 2024-25 to maintain alignment with the OECD Inclusive Framework’s continuing work on Pillar Two. The proposed amendments have not been set out in detail but it is stated that they will include updates to the rules on:  

• joint ventures; 
• the inclusion of minority-owned subgroups in the de minimis election;
• categories and calculation of recaptured deferred tax liabilities; 
• technical adjustments to the calculation of substance-based income exclusion amounts; 
• divergences between Pillar Two and accounting carrying values; 
• allocation of profits and covered taxes of flow-through entities; 
• effective tax rates where a blended controlled foreign company regime applies; 
• technical adjustments to the inclusion ratio computation;
• extension of qualifying foreign tax credits to foreign source income arising from controlled foreign companies, permanent establishments, hybrid entities and reverse hybrid entities; 
• cross-border allocation of deferred taxes; 
• filing and payment dates; 
• a five-year election to disregard deferred tax; 
• anti-arbitrage rules in the country-by-country reporting safe harbour; 
• allocation of Domestic Top-up Tax between members of a multinational group; 
• adjustments to the rules requiring tax symmetry on an asset transfer within a reorganisation;  
• adjustments to the definition of excluded dividends; 
• adjustments to the additional top-up amounts rules; 
• adjustment to treat qualifying asset holding companies which are not members of multinational groups as excluded entities for Domestic Top-up Tax purposes; and 
• clarifications to give effect to the ordering rules for qualifying overseas regimes.  

Who will be affected?

Large multinational groups within the scope of the UK Pillar Two rules i.e. generally those with annual consolidated group revenue of at least EUR 750 million and UK-located group members. Domestic Top-up Tax may also apply to wholly domestic UK groups above the Pillar Two revenue threshold.

When will the measure come into effect?

The measures will largely take effect for accounting periods beginning on or after 31 December 2024, but it is also suggested that businesses will have the option to elect to apply certain of the measures to accounting periods beginning on or after 31 December 2023 (and some provisions will by default apply for accounting periods beginning on or after 31 December 2023).  It is stated that the anti-arbitrage rule in the country-by-country reporting safe harbour will, as previously announced, apply from 14 March 2024.