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July 21, 2022

UK Government releases draft legislation on new multinational top-up tax

  • The UK Government has released draft legislation on implementing the Pillar Two Income Inclusion Rule in the UK through the new multinational top-up tax.

  • The Government is committed to enacting legislation which is consistent with the objective of the OECD GloBE Model Rules and believes that the structure presented in the Model Rules is the most effective way to achieve this.

  • The Income Inclusion Rule is expected to apply to accounting periods commencing on or after 31 December 2023.

  • The Draft Legislation is open for comment until 14 September 2022. The UK Government will analyze the feedback it receives with a view to including the measures in the Finance Bill to be issued at the end of this year after the UK Budget.

Executive summary

On 20 July 2022, the United Kingdom (UK) Government released the summary of responses to the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Pillar Two consultation that closed on 4 April 2022. Alongside this, the UK Government also released draft legislation on the Introduction of the new multinational top-up-tax” (the Draft Legislation). 

The Draft Legislation builds on the Global Anti-Base Erosion (GloBE) Model Rules published by the OECD on 20 December 2021 which effectively provided governments with a template for legislating the global minimum tax rules. The Draft Legislation covers the application of the Income Inclusion Rule (IIR), however details on the timing and design of the UK’s Undertaxed Profits Rule (UTPR) are not included. An update on the UTPR is expected to be issued later, in light of wider developments internationally. The Draft Legislation confirms that the IIR is expected to apply to accounting periods commencing on or after 31 December 2023. 

While we continue to work through the details of this release, this Alert summarizes the key observations from the various documents that have been released

Detailed discussion


  • The UK Government is committed to enacting legislation which is consistent with the objective of the GloBE Model Rules and believes that the structure presented in the Model Rules is the most effective way to achieve this.
  • There are areas of the Model Rules where the application is uncertain or not as clear as it could be. As such the Government has sought to include further rules within the Draft Legislation which reflect the outcomes expressed in the OECD’s commentary to the Model Rules, where it was considered the Model Rules themselves were unclear.
  • There is a very high threshold for agreeing on substantive changes to the GloBE Model Rules, and for any changes to be considered there would need to be the following conditions:
    • Clear evidence of undesirable outcomes that are inconsistent with the objectives of the Model Rules
    • A viable alternative approach that is contained and does not have an impact on other areas of the rules
    • Broad consensus among the members of the Inclusive Framework on BEPS that the change is necessary
  • Despite this, the Government does believe that some of the issues raised as part of the consultation may have satisfied this threshold and therefore deserve further consideration internationally, as well as domestically in certain cases.

Technical issues

Issues on which clarification has been provided or which require further discussion at an international level include:

  • Concerns raised by businesses around Article 4.1.5 potentially leading to top-up taxation in a period in which the multinational enterprise (MNE) incurred a loss in a jurisdiction are being considered, and the Government will explore potential options that could address issues relating to the timing of the charge and the ability to access the substance based carve-out.
  • Changes to the proposed mechanism to recast deferred tax at 15% rather than the local statutory rate and the recapture of deferred tax liabilities after a period of five years have been ruled out.
  • It is recognized that there is significant uncertainty around the effect of Article 9.1.3 of the Model Rules; the transition rule which limits the basis of assets transferred after 30 November 2021. The UK Government agrees there is a need for further guidance on this point and intends to raise this as part of the Implementation Framework.
  • It has been acknowledged that credits arising from a debt release could result in significant adverse outcomes in some scenarios under the Model Rules, most notably the fact that a top up tax could be due even in the circumstance where the group is in financial distress. It has been confirmed that this issue will be raised as part of the work on the Implementation Framework.
  • The UK Government agrees that foreign exchange gains or losses on hedging instruments which are within the scope of the UK Disregard Regulations should be excluded from GloBE income if the instrument is hedging an excluded item. This had been identified in the commentary to the Model Rules as requiring resolution, and as such the Government has confirmed these concerns will be raised within the Implementation Framework.

Administration and reporting

Clarification on the following administration, compliance and reporting issues is provided in the consultation response:

  • There will be a one-time requirement for MNEs to register that they are in scope of GloBE when they first come into scope.
  • A single entity will register and file on behalf of the whole MNE group, and there will be an annual notification in line with the requirements in the Model Rules. The default position will be that this is the Ultimate Parent Entity, although the MNE will be permitted to designate an alternative entity if it wishes.
  • Reporting of a top up tax liability to HMRC will be done through the MNE’s Pillar Two digital service, which is separate to the existing corporation tax return.
  • The registered entity will submit a short report alongside either its GloBE Information Return or annual notification, which will confirm its liability under the Model Rules to the UK. The filing date for this short domestic return will be aligned with the filing dates of the GloBE Information Return.
  • Payments of top-up tax will be made in a single annual installment, 15 months from the end of the accounting period (18 months in the Transition Year), in order to align with filing obligations. This should remove the requirement to estimate GloBE liabilities.

Comments on the US GILTI Regime

The consultation response sets out how the United States (US) Global Intangible Low-Taxed Income (GILTI) regime may be dealt with, to the extent the requisite changes to align it with the GloBE Model Rules are further delayed. 

It is expected that any tax paid in the US under the GILTI regime would be included in the adjusted covered taxes of a US company’s controlled foreign corporation (CFC) for the purposes of both the IIR and UTPR. It is, however, acknowledged that there would need to be rules to determine the additional US tax that results from a GILTI inclusion, and how that should be allocated to the CFCs of Constituent Entities to which the GILTI inclusion relates. 

Further details on how this mechanism is expected to work in practice, and indeed whether it will be replicated by other Inclusive Framework members, remains to be seen. 

Safe Harbors

The UK Government is supportive of a safe harbor which switches off the operation of the rule where a territory has adopted a Qualified Domestic Minimum Tax (QDMT) which is closely aligned with the Model Rules. The UK Government acknowledges that many stakeholders were in favor of a “whitelist” safe harbor that, broadly, would switch off the Model Rules in jurisdictions that are considered to be high tax by the Inclusive Framework. However, there is still uncertainty as to whether consensus on the adoption of such safe harbors would be achieved between members of the Inclusive Framework given that the Model Rules look at the effective tax rate within a jurisdiction and therefore a safe harbor based on the statutory tax rate is still likely to require adjustments such that any benefits of simplification may be lost. 

The UK Domestic Minimum Tax (DMT)

The Government maintains that there are strong arguments in favor of a UK DMT and confirm that if a DMT is introduced the threshold would be €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 to wholly domestic groups to prevent economic distortions. However, as yet, there is no commitment to introduce a DMT and therefore, the Government welcomes further comments. 

Next stage

The Draft Legislation is open for comment until 14 September 2022. The UK Government will analyze the feedback it receives with a view to including the measures in the Finance Bill to be issued at the end of this year after the UK Budget. The final contents of that Finance Bill will be a decision for the Chancellor (and will be influenced by whichever of the two current candidates – Rishi Sunak and Liz Truss – becomes the next Conservative Party Leader).


For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United Kingdom), London

Ernst & Young LLP (United States), UK Tax Desk, New York

Ernst & Young LLP (United States), FSO Tax Desk, New York

Ernst & Young LLP (United States), Transaction Tax Desk, New York

Ernst & Young LLP (United States), UK Tax Desk, Chicago


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