Sign up for tax alert emails GTNU homepage Tax newsroom Email document Print document Download document
July 21, 2022
UK Government releases draft legislation on new multinational top-up tax
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.
Issues on which clarification has been provided or which require further discussion at an international level include:
Administration and reporting
Clarification on the following administration, compliance and reporting issues is provided in the consultation response:
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.
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.
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