Policy paper

Multinational top-up tax and Domestic top-up tax: UK adoption of OECD Pillar 2

Published 15 March 2023

Who is likely to be affected

Groups with annual global revenues exceeding €750m that have business activities in the UK.

General description of the measure

Multinational top-up tax

The multinational top-up tax will introduce a new tax on UK parent members within a multinational enterprise group. A tax will be charged where a UK parent member has an interest in entities located in a non-UK jurisdiction, and the group’s profits arising in that jurisdiction are taxed at below the minimum rate of 15%.

The charge is a top-up tax; the amount brought into charge is that required to achieve a 15% minimum rate. No additional tax will arise in respect of jurisdictions where the group’s profits are taxed at 15% or more.

A UK parent member is an entity within the multinational enterprise group that holds a direct or indirect ownership interest in a foreign entity.

This is in accordance with the agreement to reform the international tax framework made by the G20/OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS) on 8 October 2021.

Domestic top-up tax

The domestic top-up tax will introduce a new tax on UK members within a domestic or multinational enterprise group and will ensure that any top-up tax due on UK profits is collected in the UK. A top-up tax will be charged when the group’s profits arising in the UK are taxed at below the minimum rate of 15%.

Policy objective

This policy will help tackle opportunities for profit shifting and aggressive tax planning by multinationals. It will also place a floor on tax competition between jurisdictions, reducing the attractiveness of low and no tax territories and increasing the competitiveness of the UK as a place to do business. This ensures that the UK collects tax that would otherwise be paid to another jurisdiction and safeguards the sustainability of Corporation Tax as a major source of government revenues, while leaving appropriate flexibility for countries to use corporation tax as a policy lever for supporting business investment and innovation.

Background to the measure

In October 2021, over 130 countries in the OECD Inclusive Framework reached agreement on a two-pillar solution to reform the international tax framework in response to the challenges of digitalisation. Pillar 2 is the second of the two-pillar solution.

The agreement was followed by a consultation on the UK implementation of Pillar 2 which closed in April 2022.

Detailed proposal

Operative date

These measures will have effect in respect of in-scope groups’ accounting periods beginning on or after 31 December 2023.

Current law

This is new legislation and there is no current law in this area.

Proposed revisions

The measures are part of the UK’s adoption of the Global Base Erosion Rules (Globe rules). The Globe rules have been developed by the OECD Inclusive Framework as part of the solution to address the tax challenges of the digital economy.

Scope

The multinational top-up tax will apply to a “responsible member” of a qualifying multinational group. A qualifying multinational group will be a consolidated group where at least one of the members is not in the same territory as the others and the group has global annual revenues exceeding €750 million in at least two of the previous four accounting periods.

The domestic top-up tax will apply to a ‘qualifying entity’. A qualifying entity is an entity that is located in the UK and either has revenues or is part of a group that has revenues exceeding €750 million in at least two of the previous four accounting periods.

Excluded entities

Certain entities will be excluded from the rules. These include governmental entities, international organisations, non-profit organisations and pension funds. These are entities that are typically exempt from Corporation Tax. There will also be a provision to exclude investment funds and real estate investment vehicles when these entities are the ultimate parent of the group, to protect their status as tax neutral investment vehicles.

Calculation of effective tax-rate

To determine the amount of multinational top-up tax due for the period, the group will aggregate the net income and the relevant taxes of all group members located in each jurisdiction that the group operates in. This will then be used to determine the effective tax rate for each jurisdiction.

For domestic top-up tax, similar rules will apply to determine the effective tax rate for members located in the UK.

There will be special rules to calculate the effective tax rate of investment entities, joint ventures and members in which the group only has a minority interest.

Calculation of profits or losses

The profit or loss of each group member will be calculated based on its accounting profit. The accounting profit will generally be taken from the financial accounting net profit or loss of each group member used in the preparation of the consolidated financial statements of the ultimate parent.

Adjustments to profits or losses

Certain adjustments to the net profit or loss of each group member will be required. These include adjustments to remove dividends and capital gains or losses from the disposal of shares, with the exception of certain portfolio shareholdings. These adjustments are designed to account for certain permanent differences between the measurement of accounting and taxable profits.

The profit will be adjusted to include qualified refundable tax credits such as the UK research and development expenditure credit, ensuring such credits do not have a negative impact on the effective tax rate. There will also be rules allocating profits between members to ensure that income is allocated to the appropriate jurisdiction.

There will be an exclusion for international shipping profits, which provides an exclusion for profits derived from international shipping. The exclusion is based broadly on the scope of Article 8 of the OECD Model Tax Convention.

Calculation of Covered taxes

When calculating the effective rate for each jurisdiction, the group will aggregate their relevant taxes. Covered taxes will include taxes on income or profits and taxes charged by reference to the capital of a group member.

The amount of taxes accrued will be calculated based on the current tax expense in the financial accounts. This will be determined based on the same accounts used to calculate the profits or loss in a jurisdiction.

There will then be certain adjustments to that amount of covered taxes. These include adjustments to exclude any taxes which are associated with income that has been excluded from the calculation of profit or loss.

There are then allocation rules which broadly allocate cross border taxes to the jurisdiction where the profit is recognised. These allocation rules include rules for permanent establishments, tax transparent entities, and controlled foreign company taxes.

The covered taxes will also be adjusted to take deferred tax into account. These adjustments are designed to prevent additional taxes arising solely from timing differences between the recognition of income and expenses for tax and accounting purposes.

Calculation of top-up amounts

If the effective tax rate for a jurisdiction is below 15%, a top up tax percentage will be calculated. This will be used to calculate the multinational top-up tax and domestic top-up tax required to bring the tax up to the minimum rate and is found by subtracting the effective tax rate from 15%.

For multinational top-up tax, the top-up tax percentage will then be applied to the profit in each foreign jurisdiction after deducting a substance-based income exclusion to determine the multinational top up tax due in respect of each jurisdiction.

For domestic top-up tax, the top up tax percentage will be applied to the same profit determined for the UK.

The substance-based income exclusion will be the sum of 5% of the eligible payroll costs in relation to group activities in that jurisdiction, plus 5% of the carrying value of eligible tangible assets located in the jurisdiction. An annual election will be available for groups who do not wish to apply this exclusion.

The top up tax for the jurisdiction will then be allocated to the group members in that jurisdiction. This will generally be based on their proportion of the profits in the jurisdiction.

There will be a de minimis exclusion, which will allow an annual election for any top-up tax to be treated as nil where the average revenue of the jurisdiction in which the top-up tax was calculated is less than €10m and the average profit within that jurisdiction is less than €1m.

There will also be a transitional safe harbour to exclude operations in lower-risk jurisdictions in the short-term.

The charge

Members of a qualifying multinational group will be chargeable to multinational top-up tax if they are a responsible member who is responsible for other members of the group. Various conditions determine whether a member is responsible depending on its position within the group structure.

The amount of multinational top-up tax that is attributed to a responsible member will be calculated with reference to the member’s inclusion ratio. The inclusion ratio will be determined based on the proportion of the profits which would be allocated to the responsible member if it were to prepare consolidated financial statements.

The domestic top-up tax is charged on the UK member directly.

Filing and Reporting

A single member of the group will report the multinational top-up tax and domestic top-up tax to HMRC. The ultimate parent of the group will be the default member, but groups will be able to nominate an alternative member to fulfil these responsibilities.

A Globe Information Return will also be filed by the group. This return will contain information which shows how the top-up tax has been calculated in every jurisdiction.

The tax will be payable and reportable on an annual basis.

Summary of impacts

Exchequer impact (£m)

2022 to 2023	2022 to 2023	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028
—	+335	+2110	+2085	+2115	+2255

These figures are set out in Table 5.1 of Autumn Statement 2022 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2022.

Updated estimates consistent with Spring Budget 2023 forecasts can be found in Table 4.2 of Spring Budget 2023.

Economic impact

The measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

There is expected to be no impact on individuals as this measure only affects businesses. The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

It is not expected that there will be adverse effects on any group sharing protected characteristics.

Impact on business including civil society organisations

This measure has the potential to significantly impact large enterprises with global revenues in excess of €750m per annum. One-off costs could include familiarising themselves and their employees with the Pillar 2 rules, registering with HMRC that they are in scope of the Pillar 2 rules, updating software and systems and training and upskilling staff. One-off costs to businesses affected by the measure are estimated to be £13.7 million.

Continuing costs could include recording and receiving information from other entities within the group, performing the Pillar 2 calculations to meet their reporting obligations and providing the information on their Pillar 2 calculations to HMRC. Annual costs to businesses affected by the measure are estimated to be £8.2 million.

Estimated one-off impact on transitional Business costs (£m)

One-off impact	(£m)
Costs	13.7
Savings	—

Estimated continuing impact on Administrative Burden (£m)

Continuing average annual impact	(£m)
Costs	8.2
Savings	—
Net impact on annual administrative burden	+8.2

This measure may affect business’ experience of dealing with HMRC. The change is complex and requires additional tax administrative tasks to be completed. Guidance will be in place to advise groups on what their reporting requirements are and how they can fulfil them. This measure is not expected to impact civil society organisations.

Operational impact (£m) (HMRC or other)

The estimated operational costs to implement this change for HMRC are in the region of £47m covering both IT and staff costs.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through information collected from receipts.

Further advice

If you have any questions about this change, please contact the Pillar 2 team by email: [email protected]