Policy paper

Multinational top-up tax: UK adoption of Organisation for Economic Co-operation and Development Pillar 2

Published 20 July 2022

Who is likely to be affected

Multinational enterprise groups with annual global revenues exceeding 750 million euros that have business activities in the UK.

General description of the measure

This measure will introduce a new tax on UK parent members within a multinational enterprise group. A top-up tax will be charged on UK parent members when a subsidiary is located in a non-UK jurisdiction, and the group’s profits arising in that jurisdiction are taxed at below the minimum rate of 15%.

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 — Organisation for Economic Co-operation and Development Inclusive Framework on Base Erosion and Profit Shifting (BEPS) on 8 October 2021.

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, ensuring 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 Organisation for Economic Co-operation and Development Inclusive Framework reached agreement on a 2 pillar solution to reform the international tax framework in response to the challenges of digitalisation. Pillar 2 is the second of the 2 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

The measure will have effect for multinational enterprise groups with fiscal years 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 multinational top-up tax is the UK’s adoption of the Income Inclusion Rule (IIR), one of the 2 charging mechanisms in the Global Base Erosion Rules (Globe rules). The Globe rules have been developed by the Organisation for Economic Co-operation and Development 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 euros in at least 2 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.

There will be special rules to calculate the effective tax rate of investment entities, joint ventures and members in which the multinational 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.

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 Organisation for Economic Co-operation and Development 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 for the purposes of multinational top-up tax. 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 required to bring the tax up to the minimum rate and is found by subtracting the effective tax rate from 15%.

The top-up tax percentage will be applied to certain profit in the jurisdiction to determine the multinational top-up tax due in respect of that jurisdiction.

The profit is found by deducting a substance-based income exclusion from the aggregate profit in the jurisdiction that was used to determine the effective tax rate.

The 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 10 million euros and the average profit within that jurisdiction is less than 1 million euros.

Allocation of top-up amounts to responsible members

Members of a qualifying multinational group will only 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 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 themselves.

Filing and Reporting

A single member of the group will report the multinational 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 (£million)

2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028
Empty	Empty	Empty	Empty	Empty	Empty

The final costing will be subject to scrutiny by the Office for Budget Responsibility and will be set out at the next fiscal event.

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 anticipated that there will be impacts for those in groups sharing protected characteristics.

Impact on business including civil society organisations

This measure will have a significant impact on large multinational enterprises with global revenues in excess of 750 million euros 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 (£million)

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

Estimated continuing impact on Administrative Burden (£million)

Continuing average annual impact	(£million)
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 (£million) (HMRC or other)

HMRC operational costs to implement this change are estimated to be in the region of £47 million.

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, contact the Pillar 2 team by email: [email protected]