Policy paper

Multinational Top-up Tax — undertaxed profits rule

Published 30 October 2024

Who is likely to be affected

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

General description of the measure

This measure is part of the two-pillar solution to reform the international tax framework, which was developed by the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting.

The government introduced the Multinational Top-up Tax and Domestic Top-up Tax in Finance (No.2) Act 2023. These taxes are the UK’s adoption of the Pillar Two Global Anti-Base Erosion Rules (GloBE rules). This measure extends those taxes to give effect to the undertaxed profits rule.

Policy objective

This measure brings a share of top-up taxes that are not paid under another jurisdiction’s income inclusion rule or domestic minimum top-up tax rule into charge in the UK. The measure also serves to keep UK legislation consistent with the model rules, commentary and administrative guidance that have been agreed by the OECD/G20 Inclusive Framework.

Background to the measure

In October 2021, over 130 countries in the OECD/G20 Inclusive Framework reached agreement on a two-pillar solution to reform the international tax framework in response to the challenges of digitalisation. Model rules, commentary and administrative guidance have been published by the OECD pursuant to this agreement.

The agreement was followed by a consultation on the UK implementation of the GloBE rules which closed in April 2022. In Autumn Statement 2022, it was announced that the Multinational Top-up Tax and Domestic Top-up Tax would be introduced from accounting periods beginning on or after 31 December 2023 and the undertaxed profits rule from accounting periods beginning on or after 31 December 2024. Draft legislation on the undertaxed profits rule was published for consultation in July 2023. The Multinational Top-up Tax and Domestic Top-up Tax were introduced in Finance (No.2) Act 2023. In July 2024, the government confirmed the undertaxed profits rule implementation date.

Detailed proposal

Operative date

The undertaxed profits rule will be effective for accounting periods beginning on or after 31 December 2024.

Current law

The Multinational Top-up Tax was introduced in the Finance (No. 2) Act 2023 and has effect in respect of accounting periods beginning on or after 31 December 2023. A package of amendments was contained within Schedule 12 to Finance Act 2024.

Proposed revisions

Part 3 of Finance (No. 2) Act 2023 will be amended as follows to implement the undertaxed profits rule.

Chapter 2 of Part 3 will be amended to include the undertaxed profits rule within the charge to Multinational Top-up Tax.

Chapter 9A will be added to Part 3, to set out the rules required to calculate the additional tax due under the undertaxed profits rule.

Chapter 3 will be added to Part 3 of Schedule 16 to provide for the undertaxed profits rule transitional safe harbour election.

Schedule 16A will be amended to exclude profits of groups in initial phase of international expansion.

Consequential amendments will also be made.

Summary of impacts

Exchequer impact (£ million)

2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028	2028 to 2029	2029 to 2030
+85	+445	+475	+500	+525	+550

The combined figures for the repeal of Offshore Receipts in respect of Intangible Property and implementation of the undertaxed profits rule are set out in table 5.2 of Autumn Budget 2024 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Spring Budget 2024.

Economic impact

This 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 is expected to have a negligible impact for multinational enterprises already in-scope of Multinational Top-up Tax.

One-off costs could include businesses familiarising themselves and their employees with the undertaxed profits rule and updating software and systems to perform the undertaxed profits rule computations.

Continuing costs could include receiving and recording tax and accounting information from other entities within the group and reporting the undertaxed profits rule amounts to the HMRC. As this information should already be held by the multinational enterprise, the additional reporting burden is expected to be small.

Where the undertaxed profits rule is applicable, this measure could add complexity to businesses’ experience of dealing with HMRC as the change is complex and may require additional reporting to HMRC. This is not expected to be disproportionate to the application of the undertaxed profits rule in other jurisdictions and will be mitigated by both OECD and HMRC providing clear guidance to customers on how the undertaxed profits rule should be calculated and reported.

This measure is not expected to impact civil society organisations.

Operational impact (£ million) (HMRC or other)

This measure will be delivered as part of the existing programme that has been established to implement Pillar 2 in the UK, and there are no separately identifiable operational costs for HMRC.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through information collected from tax returns.

Further advice

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