Guidance

How to prepare for the Multinational Top-up Tax and the Domestic Top-up Tax

Updated 6 August 2024

1. UK adoption of Organisation for Economic Cooperation and Development (OECD) Pillar 2 model rules

1.1 Background

In October 2021, the UK and over 135 other countries agreed as part of the OECD Inclusive Framework to a two-pillar solution to reform the international corporate tax framework in response to the challenges of digitalisation.

Pillar 2 of this solution, known as the Global Base Erosion (GloBE) rules, requires a group with consolidated annual revenues of more than €750 million to pay a minimum 15% tax on its profits in each jurisdiction it operates in.

As part of the UK adoption of the OECD Pillar 2 rules, the government has announced 2 new taxes:

• the Multinational Top-up Tax (MTT)
• Domestic Top-up Tax (DTT)

These apply to accounting periods that began on or after 31 December 2023.

1.2 Multinational Top-up Tax and Domestic Top-up Tax

Multinational Top-up Tax

MTT requires all groups with both UK and non-UK entities and sufficient consolidated revenue to register with HMRC. A charge may arise on UK parent members within such a group, where a UK parent member has an interest in an entity in a non-UK jurisdiction, and the group’s profits arising in that jurisdiction are taxed below the minimum rate of 15%.

Domestic Top-up Tax

DTT requires all groups with UK entities and sufficient consolidated revenue to register with HMRC. A charge may arise on UK members within a domestic or multinational enterprise group where UK profits are taxed below the minimum rate of 15%.

2. How to prepare for these changes

Businesses will need to prepare for complying with MTT and DTT in the UK, as well as the adoption of Pillar 2 in other jurisdictions.

Work at the OECD is ongoing to ensure that implementation of Pillar 2 rules is coordinated to achieve better tax certainty for businesses and reduce compliance costs.

To help businesses meet their UK obligations, we have included below the updates and support which we have issued in our ‘Pillar 2 update’ letters to businesses that we consider to be within scope of the new taxes. We will offer more updates and support as the implementation of Pillar 2 rules progress.

Please email us if:

• you want to receive email updates on Pillar 2 developments, guidance, and event information – this may help your business prepare for the changes
• you are not sure whether you’ll be in scope of MTT and DTT and would like to discuss this with us

If you have a tax adviser, you may want to discuss these taxes with them.

We’ll offer a number of webinars in autumn 2024 to help businesses prepare for their Pillar 2 obligations. These will cover the scope of the legislation, reporting obligations and safe harbours. They will give you the opportunity to ask us questions about Pillar 2.

We’ll announce dates and how to join nearer the time. If you have suggestions for topics you’d like us to cover in webinars, please email us.

3. UK legislation

The UK legislation includes a reporting process which includes:

• a requirement for groups with consolidated revenue above €750 million to register with HMRC when they first come into scope of the Pillar 2 rules
• an annual Self Assessment return to report details of the group’s MTT and DTT liabilities
• the requirement to submit a GloBE Information Return (GIR) which shows the group’s global Pillar 2 tax calculations, or to submit an overseas return notification (where an information return has been submitted to another qualifying authority)

Groups will have UK obligations even if they do not have MTT or DTT liabilities. These obligations will apply to both UK-headed and non-UK headed groups irrespective of whether the jurisdiction of the Ultimate Parent Entity implements Pillar 2.

The Finance (No.2) Act 2023 and Finance Act 2024 Schedule 12 contain the UK legislation that implements MTT and DTT.  

We’ll continue to amend our legislation, where necessary, so that it’s consistent with the UK’s international obligations. 

There are links to MTT and DTT amendments on our collections page.

4. HMRC online service

We’re developing a new online service to enable businesses to meet their MTT and DTT obligations. This will include the ability to register, file returns and make payments. We are releasing the service in stages.

The first stage, which will allow you to register for the new taxes, is now available, well in advance of your registration deadline. The deadline to register is 6 months from the end of the accounting period in which your group became a qualifying group.

You can now register for the Report Pillar 2 top-up taxes digital service using your Government Gateway account. Make sure you are using your sign in details and not your tax adviser’s credentials. To set up a Government Gateway account or sign in, see HMRC online services: sign in or set up and account.

To register, you will need to provide HMRC with: 

• the name and registered address for the Ultimate Parent Entity (UPE) 
• the name and registered address for the filing member, if it is not the UPE 
• if either of these are a UK limited company or limited liability partnership, you must also provide the company registration number (CRN) and Unique Taxpayer Reference (UTR) 
• whether the group you are registering only has entities located in the UK, or in the UK and other jurisdictions 
• the start and end date of the group’s accounting period 
• contact details and preferences, for 1 or 2 individuals or teams in the group 
• the name and registered address for the UPE 
• the name and registered address for the filing member, if it is not the UPE 
• if either of these are a UK limited company or limited liability partnership, you must also provide the CRN and UTR 
• whether the group you are registering only has entities located in the UK, or in the UK and other jurisdictions 
• the start and end date of the group’s accounting period 
• contact details and preferences, for 1 or 2 individuals or teams in the group 

When you register, you’ll get a Pillar 2 reference number. Please make a note of it and the date that you register. You may wish to use the print page function to save a PDF, as you will not receive a registration email confirmation at this stage of development of the online service. You’ll need this information if you want to contact us at a later date. 

We expect to release the next stage of the online service in late 2024. This will allow businesses to make payments on account and authorise agents to carry out future tasks on their behalf. 

We are working with third-party software providers to provide businesses with the ability to submit UK Pillar 2 returns using existing third-party software products. Further information will be provided on this in future communications. We also welcome additional businesses helping us to further develop the online service. Please get in touch if you would like to take part. 

5. Guidance

5.1 HMRC guidance

We published draft guidance in December 2023, including updates to sections on chargeability, scope and administration that were published in June 2023. This guidance includes a new section on:

• calculating the effective tax rate 
• applying MTT and DTT to particular types of entity 

The consultation period for this guidance has now ended. However, if you have any additional feedback on this draft guidance, please send this to us and include the page number where relevant. We’re reviewing the responses we received so far which will feed into a future guidance update. 

We’ll publish further draft guidance in the coming months. This will include: 

• a section on determining top-up tax amounts (covering chapters 6 to 8 of Part 3 of Finance (No.2) Act 2023) 
• more guidance about particular types of entities and structures

5.2 OECD guidance

The OECD has recently published further Agreed Administrative Guidance (June 2024) and Consolidated Commentary to the Global Anti-Base Erosion Model Rules, incorporating the Agreed Administrative Guidance that has been released by the Inclusive Framework between March 2022 and December 2023. There are also updated ‘Illustrative Examples’.

OECD guidance:

• Agreed Administrative Guidance – published 17 June 2024 
• Consolidated Commentary to the Global Anti-Base Erosion Model Rules (2023) – published 25 April 2024 
• Illustrative Examples – published 25 April 2024 
• Agreed Administrative Guidance – published December 2023 

Other useful publications on the OECD website: 

• GloBE Model Rules 
• Pillar Two Rules in a Nutshell 
• Key Operating Provisions of the GloBE rules – published 20 December 2021 
• Safe Harbours and Penalty Relief: GloBE Rules – published 20 December 2022 
• Administrative Guidance on the GloBE rules – published 2 February 2023

6. Pillar 2 scope and compliance obligations

To help you decide whether your business is in scope, here is an overview of MTT and DTT.

6.1 Scope of MTT

A group will be within scope of MTT if these 2 apply:

• it has at least one member in the UK and one member outside the UK
• it meets the revenue threshold test

The revenue threshold test is met if the group has revenue in excess of €750 million (reduced for periods of less than a year) in any 2 of the four previous periods. The revenue of the group members is taken from the consolidated financial statements of the ultimate parent entity for the period, and so the revenue of all group members – both UK and non-UK – is included in this test.

Special rules apply if there has been a merger or demerger in the tested period or any of the prior four periods. More information can be found in our guidance (MTT11010).

Investment entities and certain excluded entities are not within scope of MTT and DTT. For more information about the types of excluded entities, please refer to our guidance (MTT10010).

6.2 Scope of DTT

A group or UK entity will be within scope of DTT if both of the following apply:

• it has a UK presence
• it meets the revenue threshold test

Groups with only UK members and single UK entities can be in scope, as well as the UK operations of multinational groups. Where the entity is a member of a group, the €750 million revenue threshold test is applied to the group as a whole. As with MTT, the revenue of all group members – both UK and non-UK - is included in this test.

6.3 Compliance obligations

One member of the group must be solely responsible for registering and complying with both the new taxes. This will be the group’s ultimate parent entity, by default unless it has nominated a different UK or non-UK member to be responsible for this.

The filing member must register with HMRC no later than 6 months from the end of the accounting period in which the group became a qualifying group. The information that will need to be provided at registration includes:

• details of the ultimate parent entity
• details of the filing member, if not the ultimate parent entity
• contact details for the individual or tax team responsible for filing the return
• the accounting period start and end dates

The filing member will later be required to submit a Self Assessment return and an information return to HMRC for each accounting period in which the group qualifies for MTT and/or DTT. If an information return has already been submitted to a qualifying authority outside of the UK, then an overseas return notification can be submitted instead.

6.4 Common misconceptions

Some businesses have estimated that they won’t have to pay any MTT and/or DTT but have mistakenly assumed that this means they won’t have UK compliance obligations. As with other UK direct taxes, if your business is in scope, you’ll still have reporting obligations, even if there’s no tax liability. This means you’ll need to register for Pillar 2 top-up taxes, file returns and make notifications. This applies to both UK and non-UK headed groups, regardless of whether the jurisdiction of the ultimate parent entity implements Pillar 2.  

The group’s filing member will need to submit a UK Pillar 2 Self Assessment return and a GloBE Information Return (GIR) to HMRC for every accounting period that the group is within scope of MTT and DTT - or DTT only, if the group is a domestic-only group. The filing member does not need to be UK resident. However, if the filing member is not UK resident, HMRC will not be able to automatically exchange any GIR. This also applies to businesses where the UK presence is limited to a UK branch.

7. Transitional safe harbour

You may be able to take advantage of the transitional Pillar 2 safe harbour, to make it easier for you to administer the new taxes. Qualifying for a safe harbour doesn’t exclude you from registering and filing returns. 

A transitional safe harbour aims to reduce the compliance obligations for groups in the first years of the regime. It allows groups to use figures calculated for the purposes of Country-by-Country (CbC) reporting to assess if they’re likely to face a top-up tax under MTT for a territory. If these simplified calculations show that one of the safe harbour tests is met, the group is treated as having no tax charge and doesn’t have to perform the full effective tax rate calculation. 

You’ll find this in our draft guidance at MTT15900 onwards.  

The safe harbour applies on a territory-by-territory basis and consists of three tests. The tests are calculated based on qualified CbC report figures. A CbC report will be a qualifying report in respect of a territory if, for that territory, the information is prepared based on qualified financial statements. For the definition of qualified financial statements, see MTT15920. 

A group only needs to meet one of the following tests to qualify for the safe harbour: 

• the threshold test – where revenue of members in a territory is less than €10 million and profit before tax is less than €1 million (or a loss) 
• the simplified effective tax rate test – where the simplified effective tax rate (ETR) of members in a territory is at least the ‘minimum’. The ETR is calculated as the members’ qualifying Income Tax expense divided by the aggregate profit (or loss) before Income Tax for those members. The ‘minimum’ ETR is 15% for accounting periods beginning in 2023 or 2024, 16% for accounting periods beginning in 2025 and 17% for accounting periods beginning in 2026 
• the routine profits test – where the aggregate profit (or loss) before Income Tax of members in a territory is not greater than the qualified substance-based income exclusion (SBIE) for the territory. The SBIE is calculated using the model rules 

7.1 Transitional safe harbour – election 

A group must make an election for the safe harbour to apply for a territory in an accounting period. This election is made annually on the GIR. 

If a group has already submitted full MTT calculations for a territory, they can’t make the election for subsequent periods. This is because the purpose of the transitional safe harbour is to reduce the compliance burden for groups first entering the scope of MTT. 

7.2 Transitional safe harbour – DTT and groups not required to prepare a CbC report 

If a group is in scope of MTT but not in scope of CbC reporting they won’t have prepared a CbC report. In these cases, the group can use the figures that would have appeared in a qualifying CbC report had they been required to prepare one. 

The transitional safe harbour applies for DTT purposes in the same way as it does for MTT, with some exceptions for wholly domestic groups and entities. For more information, see our draft guidance at MTT15970.

7.3 Transitional safe harbour – other things to note 

You’ll need to make some adjustments to the CbC report figures for the purpose of the transitional safe harbour. These adjustments make sure the calculations for the safe harbour tests are more closely aligned to the calculations that would normally be made for MTT. For more information, see our draft guidance at MTT15925. 

The above is not a comprehensive summary of the rules relating to MTT and DTT. You should refer to the legislation and guidance for detailed information.  

If you have any questions, or suggestions about what you’d find useful to cover in future updates, please email us.