UK consults on the introduction of a global minimum corporate tax rate
Published on 4th Mar 2022
Following global agreement on a two pillar solution to reform tax rules in response to the challenges of digitalisation, the UK is pushing ahead with implementation – but the approach of the US is likely to be key
After the publication on 20 December 2021 of the OECD model rules for the domestic implementation of Pillar 2 (the Model Rules), the UK government published a consultation on its domestic implementation of Pillar 2 on 11 January 2022. The consultation seeks input on the UK's application of the Model Rules and other wider implementation questions. The UK's consultation does not cover the UK implementation of Pillar 1 and further work on this strand is continuing at the OECD level (including the interaction between the two pillars). You can read the background to these proposals in our previous Insight and listen to our podcast.
OECD Model Rules on Pillar 2
The Model Rules define the scope and set out the mechanism for the Global Anti-Base Erosion (GloBE) rules. The rules provide for a co-ordinated system of taxation intended to ensure large multinational enterprises (MNEs) pay a minimum level of tax (15%) on income arising in each of the jurisdictions in which they operate.
The rules create a “top-up tax” to be applied on profits in any jurisdiction whenever the effective tax rate, determined on a jurisdictional basis, is below the minimum 15% rate. Any resulting top-up tax is generally charged in the jurisdiction of the ultimate parent of the MNE. The liability to top-up tax for a member of an in-scope MNE group arises under two types of provisions contained in the Model Rules. The primary rule is the Income Inclusion Rule (IIR) - under the IIR, the minimum tax is paid at the level of the parent entity, in proportion to its ownership interests in those entities that have low taxed income. A backstop, however, is needed to ensure the minimum tax is paid where an entity with low taxed income is held through a chain of ownership that does not result in the low-taxed income being brought into charge under an IIR. This backstop is the Undertaxed Profits Rule (UTPR). This rule works by requiring an adjustment (such as a denial of a deduction) that increases the tax at the level of the subsidiary.
Pillar 2 will also include a treaty-based rule (the Subject to Tax Rule (STTR)) for inclusion in treaties with developing countries in the Inclusive Framework which is designed to allow jurisdictions to impose a top-up withholding tax on certain types of outbound payments that are made between related parties and are taxed at a nominal rate of less than 9%. The development of this model treaty provision is still being discussed at OECD level.
The UK's consultation on Pillar 2
The UK has confirmed that it will adopt Pillar 2 and has committed to implement the Pillar 2 rules in the UK as closely to the OECD Model Rules as possible.
Key points arising out of the UK consultation include:
- While the Model Rules only apply to groups that meet the €750 million revenue threshold, the OECD Inclusive Framework statement does permit jurisdictions to apply the IIR to smaller MNEs that are headquartered in their jurisdiction (even if they do not meet the threshold). The UK does not propose to extend the scope of the rules in the UK and will not apply the rules to smaller UK headquartered groups.
- In-scope UK headquartered groups are expected to be covered by IIR so there appears to be some hope at government level that they will not need to be involved in UTPR calculations – but this may be optimistic particularly if entities are partly owned.
- The UK (like the EU) appears to be considering the introduction of a UK domestic minimum top-up tax in response to Pillar 2. This is to ensure any top-up tax imposed on the profits of a group’s entities within the UK stays within the UK. In such cases, the top-up collected under a qualifying domestic minimum top-up tax is subtracted from the top-up tax charged under the GloBE rules. Although this ensures that there is no over-taxation, it seems to make complicated rules even more complicated.
- The OECD has not yet published its view on the STTR which will apply to tax treaties with developing countries, so we do not know the extent to which the UK will adopt this rule.
- The consultation highlights that work is still ongoing at OECD level to consider safe harbours that would reduce administrative burdens, where particular operations of an MNE are almost certain to be taxable above the minimum rate. The consultation gives some examples of approaches which may apply in the UK, but it is far from clear what those safe harbours may be. It is also not clear what form of substance-based carve out will apply in the UK, which might provide the most practical protection for taxpayers from significant compliance costs.
- The timescale for implementation is incredibly short if Pillar 2 is to be introduced in the UK by 2023 – particularly given that the OECD still has to publish its commentary on the Model Rules that will contain much of the details. The consultation states that the government anticipates that the parts of this legislation relating to the IIR would be included in Finance Bill 2022- 23 and would have effect from 1 April 2023; and that both the UTPR and the domestic minimum top-up tax would be introduced from 1 April 2024 at the earliest. The consultation does not really consider if this timescale is feasible.
Osborne Clarke comment
It is encouraging that co-ordinated progress has been made in the last six months on the introduction of a global minimum corporate tax rate and that the OECD has published model rules to create a framework for jurisdictions to follow in implementing the rules.
The biggest elephant in the room, however, is the approach of the US. The preamble to the Model Rules highlights that consideration will be given to the conditions under which the US Global Intangible Low-Taxed Income (GILTI) regime will co-exist with the GloBE Rules, to ensure a level playing field. It is not clear how the UK will proceed if the US does not amend its GILTI rules to make them compatible with Pillar 2. But, for now, the UK is embracing the ambitious timetable for implementation, with the UK's consultation closing on 4 April 2022.