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In brief
On 23 March 2023, the UK government published its latest Finance Bill, including draft legislation to implement Pillar Two. Whilst the draft legislation is broadly aligned with the OECD Model Rules, and reflects some key developments in line with the OECD implementation package and Administrative Guidance, there are some areas where a degree of divergence appears and taxpayers will need to understand whether that is intentional on the part of the UK government or not. The UK will implement Pillar Two in respect of accounting periods beginning on or after 31 December 2023, therefore multinational groups now have little time to prepare and to ensure its potential impacts are adequately analyzed and communicated to stakeholders.
Key takeaways
Building on draft legislation published in July last year, and following a period of consultation, the publication of the Finance (No. 2) Bill 2023 (the "Finance Bill") moves the UK further forward in its process of implementing Pillar Two. The Finance Bill includes revised draft legislation introducing a Multinational Top-up Tax ("MTT") (adopting the Income Inclusion Rule) and new draft legislation implementing a domestic minimum top-up tax ("DMTT"). As anticipated, the MTT and DMTT will apply from accounting periods beginning on or after 31 December 2023. The UK government has previously announced that the undertaxed profits rule will not apply in the UK earlier than 2025 (accounting periods beginning on or after 31 December 2024), with draft legislation to be released at a later, as yet unspecified, date.
The UK draft legislation is broadly aligned with the OECD Pillar Two Model Rules (although it uses UK-specific legislative terms), and reflects some key developments in line with the OECD implementation package published by the Inclusive Framework in December 2022 (see our alert here) and the OECD Administrative Guidance published on 2 February 2023 (see our alert here). It will also likely inform other jurisdictions currently drafting domestic implementing legislation, with the expected date of implementation for many jurisdictions, including EU Member States, moving ever closer. Multinational groups now have little time to ensure the potential impacts of Pillar Two are adequately assessed and communicated to stakeholders.
The UK draft legislation provides greater certainty as multinational groups continue to navigate the complexity of the Pillar Two GloBE Rules. The Finance Bill includes the following:
These represent the key takeaways but we continue to work through the detail of the legislation. Whilst the intention behind the draft legislation seems to be to follow the OECD Pillar Two Model Rules, implementation package and Administrative Guidance, there are some areas where differences appear, or the position under the draft legislation in the Finance Bill is different to the draft MTT legislation published in July 2022. It will be important for taxpayers to understand whether these divergences are intentional on the part of the UK government or not. We are working to clarify these issues and will provide further updates.
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