As part of the Base Erosion and Profit Shifting (“BEPS”) project, the Organisation for Economic Cooperation and Development (“OECD”) has presented a two-pillar approach as an ongoing effort to reform international taxation and prevent tax avoidance by multinational enterprises (“MNEs”).
Pillar two focuses on establishing a global minimum tax rate to ensure that companies pay a minimum level of tax regardless of where they operate or where their profits are booked. The rules apply to MNEs with annual consolidated revenue of at least €750 million in at least two out of the prior four accounting periods.
The OECD provided details on two interlocking measures, the Income Inclusion Rule (“IIR”) and the Undertaxed Profits Rule (“UTPR”), whereby profits taxed at less than 15% would be targeted for additional taxation. The IIR imposes a top-up tax on the ultimate parent entity of a low-taxed foreign subsidiary. The UTPR seeks to deny deductions, or take similar actions, to collect tax that would otherwise not be collected under the IIR.
In response to this, the UK Government stated in the Autumn Statement that a qualified domestic minimum top-up tax (“QDMTT”) would be introduced in the UK alongside the IIR for accounting periods commencing on or after 31 December 2023. The QDMTT tax rule will require large groups, including those operating exclusively in the UK, to pay a top-up tax where their UK operations have an effective tax rate of less than 15%.
Both the multinational top-up tax and domestic top-up tax were formally introduced in the 2023 Finance Bill. The Government intends to implement the UTPR in the UK, but with effect no earlier than accounting periods beginning on or after 31 December 2024.
According to the OECD, Pillar Two represents “a radical shift in the tax landscape”. MNEs with global revenues of €750m or more will need to put measures in place to ensure they are compliant with Pillar Two, with MNEs that are close to the threshold being actively monitored. Failure to comply will result in penalties being imposed with interest accruing on any late paid top-up tax on a daily basis.
At Grant Thornton NI we have a dedicated international tax team and we work with a global network of international tax specialists who can advise and assist you and your business with planning to ensure compliance with the complex Pillar Two rules.
