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A Review of the UK QDMTT and the OECD Administrative Guidance

The UK’s Spring Finance Bill 2023 (Finance (No. 2) Bill) published on March 23, 2023, included a QDMTT (or at least a domestic top-up tax that is likely to qualify as a QDMTT) for accounting periods beginning on or after 31 December 2023.
The OECD Administrative Guidance includes a number of specific provisions on the design of a domestic minimum tax to ensure it is a QDMTT.
Some of the key provisions include:

A QDMTT can also apply to purely domestic groups.
The definitions of Ultimate Parent Entity, MNE Group, and Constituent Entity in the QDMTT need to correspond with the definitions in the GloBE Rules.
The QDMTT must compute the tax liability for the jurisdiction by taking into account the income and covered taxes of Constituent Entities that are located in the UK in accordance under the GloBE Rules.
A QDMTT must determine a separate ETR and Top-up Tax amount for MOCEs, Joint Ventures and JV Subsidiaries.
A QDMTT must impose a Top-up Tax on one or more domestic Constituent Entities on the Excess Profits of all domestic Constituent Entities, including the domestic Parent Entity.
The legal liability for the domestic top-up tax needs to be enforceable against at least one Constituent Entity in the jurisdiction.
The QDMTT definition allows for the use of an Acceptable Financial Accounting Standard or for the use of an Authorized Financial Accounting Standard that is not an Acceptable Financial Accounting Standard but is adjusted as necessary to prevent Material Competitive Distortions, rather than the one used in the Consolidated Financial Statements.
Income and tax computations generally need to mirror the GloBE Rules. Except:
1. The QDMTT can be more restrictive than the GloBE Rules where the tighter restriction is consistent with local tax rules.
2. The QDMTT can exclude adjustments that are not relevant to in the context of its domestic tax system.
The QDMTT must exclude the income or loss of a foreign Permanent Establishment from the income or loss of the Main Entity.
A QDMTT must include certain tax transparent provisions.
The range of taxes included in Covered Taxes needs to be the same or narrower, as under the GloBE rules.
A QDMTT does not need to have a GloBE Loss Election.
A QDMTT must exclude:
(1) tax paid or incurred by a Constituent Entity-owner under a CFC Tax Regime that is pushed down to a domestic Constituent Entity in the GloBE Rules and
(2) tax paid or incurred by a Main Entity that is allocated to a PE in the jurisdiction.
A QDMTT needs to have provisions for additional top-up tax under Article 4.5.1 of the Model Rules.
The QDMTT top-up tax formula needs to be modified as the GloBE Rules subtract tax paid under a QDMTT from the current GloBE Top-up Tax.
A QDMTT must require that top-up tax is taken into account by the relevant Constituent Entity at the same time and in the same manner as under the GloBE Rules.
A QDMTT is not required to have a Substance-Based Income Exclusion.
The tax rate applicable under a QDMTT must equal or exceed the 15% Minimum Rate.
A QDMTT is not required to have a de minimis rule.
A QDMTT needs to include restructuring rules as provided in the GloBE rules to the extent necessary to conform to the tax reorganization rules in the jurisdiction.
A QDMTT needs to contain GloBE safe harbours.
A QDMTT must include the deferred tax starting point under Article 9.1.1 of the Model Rules.
A QDMTT does not need to include the enhanced SBIE carve-out rates in Article 9.2 of the Model Rules.
The initial phase of international activity exemption does not need to be included in a QDMTT.
The extended filing deadline for GloBE Information Returns in a Transition Year does not need to be included in a QDMTT.
Where the GloBE Rules permit an election, a QDMTT generally must also provide for the election and require the MNE Group to make the same election under the QDMTT as is made under the GloBE Rules.

In this article we review the UK’s domestic top-up tax based on the OECD Guidance.

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