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UK Pushes Forward With Pillar Two Implementation

Following draft legislation issued in July 2022, the UK government confirmed in this weeks Autumn Statement that they will legislate to implement Pillar Two for accounting periods beginning on or after 31 December 2023. This was referred to as a Multinational Top-Up Tax in the draft legislation.

The previous draft legislation issued included the Income Inclusion Rule. The government confirmed this week that they will also introduce:

  • a Qualified Domestic Minimum Top-Up Tax (QDMTT) which 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%;



The IIR and QDMTT will be included in the Spring Finance Bill 2023.

The Policy Costings document issued for the Autumn Statement measures provides that expected revenue gains are as follows:

Revenue Gains0335 million2.11 billion2.08 billion2.15 billion2.25 billion

This is significantly more than the Netherlands which estimated additional tax revenue of 400-500 million euros. 

The policy costings document notes that there are areas of uncertainty not least behavioural responses of MNEs and other jurisdictions. 

MNEs are expected to restructure their operations such that fewer profits will arise in jurisdictions with a low effective tax rate, in order to avoid a top-up tax liability. This will mainly apply to profits on activities allocated to jurisdictions principally to take advantage of low tax rates.

Therefore, the profits may be likely to be transferred to jurisdictions with a higher effective tax rate, such as the UK.

Of course, another option would be for jurisdictions to simply levy a qualifying domestic minimum top-up tax. Low-taxed profits in a jurisdiction would then be taxed in that jurisdiction, and any QDMTT suffered would effectively be a tax credit to reduce any foreign top-up tax liability.