The UK is introducing a global minimum tax regime in line with the organisation for economic co-operation and development (OECD) framework. The UK government published its draft legislation on the new rules in March 2023, which can be found here. These rules are likely to be enacted in the UK around June/July 2023, though there is no set timetable.
The idea is that large groups will pay a minimum of 15% on their corporate profits across the worldwide group. The rules apply to large multinational groups with annual consolidated group revenue of at least €750 million in at least 2 of the previous 4 accounting periods. The aim is to reduce tax competition between countries and to discourage businesses from shifting their profits to jurisdictions with low tax rates.
OECD Global Minimum Tax Framework
The UK will implement the G20-OECD Inclusive Framework Pillar 2 and will adopt the following:
- An Income Inclusion Rule (IIR) which requires large UK headquartered multinational groups to pay a top-up tax where their foreign operations have an effective tax rate of less than 15%.
- A supplementary Qualified Domestic Minimum Top-up Tax, which tax authorities can introduce under OECD rules. This requires 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%.
Multinational Top-up Tax (MNTT)
In the UK, the global minimum tax will be known as the Multinational Top-up Tax (MNTT), and will have two key elements, the first based on the OECD’s IIR, and the other on the undertaxed profits rule. The first element is in the March 2023 draft legislation, although draft legislation is still awaited on the second element, which will be introduced at a later date. The new MNTT will be introduced for accounting periods beginning on or after 31 December 2023.
The rules introduce a top down test. The tax due is the amount needed to bring the overall tax on the profits in each country in which the group operates up to the minimum effective tax rate of 15%. Any tax due is generally calculated and paid by the ultimate parent company of the group to the tax authority in its own country, so for a UK headed group the tax would be payable to His Majesty’s Revenue and Customs (HMRC).
The UK’s MNTT will operate separately from the corporation tax and income tax regimes. Some entities are excluded, such as a UK REIT which is the parent of a multinational group. The MNTT will incorporate the ‘substance based income exclusion’ test that formed part of the G20-OECD agreement, which looks at payroll taxes and tangible assets in a jurisdiction to help assess economic presence.
Similar to UK transfer pricing legislation, payments by one company to another group company to compensate them for settling the tax will not be subject to corporation or income tax.
Payment of the UK top-up tax liability is due in a single instalment 15 months after the end of the accounting period (18 months in respect of the first return).
Qualified Domestic Minimum Top-up Tax (QDMTT)
The QDMTT rules impose a top-up tax in the UK on low taxed UK profits, and apply to both UK domestic groups and multinational groups with UK interests, as well as UK stand alone entities with annual revenue above €750 million. The QDMTT rules use the MNTT rules for calculating the effective tax rate. Top-up taxes in respect of any low-taxed profits of a group’s entities are paid to the domestic tax authority under a QDMTT, and so would be paid to HMRC under this legislation by a UK domestic group. The QDMTT will incorporate the ‘substance based income exclusion’ test that formed part of the G20-OECD agreement, in a similar way to the MNTT.
Undertaxed Profits Rule (UTPR)
This rule applies as a backstop in cases where the effective tax rate in any country is below the minimum rate of 15% but the IIR has not been fully applied. The top-up tax is allocated to countries which have adopted the undertaxed profits rule, based on a formula. This tax applies not only to multinational groups but to UK domestic groups and to UK stand alone entities that meet the size criteria. This rule will not apply in the UK until 2025, i.e. for accounting periods commencing on or after 31 December 2024. Draft legislation is to follow.
Both the MNTT and the QDMTT include transitional safe harbour rules for accounting periods beginning on or before 31 December 2026. These are short term measures to exclude a group’s operations from the full compliance obligation in countries considered lower risk.
The transitional safe harbour rules use information from country by country (CbC) reporting and/or financial statements to determine whether operations in a country meet any of 3 tests. Where the transitional safe harbour applies and any of these tests are satisfied, the top-up tax for that country will be nil.
- De minimis test – the business has aggregate revenues of less than €10 million and profit before tax (PBT) of less than €1 million on its CbC report for a country (including a loss).
- Routine profits test – the business’ aggregate PBT in a country is equal to or less than the ‘substance-based income exclusion’ amount as calculated under OECD rules, which looks at payroll taxes and tangible assets in a jurisdiction.
- Simplified effective tax rate (ETR) test – the business has a ‘simplified ETR’ for a country that is equal to or greater than the transition rate for the year. The transition rate starts at 15% for 2023 and 2024, increasing to 16% in 2025 and 17% in 2026. The ‘simplified ETR’ is calculated by dividing the country’s ‘simplified covered taxes’, based on its financial statements rather than CbC data, by PBT from CbC reporting.
Minimum tax has been discussed in the international tax arena for some time now, and certain jurisdictions already apply some form of ‘minimum tax’ in the domestic setting, such as corporate minimum tax (CMT) in Ontario, Canada and the corporate alternative minimum tax (CAMT) in the USA. In introducing the minimum tax concept into UK legislation, the UK is in line with the growing international trend on this topic.
If you have any questions on how the proposed measures might affect your business, please contact us today!