Corporate Tax News Issue 63 - August 2022

Draft legislation to implement Pillar Two released

As part of the ongoing efforts on global tax reform, the UK government released on 20 July draft legislation and accompanying explanatory notes to implement parts of the OECD model Pillar Two rules. The legislation would introduce a new tax on UK parent members within a multinational enterprise (MNE) group, whereby a top-up tax will be charged on such members when a subsidiary is located in another jurisdiction and the group’s profits in that jurisdiction are taxed at a rate below the minimum rate of 15%.

A public consultation on the draft legislation is being held until 14 September 2022, ahead of potential inclusion in Finance Bill 2022/2023.


Following political consensus on the components of global tax reform by the G20 and the 136 members of the OECD Inclusive Framework in October 2021, the OECD published model rules for Pillar Two (Model Rules) in December 2021 and accompanying commentary in March 2022 (for prior coverage, see the article in the November 2021 and the article in the May 2022 issue of Corporate Tax News). The Model Rules form part of the OECD’s two-pillar solution to address the tax challenges arising from the digitalisation of the economy and have wide-reaching implications for many international businesses.

The main purpose of the Model Rules is to limit tax competition among countries by ensuring that large MNE groups pay a minimum level of tax on the profits arising in each jurisdiction in which they operate.

Pillar Two seeks to establish a 15% global minimum tax rate through the introduction of two interlocking rules, the income inclusion rule (IIR) and the under-taxed payments rule (UTPR), collectively referred to as the GloBE rules. Under the IIR, where the effective tax rate (ETR) in any jurisdiction is below the minimum 15% rate, the ultimate parent entity is primarily liable for a “top-up tax” to bring the rate up to 15%. As a backstop, the UTPR can apply, by way of a denial of a tax deduction for payments that give rise to income taxed at less than 9% that is not otherwise brought into charge under the IIR. Pillar Two broadly applies where a company has consolidated revenue in excess of EUR 750 million.

UK draft legislation

The draft legislation follows the UK’s decision earlier in 2022 to defer the implementation of Pillar Two until 2024 (to first apply for accounting periods beginning on or after 31 December 2023). This decision was made in recognition of the complexity of the rules, the remaining policy and administrative issues still being discussed within the OECD Implementation Framework and the need for businesses to build systems to ensure compliance with the rules.

What is included in the draft legislation?

The UK draft legislation would introduce an IIR, referred to as the "multinational top-up tax" that would apply to MNEs with global revenues exceeding EUR 750 million in two of the previous four years for accounting periods beginning on or after 31 December 2023. The UK commencement date is aligned with the commencement date of the draft EU directive (for prior coverage, see the global tax alert dated 20 June 2022).

It is clear that the UK government has sought to follow the intent of the Model Rules as closely as possible both from a policy perspective and to ensure that the UK regime is recognised as a “qualifying” regime by other jurisdictions introducing such rules.

At the same time, the draft legislation is very detailed (with 116 pages of new law), and the UK has endeavoured to draft potential practical solutions to some of the technical and administrative issues that continue to be discussed at the OECD level (whilst acknowledging that some of these will still need to be resolved). For example, the draft UK legislation sets out clear and detailed steps for calculating ETRs and top-up taxes, expanding on the formulae set out in the Model Rules.

Finally, to ensure that the administration of the GloBE rules is as targeted as possible and to avoid compliance and administrative costs disproportionate to the policy objectives, the UK legislation is expected to include safe harbour provisions (e.g., effectively “switching off” the requirement to demonstrate compliance with the Pillar Two rules in certain circumstances; for example, for entities located in countries that implement a qualified domestic minimum tax (QDMT) at a certain rate or entities that can demonstrate an ETR above a certain rate using their existing country-by-country reporting data). However, it appears that the government is awaiting the publication of the OECD Implementation Framework, expected to be released in October or November 2022, before seeking to include such clauses in domestic law.

Reporting requirements

The UK draft legislation proposes the following reporting framework:

  • A one-time requirement for in-scope groups to register with HMRC when they first fall within the scope of the rules (i.e., MNEs with consolidated global revenues exceeding EUR 750 million in two of the previous four years, for accounting periods beginning on or after 31 December 2023).
  • An annual domestic information return/overseas return notification to confirm entities’ UK top-up tax liabilities, to be submitted to HMRC within 15 months after the end of the accounting period (extended to 18 months in respect of the group’s first return).
  • Payment of the UK top-up tax liability in a single instalment due 15 months after the end of the accounting period, extended to 18 months in respect of the group’s first return.

What is still to come?

While the draft legislation does not currently contain provisions to implement the UTPR, the government is preparing to introduce such clauses.

The draft legislation does not yet include provisions setting forth a QDMT, although the government’s response to its earlier consultation indicates that it is likely that one will be introduced. If introduced, it is envisaged that the threshold would be EUR 750 million to mirror the Pillar Two rules and would apply to both UK-headed and foreign-headed MNEs. In addition, the government will consider the costs and merits of application of the QDMT to wholly domestic groups to prevent economic distortions.

The government is also expected to introduce simplifications or suitable safe harbour rules to the extent these are supported by the wider international community. Further details are likely to follow the publication of the OECD’s Implementation Framework later this year.


With the potential increase in the ETR and compliance obligations for MNEs, existing legal and operating structures may no longer be appropriate. For some organizations, simplification of the legal structure may help to mitigate the complexity and cost of tax and accounting compliance. For others, the rules may significantly reduce or eliminate the tax efficiency of existing structures (particularly those that deliver low tax outcomes). As such, alternative structures may become more suitable.

Additionally, with the Pillar Two rules based on the consolidated accounting profits and a number of the required adjustments based on the deferred tax rules, early interaction between the accounting and tax teams is critical.

MNE groups that are likely to fall within the scope of the proposed rules may wish to consider taking the following actions:

  • Comment on the draft legislation before the end of the consultation period (i.e., 14 September).
  • Monitor developments globally as more territories publish similar draft rules.
  • Undertake an impact assessment to determine the potential impact of the global minimum tax rules on:
    • The group’s book and cash tax rates. This should include determining where incremental cash tax obligations are likely to arise, whether existing tax incentives will continue to be available and the impact on the group’s cash and working capital requirements; and
    • The increase to the group’s compliance burden. This includes assessing whether the existing tax function has the resources and expertise to manage the changes, as well as assessing the adequacy of the group’s operating systems to capture the additional data that will be required.
  • Communicate the impact of the Pillar Two rules to the organization’s board of directors and other stakeholders, including consideration of whether early disclosure in the group’s financial statements is required.
  • Identify the need for any remedial action in the next 12-18 months (if required), including restructuring, renegotiation of intercompany agreements and/or simplification of existing legal and operating structure.

Ross Robertson

Jennifer Cooper

Agata Kozolup