Now is the time to consider the UK impact of Pillar Two implementation
Pillar Two is intended to ensure that large multinational enterprises (MNEs), with consolidated group revenue above €750 million, pay a minimum level of tax on profits in each jurisdiction in which they operate. This is implemented in the UK by means of a Minimum Top-up Tax (MTT) and Domestic Top-up Tax (DTT) for accounting periods commencing on or after 31 December 2023.
These are based on the Organisation for Economic Co-operation and Development’s (OECD’s) Income Inclusion Rule (IIR) and Qualifying Domestic Minimum Top-up Tax (QDMTT). The Undertaxed Profits Rule (UTPR) is expected to follow in the UK for periods commencing on or after 31 December 2024.
The legislation relating to the introduction of Pillar Two in the UK is complex. Here, we flag some preliminary action points that should be considered when implementing Pillar Two.
Are exemptions available?
The MTT and DTT rules both include a “transitional safe harbour” which is available until the end of 2026, provided certain conditions and threshold tests are met. Falling within the “safe harbour” means that the full top-up tax calculations will not be required and no UK top-up amounts will be allocated. However, an information return will still need to be submitted to give the safe harbour election effect.
This is worth considering with your advisers now in the first year of UK implementation as the safe harbour operates on a “once out, always out” basis. This means that you cannot go back to the safe harbour after a full MTT or DTT calculation has been submitted to HMRC.
Do I need to register with HMRC?
HMRC launched their registration service on 20 May 2024 and it is recommended that you speak to an adviser to consider whether and when you would need to register. The responsibility to register will fall on the “filing member” of the MNE group, which will typically be the ultimate parent company of the group but may be another member. The registration must be made within six months of the end of the accounting period in which the thresholds are first met.
Do I need to make accounting disclosure?
As MTT and DTT are now enacted in legislation and effective for accounting periods starting in 2024, MNE groups and UK entities should consider how to disclose deferred tax for Pillar Two. Strictly, most 2023 accounting periods should disclose the potential tax impact on 2024 accounting periods.
The International Accounting Standards Board (IASB) allows for an exception, with the Financial Reporting Council (FRC) following suit. But for 2023 accounting period IFRS and FRS 102 statutory accounts, companies will still need to observe the exception requirements. One exception requirement many companies are struggling with, is outlining “information about the entity’s progress in assessing its exposure”. Understandably, many companies are reluctant to overstate progress but it is important that you carefully consider what to include in the exception statement.
How are other jurisdictions implementing Pillar Two?
Many jurisdictions are not implementing Pillar Two until 2025, beyond or at all (i.e. the US, China and India). A UK intermediate parent could become liable to MTT in respect of overseas subsidiaries if the global ultimate parent jurisdiction has not yet implemented Pillar Two. It is important to consider how staggered global implementation will impact MNE groups, as reporting obligations and top-up liabilities may change from year to year at these initial stages.
How Moore Kingston Smith can assist
As noted above, groups within the scope of Pillar 2 will have administrative obligations whether additional top-up tax is due or not. If you have any questions or would like to discuss the rules or the impact of Pillar Two implementation further, please get in touch with our specialist tax team at Moore Kingston Smith.
