UK consults on proposed global minimum tax for multinationals

The so-called ‘Pillar 2 framework’, agreed by over 130 countries in October 2021, is designed to ensure large multinational firms pay tax of at least 15% on profits in each country in which they operate - creating a more standardised international regulatory environment and minimising opportunities for tax avoidance.

The government’s consultation seeks views on the proposed tax - which will be operated on a country-by-country basis - and its application in the UK, including who the rules apply to, transitional rules and how firms within scope should report and pay.

Under the regulations, a business will only fall under the scope of the new minimum tax framework when its revenue in consolidated financial statements is greater than €750 million in at least two of the previous four fiscal years. The consultation also says that the consolidated revenue threshold will only apply to firms that operate in more than one jurisdiction.

Although rules published by the Organisation for Economic Co-operation and Development (OECD) allow countries to apply the new framework to UK headquartered groups with consolidated group revenue of less than €750 million, the consultation makes clear that the UK does not intend to do so.

Instead, the UK government is exploring the idea of introducing a domestic minimum top-up tax for UK-headquartered firms with over €750m of group revenue – intended to boost domestic tax receipts and prevent foreign jurisdictions from taxing the revenue instead.

Eloise Walker, corporate tax expert at Pinsent Masons, said: “Smaller groups will be heaving a sigh of relief that the UK has decided not to extend the framework to those falling below the €750 million threshold. The rules have the potential scope to be bewilderingly complex in their practical application, and the additional tax compliance (not to mention tax bill) will be hard enough for large groups to get a handle on.” 

“It is hardly surprising that the UK plans to get this extra tax revenue and stop it going elsewhere, and this chance at extra money might explain why the UK is especially keen to meet  the tight timescale of getting at least some of the rules ready to apply from 1 April 2023,” Walker added.

While the OECD has published guidance on the Pillar 2 framework, the intergovernmental body is yet to finalise and agree the commentary to the model rules for the reforms, which are expected in the first quarter of 2022.

With the first tranche of new rules set to apply from April 2023, and jurisdictions aiming to legislate for the changes by the end of 2022, the government acknowledged that the OECD commentary “would have helped in explaining and clarifying the detail”, but insisted it is “preferable to consult now so as to give businesses as much time as possible to consider these concepts”.

Rishi Sunak, chancellor of the exchequer, said: “Ensuring large multinational groups pay the right tax in the right place has been a long-standing priority for the UK. We reached an historic agreement last October following more than a decade of talks and negotiations, and today marks another important milestone on how this will work in practice.”

The 12-week consultation will close at 11:45pm on 4 April 2022.