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In brief

On 11 January 2022, the UK government published a consultation on the implementation of the Pillar Two regime into UK domestic law. This follows the publication of the GloBE Model Rules by the OECD on 20 December 2021. The consultation is open until 4 April 2022, with the expectation that draft legislation will be published during the summer. The consultation indicates that an Income Inclusion Rule (IIR) would take effect in UK law from 1 April 2023, with the Undertaxed Profit Rule (UTPR) following on 1 April 2024. In order to preserve taxing rights over UK profits, the government is considering the adoption of a domestic minimum tax regime, which, if pursued, would be implemented from 1 April 2024 at the earliest. The lengthy consultation document touches on all aspects of the GloBE Model rules, albeit with the caveat that most of the policy decisions behind the rules have already been made through the Inclusive Framework. The challenge now is to implement the regime into UK law as efficiently as possible.


  • Confirmation of intention to only apply to groups with revenue of more than EUR 750m: Whilst the GloBE Model Rules have a revenue threshold of EUR 750 million, the Inclusive Framework’s statement of 8 October 2021 (the “8 October Statement“) confirmed jurisdictions could apply the IIR to groups below that threshold if headquartered in their jurisdiction. The government has indicated that it is not minded to pursue that option.
  • Income Inclusion Rule from 1 April 2023: Consistent with the timetable that was committed to, politically, by the UK, the IIR is expected to apply in 2023 following its enactment through what will eventually become Finance Act 2023.
  • UTPR from 1 April 2024: The OECD’s Undertaxed Payment Rule has been re-branded as an “Undertaxed ProfitsRule” following a significant re-write of its operation under the GloBE Model Rules. Consistent with the 8 October statement, the UTPR is intended to take effect 12 months after the introduction of the IIR.
  • Potential domestic minimum tax from 1 April 2024: Notwithstanding the rate of UK corporation tax will rise to 25% from 1 April 2023, the government is considering the implementation of a domestic minimum tax to put beyond doubt that UK profits should be subject to an effective rate of 15% under the GloBE Model Rules. If pursued, this would take effect from 1 April 2024 at the earliest. The government has indicated their preference would be for the domestic minimum tax to mirror the GloBE Model Rules, and therefore it would be limited to groups above the EUR 750 million revenue threshold.
  • GILTI co-existence still to be determined: The government appear to be adopting the OECD’s position that the question of how the GloBE Model Rules interact and co-exist with the US’s GILTI regime is still to be determined and will be resolved through discussion with international counterparts. This is in contrast to the position adopted by the EU which has prescribed a set of rules on IIR equivalence (Article 51 of the draft directive) that are incompatible with the GILTI regime under current law.
  • Interaction between Pillar One and Two still to be determined: Adjustments for Pillar One outcomes are notable absentee from the text of the GloBE Model Rules. From the government’s consultation document it appears the reason for this absence is because the interaction between the two regimes has not yet been decided.
  • Confirmation that RDEC is a Qualified Refundable Tax Credit: The government has expressed the view that the UK’s Research and Development Expenditure Credit (RDEC) regime is a Qualified Refundable Tax Credit under the GloBE Model Rules and will therefore remain in place. The consequence of this treatment is that the credit forms part of a group’s GloBE Income under the rules (the alternative treatment being that it is treated as a reduction of Covered Tax – which would be a bad outcome for the RDEC regime).
  • No mention of the Patent Box regime: whilst the RDEC received positive confirmation on its future, there is no mention of the Patent Box regime in the consultation. The patent box regime imposes an effective 10% corporation tax rate on certain UK profits and might therefore result in a group’s effective tax rate on its total UK profits falling below the 15% minimum rate. The increase in the corporation tax rate to 25% will provide some additional breathing space for the regime, likewise a domestic minimum tax would ensure the patent box regime does not hand taxing rights over UK profits to other jurisdictions (but might also undermine the efficacy of the patent box regime in practice).
  • Layering complexity on complexity: Following the publication of the GloBE Model Rules, there can be no doubt that the regime will impose significant compliance burdens on multinational groups. Optimists might have been forgiven for thinking that this nuclear approach to ensuring satisfactory tax outcomes in each jurisdiction in which a group operates might replace some existing anti-avoidance provisions that police cross-border activities. The government has indicated that they view this regime as a last line of defence and therefore consider current anti-avoidance provisions, including CFC rules, should remain in place (and will operate in priority).
Author

Kate handles all aspects of cross-border tax structuring for UK-headed and non-UK headed groups. She is particularly knowledgeable in UK DPT provisions, CFC regime, loan relationship anti-avoidance provisions and the new interest limitation rules. She regularly assists multinational companies with the design of their global holding and financing structures. Kate is a chartered accountant and chartered tax adviser with nearly 20 years' experience in tax-related matters. Prior to joining the Firm, she spent seven years as a partner at a Big Four accounting firm. Kate has been heavily involved in the OECD Base Erosion Profit Shifting initiative, assisting clients in determining potential implications for their businesses. She is a regular speaker on international tax issues.

Author

James Wilson leads Baker McKenzie's global Tax Planning, Transactions and Tax Policy group. He has 18 years of experience in advising the world's largest multinational corporations on cross-border tax matters. James is a recommended lawyer for International Tax in Legal 500 USA, in particular for his expertise in advising clients in the consumer goods and retail sector. James is a member of the Firm's Consumer Goods and Retail Industry Group steering committee.

Author

Nick Evans is a senior tax adviser in Baker McKenzie London office.

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