Global Minimum Tax Rate – Pillar Two

The Global Minimum Tax Rate, or as it is better known, the OECD’s ‘Pillar Two’, only applies if your global turnover is at least €750m per year.

Ultimately Pillar Two looks to ensure that a multinational group suffers a minimum tax on profits of 15%; no matter where in the world the profits are generated. Put another way, it adds yet another tool to the Government’s armoury to protect against profits being diverted to low tax jurisdictions.

Pillar Two ensures that a minimum corporate tax rate of 15% is applied to profits in each country in which the multinational operates.

The way it works is fairly complicated, but a synopsis is included below.

Very large global groups who will be caught by this, are required to review their profits, on a country by country basis, and where there are profits subject to a tax rate of less than 15%, they must establish which country in their group structure is liable to ‘top up’ the tax paid on those profits to 15%, most likely the parent company. Or, it may be that no tax is paid in a country which is part of the multinational structure, and again 15% tax must be paid in another country by the local entity within the group, again, most likely the jurisdiction of residence of their parent company.

The introduction of Pillar Two looks at the turnover of a global business as a whole and ensures the correct amount of tax is paid in the right jurisdictions.

Make the global tax system fairer

Following consultation, the Government has announced that it will be legislating to implement the globally agreed G20-OECD Inclusive Framework Pillar 2 framework in the UK.

Pillar 2 will establish a global minimum corporation tax regime and is expected to apply to both public and privately held multinational groups with consolidated revenue over €750m.  These changes are expected to raise £2.5 billion a year by 2027/28, which is estimated to be the tax that the UK is losing to tax havens.

For accounting periods beginning on or after 31 December 2023 the Government will:

• Introduce an income inclusion rule (IIR), which will require large UK headquartered multinational groups to pay a top-up tax where their foreign operations have an effective tax rate of less than 15%.
• Introduce a supplementary Qualified Domestic Minimum Top-up Tax (QDMTT) rule which will require 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%.

Both the IIR and QDMTT will be legislated for in the Spring Finance Bill 2023.

What next?

If you have any questions or would like assistance, please contact Thomas Adcock or a member of the tax team.