Update on Pillar 2 following 20 July legislation release
Draft Pillar 2 legislation was released on 20 July 2022 with commencement of the Income Inclusion Rule (IIR) confirmed as applying to accounting periods beginning on or after 31 December 2023. The legislation will be included in Finance Bill 2022/23. The government has invited feedback on both the draft legislation and their response to the previous UK consultation on the UK implementation of Pillar 2. They also welcome continued engagement with stakeholders. The consultation will last until 14 September 2022 to inform the final drafting of the legislation.
The government also intends to introduce an Undertaxed Payment Rule (UTPR) in the UK and will make a final decision on timing of that at a later date.
With regards to the introduction of a UK Domestic Minimum Tax (DMT), the government maintains the belief that there are strong arguments in favour of a UK DMT to ensure the UK Exchequer receives any additional tax from the application of Pillar 2 to UK economic activities. The government will therefore continue to consider the introduction of a DMT and envisages that, if introduced: the threshold would be EUR750m to mirror the Pillar 2 rules; it would apply to both UK-headed and foreign-headed groups. It will also consider the costs and merits of applying it to wholly domestic groups to prevent economic distortions.
The overall approach to the drafting of the legislation has been to closely follow the intent of the OECD Model Rules but to adapt the structure and drafting in places in an attempt to ensure that the rules are as clear to users as possible. Whilst additional certainty has been provided in the draft legislation, there are several issues that the government believe should be addressed within the context of Administrative Guidance as part of the Implementation Framework (IF) at the OECD level. Examples of issues to be discussed further as part of the IF are:
- the transitional provisions relating to intra group asset transfers,
- exclusions for foreign exchange gains and losses on hedging instruments,
- addressing situations where a top up tax can arise in a loss making period, and,
- exclusions for credits from certain debt releases.
Following the IF, we would anticipate further changes to the draft UK rules. Notwithstanding that further changes may be made to the UK Pillar 2 rules, groups falling within the scope of the minimum taxation rules are best-served by undertaking an initial impact assessment now. This impact assessment will inform the disclosure required under IAS10 in the next set of published group accounts and will also facilitate preparation of a roadmap for being Pillar 2 ready.
The June edition of our Talking Tax newsletter considers Pillar 2 from various angles relevant to businesses.
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