Policy paper

Multinational top-up tax: undertaxed profits rule and other amendments

Updated 27 September 2023

Who is likely to be affected

Groups with annual global revenues exceeding €750 million that have business activities in the UK.

General description of the measure

This measure is part of the two-pillar solution to reform the international tax framework, which was developed by the G20 — Organisation for Economic Co-operation and Development (OECD) inclusive framework on Base Erosion and Profit Shifting (BEPS) project.

The government introduced the multinational top-up tax (MTT) and domestic top-up tax in Finance (No.2) Act 2023. These taxes are the UK’s adoption of the income inclusion rule and domestic minimum top-up tax rule as referenced in the Pillar 2 Global Anti-Base Erosion Rules (GloBE rules).

This measure comprises the UK’s adoption of the backstop undertaxed profits rule (UTPR) provision within the GloBE rules and other amendments required so that UK legislation remains consistent with the rules.

Policy objective

This measure ensures that any top-up taxes that are not paid under another jurisdiction’s income inclusion rule, or domestic minimum top-up tax rule, are brought into charge in the UK. The measure also ensures that UK legislation remains consistent with the OECD model rules and administrative guidance items that have been agreed by the G20 — OECD Inclusive Framework.

Background to the measure

In October 2021, over 130 countries in the OECD Inclusive Framework reached agreement on a two-pillar solution to reform the international tax framework in response to the challenges of digitalisation. Model rules and administrative guidance have been published by the OECD pursuant to this agreement.

At Autumn Statement 2022 the government announced that it intended to introduce a multinational top-up tax and a domestic top-up tax, for accounting periods beginning on or after 31 December 2023, and implement the UTPR with effect no earlier than accounting periods beginning on or after 31 December 2024.

Detailed proposal

Operative date

The UTPR provisions have effect as appointed by the Treasury in regulations, which will not be before accounting periods beginning on or after 31 December 2024.

Current law

Multinational top-up tax was introduced in the Finance (No. 2) Act 2023 and will have effect in respect of accounting periods beginning on or after 31 December 2023.

Proposed revisions

UTPR

Part 3 of Finance (No2) Act 2023 will be amended as follows to implement the UTPR.

Section 121 will be amended to extend multinational top-up tax to cover tax under the undertaxed profits rule.

Section 122 will be amended to expand the chargeable persons from a responsible member to any member of the group.

Section 123 will be amended to introduce a condition that a person is chargeable to multinational top-up tax, where top-up amounts and additional top-up amounts of one or more group members are potentially undertaxed, and the relevant member is not an investment entity.

Section 123A will be added to allow the amount of any undertaxed profits multinational top-up tax charge to be set in accordance with Chapter 9A.

Section 124 will be amended to provide for Chapter 9A, which sets out the provisions for determining whether top-up tax amounts are potentially undertaxed and how these amounts should be allocated to UK group members.

Chapter 9A will be added which provides for the meaning of ‘potentially undertaxed’ and ‘untaxed amounts’. Chapter 9A will also set out the steps required to allocate untaxed amounts to qualifying members located in the UK. These steps require the group to determine the number of its employees and the value of its tangible assets located in the UK and other territories that have a qualifying undertaxed profits tax.

The filing member of the group will be able to elect that a specified member of the group is to be allocated the whole of the tax that is attributable to UK members through the undertaxed profits rule.

Chapter 9A also will determine the rules for allocating untaxed amounts in respect of joint ventures.

Schedule 16 will be amended to ensure that the transitional provision also applies to untaxed amounts under the undertaxed profits rule.

There will also be consequential amendments to Section 128 (responsible members), Section 257 (meaning of qualifying undertaxed profits tax), Section 259 (country-by-country reports) and Schedule 17 (definitions).

Other amendments and additions

Part 3 of Finance (No. 2) Act 2023 will also be amended in various places to ensure consistency with the OECD model rules and administrative guidance. These amendments will include a non-material constituent entity safe harbour election.

Summary of impacts

Exchequer impact (£ million)

2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028	2028 to 2029
—	—	—	—	—	—

The final costing will be subject to scrutiny by the Office for Budget Responsibility and will be set out at a future fiscal event.

Economic impact

This measure will be formally assessed once costings have been certified by the Office for Budget Responsibility, but is not expected to have significant macroeconomic impacts.

Impact on individuals, households and families

There is expected to be no impact on individuals as this measure only affects businesses. The measure is not expected to impact on family formation, stability, or breakdown.

Equalities impacts

It is not anticipated that there will be impacts for those in groups sharing protected characteristics.

Impact on business including civil society organisations

This measure is expected to impact some of the estimated large enterprises with global revenues in excess of €750 million per annum in scope of MTT. This will be determined by the number of other countries that introduce GloBE rules, and the reporting requirements that are being developed by the G20 — OECD Inclusive Framework. The government is monitoring international developments to gain a better understanding of these impacts.

One-off costs could include familiarising themselves and their employees with the UTPR and updating software and systems to perform the UTPR computations.

Continuing costs could include recording and receiving information on tangible assets and number of employees from other entities within the group and reporting the UTPR amounts to the HMRC.

Where the UTPR is applicable, this measure could negatively affect business’ experience of dealing with HMRC as the change is complex and is likely to require additional reporting to HMRC. This is not expected to be disproportionate to the application of the UTPR in other jurisdictions and will be mitigated by both OECD and HMRC providing clear guidance to customers on how the UTPR should be calculated and reported.

This measure is not expected to impact civil society organisations.

Operational impact (£ million) (HMRC or other)

This measure will be delivered as part of the existing programme that has been established to implement Pillar 2 in the UK, so there are no further operational costs for HMRC.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through information collected from receipts.

Further advice

If you have any questions about this change, please contact the Pillar 2 team by email: PillarTwoConsultation@hmtreasury.gov.uk.

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