The UK HMRC issued guidance on How to prepare for the Multinational Top-up Tax and the Domestic Top-up Tax.
In October 2021, the UK and over 135 other countries agreed as part of the OECD Inclusive Framework to a two-pillar solution to reform the international corporate tax framework in response to the challenges of digitalisation.
Pillar Two of this solution, known as the Global Base Erosion (GloBE) rules, requires a group with consolidated annual revenues of more than EUR 750 million to pay a minimum 15% tax on its profits in each jurisdiction it operates in.
As part of the UK adoption of the OECD Pillar Two rules, the government has announced two new taxes:
- The Multinational Top-up Tax (MTT)
- Domestic Top-up Tax (DTT)
These will apply to accounting periods that begin on or after 31 December, 2023.
1.2 Multinational Top-up Tax and Domestic Top-up Tax
Multinational Top-up Tax
MTT will require all groups with both UK and non-UK entities and sufficient consolidated revenue to register with HMRC. A charge may arise on UK parent members within such a group, where a UK parent member has an interest in an entity in a non-UK jurisdiction, and the group’s profits arising in that jurisdiction are taxed below the minimum rate of 15%.
Domestic Top-up Tax
DTT will require all groups with UK entities and sufficient consolidated revenue to register with HMRC. A charge may arise on UK members within a domestic or multinational enterprise group where UK profits are taxed below the minimum rate of 15%.
2. How to prepare for these changes
Businesses will need to prepare for complying with MTT and DTT in the UK, as well as the adoption of Pillar Two in other jurisdictions.
3. UK legislation
The UK legislation includes a proposed reporting process which includes:
- A requirement for groups with consolidated revenue above EUR 750 million to register with HMRC when they first come into scope of the Pillar 2 rules;
- An annual Self Assessment return to report details of the group’s MTT and DTT liabilities;
- The requirement to submit a GloBE Information Return (GIR) which shows the group’s global Pillar Two tax calculations, or to submit an overseas return notification (where an information return has been submitted to another qualifying authority).
Groups will have UK obligations even if they do not have MTT or DTT liabilities. These obligations will apply to both UK-headed and non-UK headed groups irrespective of whether the jurisdiction of the Ultimate Parent Entity implements Pillar Two.
4. HMRC online service
HMRC has been developing a new online service to enable businesses to meet their MTT and DTT obligations. This will include the ability to register, file returns, and make payments.
The first stage will allow taxpayers to register for the new taxes and make a payment on account if they want to. The HMRC aims to complete this by Spring 2024.
5. Guidance
The UK published draft guidance in July 2023 as part of a consultation exercise. The guidance provides an overview of MTT and DTT as well as covering the scope and administration of the taxes. The consultation ended in September 2023 and we’re reviewing the responses we received.
The OECD has also published a further administrative guidance and new guidance on the GloBE Information Return:
- Agreed administrative guidance – published July 2023
- GloBE Information Return – published July 2023
6. Pillar Two scope and compliance obligations
To help you decide whether you’re in scope, here is an overview of MTT and DTT.
Bear in mind that groups in scope will have UK reporting obligations even if the group does not have a MTT or DTT liability. These obligations will apply to both UK-headed and non-UK headed groups, irrespective of whether the jurisdiction of the ultimate parent entity implements Pillar Two.
6.1 Scope of MTT
A group will be within scope of MTT if these two apply:
- It has at least one member in the UK and one member outside the UK;
- It meets the revenue threshold test.
The revenue threshold test is met if the group has revenue in excess of EUR 750 million (reduced for periods of less than a year) in any two of the four previous periods. The revenue of the group members is taken from the consolidated financial statements of the ultimate parent entity for the period, and so the revenue of all group members – both UK and non-UK – is included in this test.
Special rules apply if there has been a merger or demerger in the tested period or any of the prior four periods. More information can be found in our guidance (MTT11010).
Investment entities and certain excluded entities are not within scope of MTT and DTT. For more information about the types of excluded entities, please refer to guidance MTT10010.
6.2 Scope of DTT
A group or UK entity will be within scope of DTT if both of the following apply:
- It has a UK presence;
- It meets the revenue threshold test.
Groups with only UK members and single UK entities can be in scope, as well as the UK operations of multinational groups. Where the entity is a member of a group, the EUR 750 million revenue threshold test is applied to the group as a whole. As with MTT, the revenue of all group members – both UK and non-UK – is included in this test.
6.3 Compliance obligations
One member of the group must be solely responsible for registering and complying with both the new taxes. This will be the group’s ultimate parent entity, unless you’ve nominated a different UK or non-UK member to be responsible for this.
The filing member must register with HMRC no later than six months from the end of the accounting period in which the group became a qualifying group.
The information that will need to be provided at registration includes:
- Details of the ultimate parent entity;
- Details of the filing member, if not the ultimate parent entity;
- Contact details for the individual or tax team responsible for filing the return;
- The accounting period start and end dates.
The filing member will later be required to submit a Self Assessment return and an information return to HMRC for each accounting period in which the group qualifies for MTT and/or DTT. If an information return has already been submitted to a qualifying authority outside of the UK, then an overseas return notification can be submitted instead.