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Some of Europe's brightest legal minds look at the tax issues across Europe which could impact multinational businesses.

| 5 minutes read

International tax reform: the gift that keeps on giving

The OECD published a second set of Administrative Guidance on the Pillar Two GloBE Rules and the GloBE Information Return (and numerous other documents), while the UK released 30 pages of proposed amendments to the legislation implementing the Income Inclusion Rule (IIR) in the UK. The UK’s IIR is called the multinational top-up tax (MTT) and the relevant legislation is found in Part 3 of the Finance (No. 2) Act 2023.

The proposed amendments to the MTT legislation were released as part of the “L-day” publication of draft legislation for the Finance Bill 2023-2024. Given that there was only about a day’s gap between the OECD’s and the UK’s releases, important aspects of the new Administrative Guidance are not yet reflected in the draft legislation, so further materials can be expected in due course.

Administrative Guidance: QDMTT safe harbour

The new Administrative Guidance includes clarifications in respect of the design and operation of Qualified Domestic Minimum Top-up Taxes (QDMTTs), for instance on points around joint ventures and flow-through entities. It also clarifies that countries have significant latitude in deciding the allocation of QDMTT to particular entities; the allocation mechanism need not follow the one applicable to the IIR pursuant to Article 5.2.4 of the GloBE Rules. Similarly, information returns in respect of the QDMTT need not take the form of the GloBE Information Return.

The eagerly awaited permanent QDMTT safe harbour is also included in the new Administrative Guidance. It would operate to deem the GloBE top-up for the relevant jurisdiction to be nil, meaning that, for the jurisdiction, the group would have to undertake only the QDMTT and not also the GloBE calculation.

But not every QDMTT will qualify for the safe harbour! Because of the greater latitude afforded to jurisdictions in the design of their QDMTTs (as compared to their implementation of the GloBE Rules), the guidance sets out three additional criteria that QDMTTs will need to meet in order to qualify for the safe harbour which will be assessed pursuant to a peer review process by reference to the relevant legislation and its practical administration.

The QDMTT safe harbour would need to be elected into, and the election will only be available where the QDMTT would have otherwise reduced an IIR top-up pursuant to Article 5.2.3. This makes for a complex situation where a QDMTT charge is challenged. The new Administrative Guidance envisages that where a QDMTT charge is challenged, for instance on the basis of its being unconstitutional or contrary to a tax stabilisation agreement, the QDMTT cannot reduce the IIR top-up pursuant to Article 5.2.3. So, in those circumstances, the QDMTT safe harbour would be unavailable as well.

GloBE Information Return: a question of terminology

The GloBE Information Return published by the OECD should form the blueprint for the “information return” required to be submitted under the UK’s MTT legislation. Indeed, the first tranche of HMRC’s draft guidance on the legislation stated that “[The structure and format of the information return is being developed further by HMRC and international partners at the OECD. This guidance will be updated when the structure and format are finalised.]”

But, unsurprisingly, the GloBE Information Return’s terminology closely mirrors the OECD’s Model Rules. This seems a crucial feature for the return to be useful as a standardised form intelligible across different jurisdictions (the MTT legislation itself envisages that an information return need not be submitted in the UK where an equivalent return has been submitted to the tax authority in another jurisdiction that has implemented the GloBE Rules). But it inevitably creates some tension with the UK’s choice to adopt its own, different terminology and ordering of the rules. It remains to be seen how the GloBE Information Return will be translated into the MTT context. 

UK draft legislation: UTPR and further tweaks

The draft legislation for Finance Bill 2023-24 sets out provisions for the implementation of the Undertaxed Payment/ Profits Rule (UTPR) as part of the MTT. The amount of MTT payable would then be calculated by reference to "top-up amounts" and "additional top-up amounts" (i.e. the existing IIR top-up) as well as “untaxed amounts” to be determined and allocated in accordance with a new Chapter 9A to be inserted into Part 3 of that Act (i.e. the new UTPR top-up). The draft legislation does not set a commencement date, but allows the government to bring the rules into force from a date to be specified by Treasury regulation.

Given that (as per the new Administrative Guidance) the “UTPR is designed to operate as a backstop to the IIR by encouraging jurisdictions to adopt the GloBE rules and MNEs to structure their group holdings in a way that brings their operations within the charge of the IIR”, I suspect that, depending on the pace at which IIRs and QDMTTs are implemented, it may ultimately prove unnecessary to bring into force the UTPR (or, if UTPRs are brought into force, that they might be removed in the not too distant future). According to the OECD’s October 2021 statement, UTPRs were envisaged to be implemented during 2024; the UK government previously indicated that, in the UK, the UTPR would not come in before 31 December 2024 at the earliest. The new Administrative Guidance now also provides for a transitional safe harbour that would limit the application of UTPRs until the end of 2026 by effectively disapplying them in respect of the parent jurisdiction provided that the jurisdiction has a corporate income tax rate of at least 20%. So, I remain sceptical as to the extent to which UTPRs will prove relevant in practice.

The draft legislation would also make a range of other changes to the MTT legislation. According to the accompanying policy paper these are “to ensure consistency with the OECD model rules and administrative guidance” and include a new election for simplified calculations in respect of constituent entities that do not have to be included in the parent’s accounting consolidation because they fall below a size or materiality threshold. Other changes include additional provisions in relation to partnerships on continuity following changes in the composition of the partnership and a “partnership payment notice” pursuant to which HMRC may require any partner to pay the partnership’s outstanding MTT. The new legislation would then permit the paying partner to “recover the amount from the other partners”; partners will want to consider how this may interact with the way in which they have agreed to share costs.

Other materials published by the OECD and in the UK

Alongside the second set of Administrative Guidance and the GloBE Information return, the OECD published further international tax reform materials, including a model article (plus commentary) for the Subject to Tax Rule and a public consultation on Amount B. A number of reports were also published, including on the state of tax transparency in respect of foreign-owned real estate and the sharing of information between tax and non-tax authorities (including where such information has been obtained through an exchange of information under a tax treaty).

Other draft legislation published by the UK as part of L-day includes a proposal for a merged regime for research and development tax reliefs that would apply to small and medium-sized as well as larger companies with the previously announced limitations on relief for overseas expenditure. The final decision as to whether or not this merger will be taken forward is, however, still outstanding; the position is to be confirmed at a future fiscal event (which probably means in the autumn).

In addition to the draft legislation, several consultation responses (including in respect of R&D reliefs) and new consultations were published. One new consultation concerns the Energy Security Investment Mechanism which should result in an early termination of the Energy (Oil and Gas) Profits Levy if oil and gas prices drop below a certain threshold.


slaughterandmay, tvelling