Policy paper

Multinational top-up tax and domestic top-up tax — amendments

Published 22 November 2023

Who is likely to be affected

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

General description of the measure

Multinational top-up tax and domestic top-up tax are the UK’s adoption of the income inclusion rule and domestic minimum top up tax rule in the Global Anti-Base Erosion (GloBE) Rules agreed by the UK and other members of the G20/Organisation for Economic Co-operation and Development (OECD) Inclusive Framework on base erosion and profit shifting.

This measure is comprised of amendments identified from stakeholder consultation and those necessary to ensure that UK legislation remains consistent with administrative guidance to the GloBE rules agreed by the UK and other members of the Inclusive Framework.

Further amendments may be introduced in the future to reflect subsequent administrative guidance agreed by the UK as part of the Inclusive Framework.

Policy objective

This measure is part of pillar two of the two-pillar solution to reform the international tax framework, which was developed by the UK and other members of the Inclusive Framework.

It ensures that UK legislation remains consistent with the agreed GloBE rules, commentary and administrative guidance.

Background to the measure

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

The agreement was followed by a consultation on the UK implementation of the GloBE rules, which closed in April 2022. The government introduced multinational top-up tax and domestic top-up tax in Finance (No.2) Act 2023.

Detailed proposal

Operative date

The measure will take effect for accounting periods beginning on or after 31 December 2023.

Current law

Multinational top-up tax and domestic top-up tax were 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

Part 3 and Part 4 of Finance (No.2) Act 2023 will be amended to facilitate the effective implementation of the GloBE rules, commentary and administrative guidance as these continue to evolve. These amendments relate to:

• partnerships, including partnership liabilities and the rules for where there is a change in the membership of a partnership
• charging permanent establishments of intermediate and partially-owned parent members
• the revenue threshold test and definition of revenue
• adjustments required to account for errors in prior accounting periods
• adjustments for pension fund expenses where funds are in surplus
• the definitions of qualifying refundable tax credits, marketable transferable tax credits and tax credits received by a tax equity partnership — the amendments also explain how to value these types of tax credits, and how the profits and covered taxes should reflect each type of tax credit
• adjustments for companies in distress
• adjustments for insurance and life assurance businesses
• the push down of profits from a main entity to a permanent establishment
• the election to spread certain capital gains over 5 years
• flow-through entities, including the definition and location of a flow-through entity
• the treatment of tax benefits provided to an investor through certain types of flow-through entities — this includes the definition of qualifying flow-through tax benefits and provisions to determine the amount of the tax benefits qualifying for this treatment
• Controlled Foreign Companies (CFC), including the calculation of the effective tax rate for a jurisdiction when a blended CFC regime also taxes entities that are not members of the multinational group
• The creation of a special foreign tax asset when a member sets a domestic loss against foreign income included under a CFC regime and is consequently not able to credit foreign taxes paid on that income — this asset is only created if the member is permitted to increase the amount of foreign tax credits it is able to credit against a tax liability in a subsequent period in order to recover the value of the domestic loss it used in the initial period
• the calculation of eligible tangible assets and payroll costs within the substance-based income exclusion — this includes a power to make further provisions concerning the substance-based income exclusion
• the valuation of assets where assets are transferred within the group
• the allocation of profits and taxes to investment entities, including the availability of elections.
• a simplified calculation for non-material members — the profits and covered tax balance of a member do not need to be adjusted if its financial results are not consolidated due to its size or lack of materiality
• the conditions to be treated as an investment entity
• the currency that should be used to carry out calculations, and the rates to be used to convert amounts relating to the threshold test and for the conversion of any top-up amounts into sterling
• provision to disregard another jurisdiction’s qualified domestic top-up tax if its enforceability is in question
• amendments to the power which permits amendments to the legislation to ensure consistency with the GloBE rules, to increase flexibility as to its use
• repayments of overpaid tax and repayment interest
• the adjustments to the value of deferred tax assets where there is an intra-group transfer before entry into the multinational top-up tax and domestic top-up tax regimes
• the definition of a Country-by-Country Report (CbCR) and the transitional CbCR safe harbour
• the introduction of the qualified domestic top-up tax safe harbour — where members of the group are subject to a qualified domestic top-up tax in another jurisdiction that has been specified in regulations as meeting the safe harbour conditions, the filing member can make an election so that those members are treated as having no top-up tax amounts for the purposes of calculating multinational top-up tax — a separate election can also be made for any non-standard members of the group, for example joint venture groups, investment entities and minority owned members
• a new transitional reporting election, which allows simplified jurisdictional and entity-level reporting during the first years of the regime
• the allocation of top-up tax arising on an investment entity when standard members have not made a profit
• provision to treat certain vehicles used in securitisation transactions as excluded entities for domestic top-up tax purposes, and to treat those vehicles as deconsolidated for domestic top-up tax purposes notwithstanding that they may be included in consolidated accounts
• the transition rules for members that are subject to domestic top-up tax before they are subject to GloBE rules in another jurisdiction
• excluded dividends from protected cell companies
• other minor corrections and technical changes to Part 3, Part 4 and Schedules 14 to 17 of Finance (No.2) Act 2023

Summary of impacts

Exchequer impact (£ million)

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

This measure is not expected to have an Exchequer impact.

Economic impact

The measure is not expected to have any significant economic 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 have a negligible impact on multinational enterprises with global revenues in excess of 750 million euros per annum and how they calculate their multinational top-up tax and domestic top-up tax liabilities.

One-off costs could include familiarisation with the amendments and their impact on the group’s top-up tax liabilities. Continuing costs could include ensuring the group’s GloBE calculations are performed consistently with the amended legislation.

Customer experience is expected to remain broadly the same as it does not alter how businesses would interact with HMRC.

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