MTT01020 - Introduction: Background to Pillar Two

Pillar Two has its origins in a 2013 OECD report entitled Addressing Base Erosion and Profit Shifting. Under a G20 mandate, it outlined 15 actions to be taken to address these issues. Action 1, Addressing the Tax Challenges of a Digital Economy, was elaborated in a 2015 paper.

In 2019, the G20/OECD Inclusive Framework announced plans to further develop a proposed two-pillar solution to address the tax challenges arising from the digitalisation of the economy. Pillar 1 consists of a partial reallocation of taxing rights between territories, in order to adapt the international tax system to better reflect the modern global economy. Pillar Two consists of the implementation of a global minimum corporate tax rate.

In October 2021, the territories of the Inclusive Framework reached an agreement on Pillar Two to ensure that the largest MNEs will be subject to a minimum rate of tax, by enacting a global minimum corporate tax rate of 15%.

On 20 December 2021, the OECD released the Pillar Two Model Rules, which set out how the Income Inclusion Rule (IIR) and its backstop, the Undertaxed Profits Rule (UTPR), will operate. Further details were provided in the Commentary to the Model Rules which was published in early 2022.

Multinational Top-up Tax (MTT) implements the IIR in the UK. MTT, in implementing the IIR, seeks to reduce the incentive for the largest MNEs to shift profits to low- or no-tax territories, and to restrict harmful tax competition between territories. These aims will be achieved by applying a top-up charge where a MNE has an Effective Tax Rate (ETR) below the minimum of 15% in each territory in which they operate.

Example

The ABC Multinational group consists of three companies:

  • A Ltd is the ultimate parent and is located in the UK.
  • B Ltd is an intermediate parent and is located in Country Y, which has implemented Pillar Two, including an IIR.
  • C Ltd is located in Country Z, which has no Pillar Two rules.

C Ltd has £100m profits in an accounting period, on which it pays tax at an effective rate of 13%. Under the Pillar Two rules, a top-up amount of up to £2m will be charged to bring it to the effective rate. This amount will be collected by the UK, through MTT, as the UK is the territory in which the ultimate parent is located.

If the UK had not implemented MTT, the amount would have instead been collected by Country Y, the territory of the intermediate parent.

If Country Z had implemented the Pillar Two rules, including a domestic minimum top-up tax, it would have been able to collect the top-up amount itself.