Introduction of the new multinational top-up tax

HMRC has published draft legislation that would introduce a new tax on UK members within a multinational enterprise group (MNE). A top-up tax would be charged if an MNE has UK members (and at least one member based in another jurisdiction) and the group’s profits arising in the UK are taxed at below the minimum rate of 15%.

This is in accordance with the agreement to reform the international tax framework, which was made by the G20 and the OECD’s Inclusive Framework on BEPS on 8 October 2021. This measure forms part of what has often been referred to as the pillar two rules.

The draft legislation implementing these rules into UK law is lengthy (116 pages) and has been published alongside 239 pages of explanatory notes. The following is a short summary of the regime intended to apply to MNEs with fiscal years beginning on or after 31 December 2023.

MNEs in scope are those with global annual revenues exceeding €750m in at least two of the previous four accounting periods. Entities and groups exempt from corporation tax will generally be exempt from the regime.

To determine the amount of multinational top-up tax due for the period, the group will aggregate the net income (for accounts purposes) and the relevant taxes of all group members located in each jurisdiction that the group operates in. This will then be used to determine the effective tax rate for each jurisdiction.

Certain items of income will be excluded (eg, most dividends, capital gains or losses arising from the disposal of shares, and international shipping profits).

The starting point for calculating relevant taxes will be the current (and deferred) tax expense in the financial accounts. There will be adjustments, such as to exclude taxes associated with income excluded from the calculation of profit or loss and rules to allocate taxes attributable to permanent establishments, tax transparent entities, and controlled foreign companies.

Other than where a de minimis exclusion election is made (which will be possible where average revenue in a jurisdiction is less than €10m and average profit is less than €1m), a top up tax will be allocated to group members in that jurisdiction with reference to an “inclusion ratio”, so that the effective tax rate is topped up to 15%. There will also be a substance-based income exclusion when calculating the top up amounts.

By default, the ultimate parent company of the group will be responsible for filing a multinational top-up tax report to HMRC. A Globe Information Return will also be filed by the group. This return will contain information which shows how the top-up tax has been calculated in every jurisdiction.

New transfer pricing documentation requirements for UK businesses

The UK is to fully adopt the OECD’s guidance on a standardised approach to transfer pricing documentation, as set out in the OECD’s Base Erosion and Profit Shifting (BEPS) action plan.

The standardised approach consists of:

a master file containing standardised information relevant for all multinational enterprise (MNE) group members;
a local file referring specifically to material transactions of the local taxpayer; and
a country-by-country report (CbCR) for the largest multinational enterprise groups containing aggregate data on the global allocation of income, profit, taxes paid and economic activity among the tax jurisdictions in which it operates.

At present, the only prescribed documentation requirement in the UK’s transfer pricing code is that MNEs operating in the UK must prepare a CbCR. For accounting periods commencing on or after 1 April 2023, those businesses will also need to complete and file a master file and a local file.

From the same date, a summary audit trial will also need to be completed. This will be a questionnaire detailing the main actions undertaken in preparing the local file.

https://www.icaew.com/insights/tax-news/2022/Jul-2022/Draft-Finance-Bill-2022-23-enactment-of-OECD-rules-into-UK-law

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