United Kingdom: Pillar Two: draft Income Inclusion Rule (IIR) legislation and consultation response

On 20 July 2022, the UK government released the draft legislation on the Pillar 2 In­come Inclusion Rule (IIR) along with its response to the public consultation on the UK implementation of Pillar 2. The draft legislation is intended to be introduced in Finance Bill 2022-23 (expected to receive royal assent in early 2023) and will apply to account­ing periods commencing on or after 31 December 2023 (which is aligned with the proposed EU implementation).

In the consultation response, the UK government reiterated their view that the UK implementation of Pillar 2 rules should closely follow the OECD model rules. In areas where there is currently ambiguity, the UK intends to seek for resolution by working with its international partners as part of the OECD Implementation Framework to best ensure international consistency.

The response has also provided an opportunity for the UK government to share their position on the following key areas:

• Undertaxed Profits Rule (UTPR): still intended to be introduced, although an update on the timing and design of the UTPR to be released at a later date due to the impact of wider developments internationally.
• Domestic Minimum Tax (DMT): considers there are strong arguments in favour of a UK DMT to ensure that the UK exchequer receives any additional tax on UK economic activities applied from Pillar 2. The introduction will continue to be considered but, if introduced, it is envisaged that it would have the same threshold as the Pillar 2 rules and apply to both UK and foreign-headed MNEs (along with potentially wholly domestic groups).
• GILTI: notwithstanding any reform to the GILTI rules to be Pillar 2-compliant, it is expected that any tax paid under the current GILTI rules would be included in the covered taxes of the CFC for the purposes of both the IIR and UTPR. This contrasts with the hybrid mismatch provisions where specific rules were introduced to pre­vent GILTI from being regarded as a foreign CFC charge.
• Safe harbours: supportive of a safe harbour where there is a qualified DMT in place as this could provide real benefits to both businesses and tax administrations, and is committed to taking this forward with international partners. Also open to other safe harbours using either CbCR data or statutory tax rates, but considers it may be too difficult to gain a consensus.
• Tax Compliance Process: intention to work with international partners to produce standardised GloBE Information Return along with a centralised reporting system. From a UK perspective there will be a one-off registration requirement along with annual notification requirements in line with the model rules. The UK penalty regime is aligned with the existing corporation tax penalties.

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