United Kingdom releases draft Pillar Two legislation

April 2023

In brief

The United Kingdom released draft legislation on March 23, containing an income inclusion rule (IIR) and new draft legislation for a Domestic Minimum Top-up Tax, as part of the latest installment of the UK’s implementation of the OECD’s Pillar Two project. Both the UK IIR (‘Multinational Top-up Tax’) and the UK domestic minimum tax apply for accounting periods beginning on or after December 31, 2023.

Action item: The UK draft legislation generally is aligned with the OECD Model Rules, commentary and administrative guidance. The legislation includes provision for future amendment intended to ensure consistency with additional guidance to be published by the OECD. Since the UK’s implementation of the Pillar Two rules is fast approaching, groups within scope should take action now to analyze the potential impact on their group, as well as whether their current data models, systems, technology, and processes can respond to the requirements of the new regime.

Multinational Top-up Tax (UK IIR)

Draft UK Multinational Top-up Tax legislation previously issued in July 2022. The updated legislation includes additional provisions that were left as placeholders in the previous draft, as well as new provisions to incorporate the OECD Administrative Guidance (AG) issued in February 2023. Key items included in the AG (and reflected in the updated UK legislation) include the treatment of Blended CFC Regimes (e.g., US global intangible low-taxed income (GILTI)), treatment of debt releases, and updates to the transitional provisions regarding deferred tax assets and intra-group transfers.

Domestic Top-up Tax

The Spring Finance Bill also included new draft legislation for a UK domestic minimum tax. The legislation reflects that the UK domestic minimum tax is intended to be a ‘qualifying domestic minimum tax (QDMTT),’ meaning that it should operate to prevent further calculations being required (and tax being paid) under an overseas IIR or UTPR regime. The qualifying status is dependent on the OECD Inclusive Framework recognizing it as such, which will be subject to peer review and monitoring.

Observation: The UK domestic minimum tax appears to largely follow the UK IIR rules and is effective for the same periods, beginning on or after December 31, 2023. There are some specific adjustments that are required in order for the UK rules to qualify as a QDMTT, including confirmation that there is no allocation to the United Kingdom of taxes paid on UK profits under overseas CFC regimes and no allocation of overseas head office taxes to UK branches. Similarly, taxes paid in respect of overseas profits under the UK CFC regime are fully excluded from the calculations.

As previously announced, the UK domestic minimum tax applies not only to multinational groups but also to UK domestic groups and UK stand-alone entities of sufficient size (annual revenues of more than €750 million).

Transitional safe harbour

The draft legislation confirms that the transitional safe harbour provisions would apply to both the UK IIR and domestic minimum tax. As a result, detailed IIR/domestic minimum tax calculations would not be required if one of the three safe harbour tests are met in respect of a group’s operations in a jurisdiction for the first three years of the regime.

Observation: Critical to the application of the safe harbour is the requirement for an MNE group’s CbC Report to be ‘qualifying.’ In practice, we expect this may require changes to many groups’ existing processes and methodology for CbCR preparation and reporting. CbCR is coming more and more into the spotlight due to both the potential to reduce Pillar Two compliance obligations as well as the forthcoming EU public CbCR disclosures.

Administration and compliance

The proposed UK reporting processes for the UK IIR and UK domestic minimum tax include a one-time requirement for the ‘filling member’ of in-scope groups to register with HMRC within six months of the end of the first accounting period when they first come into scope of the rules. The filing member is the ultimate parent entity of the group, unless a nomination is made in respect of another group company. Notably, any such nomination must apply for the purpose of both the UK IIR and the UK domestic minimum tax.

Both an information return and a self-assessment return must be filed (and Top-up Tax paid) within 15 months of the end of the accounting period (18 months for the first period). As with the IIR, an information return is not required in the United Kingdom if a return already has been submitted to an overseas tax authority which has an information sharing agreement with HMRC.


The updated draft legislation confirms that the UK IIR and domestic minimum tax would apply for accounting periods beginning on or after December 31, 2023. UK groups will be monitoring closely the progress of the draft legislation to determine when it is ‘substantively enacted’ for financial statement purposes. This is likely to be June or July 2023 (prior to the UK parliament’s summer recess), although no set timetable has been published.

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Ken Kuykendall

Ken Kuykendall

US Tax Leader and Tax Consulting Leader, PwC US

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