By Doug Connolly, MNE Tax
On January 11, the British government opened a consultation on how it plans to implement and administer in the UK the OECD model rules on the internationally agreed 15% aggregate minimum tax. The consultation also considers the introduction of a national minimum tax in the UK, as well as possible broader changes to base erosion and profit shifting (BEPS) measures.
In the consultation paper, the government describes how it proposes to translate the provisions relating to the application of the Global Anti-Base Erosion (GloBE) rules of the minimum tax, to the calculation of the effective tax rate, reporting and payment, and other matters.
The consultation is open until April 4, alongside the OECD’s work on commentary on the Model Rules which was published last month. Following the consultation, the UK government plans to publish a draft bill this summer.
The government plans to include legislation relating to the GloBE “income inclusion rule” in the Finance Bill 2022-23, which would then come into force on April 1, 2023. This should be in line with the agreement of October of the OECD’s Inclusive Framework, which sets a deadline by which jurisdictions must enact comprehensive minimum tax legislation in 2022, with the aim for the provisions to come into force in 2023.
The consultation also seeks comments on GloBE’s “undertaxed payments rule”, as well as the potential national minimum tax, but it says these provisions will not come into effect until April 1, 2024, at the earliest. .
The consultation does not cover the treaty-based “subject to tax rule” in the global minimum tax. The government notes that this rule will require the development of a model treaty provision, which is still under discussion within the OECD Inclusive Framework.
Application of GloBE Rules
The government states that it expects that in most cases additional tax attributable to UK multinational groups in respect of foreign entities in low tax jurisdictions will be charged to the ultimate parent entity at UK under the income inclusion rule. Once the income inclusion rule is introduced in the UK, UK-based groups will not be subject to the undertaxed payments rule, which foreign jurisdictions might otherwise charge to other group entities if the additional tax was not levied under the income inclusion rule.
In addition to ultimate parent entities, the UK income inclusion rule would also apply to UK-based intermediate parent entities of overseas-headquartered groups located in jurisdictions that have not introduced GloBE rules. .
The UK undertaxed payments rule would only apply to UK entities of groups having their registered office abroad and only where additional tax is payable for a foreign entity in the group and that additional tax does not is not collected in another jurisdiction under the income inclusion rule.
The consultation says the UK government plans to implement the rules “as close as possible to the OECD model rules”. It acknowledges that there may be limited areas where adaptations to UK law are required, adding however that it intends to keep these adaptations in line with the intentions of the OECD agreement. Still, the consultation asks – conceding limited leeway to deviate from agreed rules – whether the UK should consider not sticking so closely to OECD rules.
The income inclusion rule and the undertaxed payments rule would only apply to multinational groups with a turnover of more than €750 million. While the OECD agreement allows countries to apply the income inclusion rule to smaller groups in their jurisdiction, the UK government does not intend to do so. However, he asks for different views on this threshold for in-scope entities.
Calculation of the effective tax rate
Supplementary tax applies when a multinational group makes profits in a jurisdiction that are taxed below the minimum effective tax rate of 15%. In general, the effective tax rate for a jurisdiction is calculated by dividing the group’s total tax in a jurisdiction by its total profit in the jurisdiction.
Constituent entity income under the GloBE rules is calculated on the basis of financial accounting profit, with certain adjustments to reconcile material accounting and tax differences. Generally, for entities included in the group’s consolidated financial statements, profit or loss is calculated in accordance with the accounting framework of the ultimate parent entity.
The consultation asks for comments on the adjustments made to accounting profit under the rules and whether UK legislation could clarify existing uncertainties while still adhering to the model rules. The OECD model rules also deal with the measurement of deferred tax liabilities and deferred tax assets, and the consultation asks how UK law might address the uncertainty surrounding the temporary difference rules.
The government notes that the treatment of tax credits in the OECD model rules depends on their refundability. Generally, tax credits refundable within four years are treated as grants and are included in the income of the constituent entity, rather than being treated as tax reductions.
The consultation indicates that this distinction in the treatment of tax credits will ensure that the UK research and development (R&D) expenditure credit will continue to be effective in promoting R&D in the UK. Indeed, according to the government, the R&D credit will be treated as an addition to income rather than a tax reduction for the purposes of calculating the effective tax rate.
Declaration and payment
There will be a new registration process, explains the consultation paper, under which multinational groups in the UK will be required to notify the government that they fall within the scope of the GloBE rules. The government plans to set the deadline for registration at six to nine months from the end of the relevant tax year of the group – although it is seeking views on this deadline.
The consultation also raises questions about the method of reporting liabilities under the income inclusion rule or the undertaxed payments rule, i.e. whether this reporting should appear on the tax return. companies or on a GloBE statement. The government says it would prefer to have the data in the GloBE statement, but is still determining what level of information to require in that statement.
Given the complexity of calculating additional tax liabilities under the GloBE rules, the government expects it will be difficult to require quarterly installments, as is the case for corporation tax. Accordingly, he proposes that GloBE’s liabilities be paid annually rather than quarterly. He further suggests that the deadline for these annual payments should be aligned with that for corporation tax, ie nine months from the end of the financial year. Nevertheless, he invites comments on this deadline.
Remaining GloBE issues
The government notes that there have been discussions on a simplified calculation of the effective tax rate based on the country-by-country reporting of a multinational group. The consultation seeks feedback on how such a safe harbor should be designed, how to deal with timing differences within the safe harbor framework, and how to manage a group’s transitions between safe harbor and main GloBE rules.
The interactions of the global minimum tax with the other pillar of the OECD Inclusive Framework Agreement on profit attribution rules (i.e. pillar 1) should also be considered. Specifically, the rules should address how the share of profits allocated to market jurisdictions for tax purposes (Amount A) is taken into account for the purposes of GloBE effective tax rate calculations.
In addition, questions arise about the interaction of the US Global Intangible Low-Tax Income (GILTI) provisions with the GloBE rules. These questions will likely remain unresolved until the outcome of pending US legislation to amend GILTI provisions and bring them into line with GloBE rules becomes clearer.
National Minimum Tax and Broader BEPS Changes
The UK is also considering adopting a national minimum tax, based on the GloBE rules, which would impose an additional tax on UK entities of multinational groups. The aim would be to ensure that the additional tax liability arising from the GloBE rules falls on the UK government, rather than allowing a foreign jurisdiction to levy the additional tax. The government also argues that this approach would reduce compliance burdens for UK-based groups.
The government says the global minimum tax cannot replace existing BEPS measures, noting that they address different issues. Furthermore, he believes profit shifting patterns are likely to persist as the UK increases its corporate tax rate to 25% (10 percentage points above the 15% minimum). Therefore, the government does not plan a major overhaul of its BEPS anti-avoidance rules. However, it “is willing to consider reform” of measures to reduce compliance burdens and uncertainty.