What are the Government’s top-up tax plans and who will they affect?

Top-up tax plans

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Back in 2021, the governments of 135 nations struck a historic agreement under the auspices of the Organization for Economic Development and Cooperation (OECD) to cooperate on corporate tax policy.

The deal was part of a drive to tackle so-called base erosion and profit sharing (BEPS) – a tax planning strategy used by multinational corporations to exploit variations in tax rates around the globe to reduce their effective tax burden.

Enabled by the ease with which money can be moved around in a digital economy, BEPS has been singled out as a major vehicle for tax avoidance by big companies. It also leads to countries missing out on tax revenue from profits accrued within their jurisdiction, but then offshored elsewhere using complex corporate finance structures.

The OECD agreement, known as the Global Anti-Base Erosion Rules (GloBE), includes a provision for all signatories to set a minimum effective corporate tax rate of 15%. Also known as Pillar 2 of the GloBE agreement, the objective is to remove one of the key incentives for corporations to engage in profit sharing across national boundaries. If effective tax rates are below 15%, signatories have agreed to introduce top-up taxes accordingly.

As one of the signatories to the deal, the UK government has introduced a set of measures that will take effect during accounting periods that start on or after 31st December 2023. The proposals take the form of two Corporation Tax top-ups, one affecting domestic companies, the other affecting multinational companies with UK-based parent members.

In both cases, the top-up regimes will affect only groups with UK-based operations that have global revenues exceeding €750m.

How the top-ups will work

The domestic top-up tax will affect UK-based operations, whether the companies involved are UK or internationally-owned. Although the UK’s main rate of Corporation Tax is currently 25%, and therefore well above the OECD’s 15% base, through various allowances and reliefs, the effective rate paid by a company can fall below 15%. If this is the case, from 2024, corporations will be charged a top-up on UK profits to take their effective tax rate back up to the 15% minimum.

The multinational top-up will apply to UK-based parent companies that have an ownership interest in businesses operating overseas. When the tax paid on the group’s profits in a particular jurisdiction fall below 15%, the UK will be able to apply the top up to the parent group’s profits. This only applies where top ups are not applied locally, and is intended to cover the fact that not all nations have signed up to the GloBE initiative.

Administration of the top-up taxes will involve the following:

  • Calculation of the effective tax rate, or the rate of tax paid in a particular jurisdiction. For UK-based parent entities that fall under the multinational top-up scheme, this will involve aggregating the net income and the relevant taxes of all group members located in each jurisdiction that the group operates in, and from this determining the effective tax rate of each jurisdiction.
  • Calculation and adjustments of profits and losses. Again, this will take place at the level of individual entities within a group. For the multinational top-up, profits and loss figures will be taken from the consolidated financial statements of the parent. Adjustments will take into account certain permitted disposals such as dividends and capital gains, as well as certain tax credits, so they don’t impact the overall effective rate.
  • Allocation of taxes. For multinational companies, one of the most complicated parts of the process is determining which jurisdiction taxation on profits should be allocated to. Allocation rules are different for permanent establishments, tax-transparent entities, and controlled foreign company taxes.

Any company eligible for either domestic or multinational top-ups under the Pillar 2 rules must register with HMRC, and then take steps to handle calculations and reporting going forward.

These are significant changes for large enterprises operating in and out of the UK, with the UK government admitting implementation could see costs exceeding £8m for affected companies.

Speak to an expert

To get ahead on your preparations for the arrival of Pillar 2 top-ups, contact our Tax Planning team to discuss your eligibility and what steps you need to take next.

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