Pillar Two Global Minimum Tax Starts Applying in the EU and UK

Both regimes implement the OECD/G20 Inclusive Framework's model rules, under which large groups should pay an effective tax rate of at least 15% in every jurisdiction where they operate. The European Commission explains that the EU rules apply to any large group, domestic or international, with combined revenues of more than €750 million a year and a presence in a Member State. The directive was approved by the Council on 14 December 2022 and published in the Official Journal on 22 December 2022.

How the top-up tax works

The effective tax rate is calculated jurisdiction by jurisdiction, by dividing covered taxes by qualifying income. Where the rate in a jurisdiction falls below 15%, a top-up tax is due to bring it up to the minimum. The Commission identifies three collection routes: the income inclusion rule, which taxes the parent; the undertaxed profits rule, a backstop; and a qualified domestic minimum top-up tax, which allows the jurisdiction where the low-taxed profits arise to collect the tax itself.

The UK has legislated for two of these. According to HMRC's policy paper on UK adoption of Pillar 2, the multinational top-up tax applies to groups with at least one member outside the UK and global annual revenues above €750 million in at least two of the previous four accounting periods. The domestic top-up tax applies to UK entities in groups above the same threshold, so that top-up tax on UK profits is collected in the UK. Section 278 of the Finance (No. 2) Act 2023 confirms that the domestic top-up tax has effect for accounting periods commencing on or after 31 December 2023.

Who is affected

The rules reach multinational groups headquartered anywhere in the world if they have entities in the EU or the UK and cross the €750 million revenue line. Government entities, international and non-profit organisations and certain pension and investment funds are excluded, in line with the Inclusive Framework agreement. Groups operating in low-tax jurisdictions, or benefiting from incentives that reduce their effective rate, are the most likely to face a top-up charge.

What happens next

For most calendar-year groups the first period in scope has now begun, although returns and payments fall due later. Tax teams will need data on covered taxes and qualifying income for each jurisdiction, which often sits outside existing financial reporting systems. Groups should also track how other countries adopt domestic minimum taxes during 2024, since a qualified domestic tax in one jurisdiction can reduce the top-up collected elsewhere.

Sources

• European Commission: Minimum corporate taxation
• GOV.UK: Multinational top-up tax and domestic top-up tax, UK adoption of OECD Pillar 2
• legislation.gov.uk: Finance (No. 2) Act 2023, section 278