HMRC have published a policy paper, 'Multinational top-up tax and domestic top-up tax — transitional country by country reporting safe harbour anti-arbitrage rule'. The draft legislation aims to prevent taxpayers from engaging in avoidance arrangements to benefit from the transitional Country-by-Country Reporting (CbCR) safe harbours.
- The UK's adoption of the Multi-national Top-Up Tax (Income Inclusion Rule) (MTT) and the Domestic Minimum Tax (DMT) were introduced in the Finance (No2) Act 2023. These measures took effect for accounting periods beginning on or after 31 December 2023.
- The top-up tax will be charged on UK parent members when a subsidiary is located in a non-UK jurisdiction, and the group’s profits arising in that jurisdiction are taxed below the minimum rate of 15%.
- The DMT ensures UK subsidiaries of overseas groups are subject to the same de-minimis level of tax of 15%.
- The MTT and DMT will apply to large groups with over €750 million in global revenues.
What are transitional CbCR safe harbours?
- The transitional CbCR safe harbours are temporary measures designed to exempt a group's operations in lower-risk countries from the compliance requirement of preparing full Pillar Two calculations.
- The safe harbours are applicable for years beginning on or before 31 December 2026.
Why is the anti-arbitrage rule needed?
- The Organisation for Economic Co-operation and Development (OECD) Inclusive Framework has identified avoidance transactions designed to exploit differences between the tax and accounting rules, allowing groups to qualify for the transitional CbCR safe harbour where they would otherwise not be eligible.
What is changing?
From 14 March 2024:
- The Finance (No.2) Act 2023 will be amended to introduce an anti-arbitrage rule to the Transitional CbCR Safe Harbour.
- The additional provisions aim to prevent Multinational Enterprises (MNEs) from benefiting from the safe harbour where they have entered certain hybrid arbitrage arrangements.
- Paragraph 6A and 6B will be introduced to Schedule 16, Part 2 of Finance (No 2)Act 2023.
- These paragraphs adjust the calculation that determines access to the transitional safe harbour when a group member has incurred a disqualifying expense.
- Any such expense is required by the new rule to be added back in computing the aggregate profit or loss of the standard members of a group in a territory.
- This adjustment will reduce the group’s Effective Tax Rate (ETR) in that territory for the Transitional CbCR Safe Harbour test.
- This amendment ensures that UK legislation remains consistent with OECD administrative guidance on the Global Anti-Base Erosion (GloBE) rules agreed by the UK and other members of the Inclusive Framework.
Will it affect me or my clients?
- MTT and DMT are unlikely to affect typical UK-based Small and Medium-Sized Enterprises (SMEs) or their owners as they are probably too small.
- The measure primarily affects large multinational groups with global revenues exceeding €750 million.
- The measures are primarily aimed at large multinational companies and have been designed to minimise the impact on SMEs.
- Taxpayers categorised as 'Wealthy' or 'Mid-sized' by HMRC should also be aware of the changes even if it does not currently impact them.
- Companies who consider themselves to be an SME, but are part of a larger multi-national group, should check the group size as they may inadvertently be included in the rules.
Useful guides on this topic
BEPS & Diverted Profits Tax (for SME owners)
What is BEPS? What is Diverted Profits Tax? Will either of these affect me or my SME clients?
Finance Act 2023-2024: tax update & rolling planner 2023-24
This rolling planner tracks the key tax announcements that impact the 2023-24 tax year and beyond. This planner is updated on an ongoing basis.
Finance (No.2) Act 2023: Contents
Contents of Finance (No. 2) Act 2023: the act received Royal Assent on 11 July 2023
External Links
Policy paper: Multinational top-up tax and domestic top-up tax — transitional country by country reporting safe harbour anti-arbitrage rule
