Pillar Two and domestic minimum taxes – what might the UK Government do?

18 August 2022

Those following the G20/OECD Inclusive Framework for a global minimum tax will know that a late addition to the Pillar Two Model Rules allows countries to establish domestic minimum tax (DMT) regimes.

A DMT regime that is consistent with the Model Rules, will be classified as a qualified domestic minimum top-up tax (QDMTT) and become the first in line to receive any Pillar Two top-up revenue due from low-taxed entities located in its jurisdiction. Absent a QDMTT, that same top-up revenue would go to another jurisdiction as determined by the Pillar Two rule order.

We have previously commented that for this reason QDMTTs may prove popular, and many countries (including Canada, Ireland, Hong Kong, Singapore, and Switzerland) are considering the introduction of QDMTT regimes.

A consultation document published in January 2022 confirmed that the UK too was considering a DMT. The UK Government’s policy rationale was twofold - revenue protection and simplification.

The UK Government has now published consultation responses and this document provides some useful insight into current thinking about a UK DMT regime.

Most importantly, the UK Government maintains its belief that there are strong arguments in favour of a UK DMT. These arguments are revenue based, namely that a domestic tax would ensure any top-up tax due under the Pillar Two framework from UK economic activities and profits would go directly to the UK Exchequer, rather than to another country.

The document acknowledges that the simplification case for a UK DMT is less clear cut. While the Government thought that a domestic tax would significantly reduce compliance and administrative burdens for multinational groups by preventing them from being subject to top-up taxes in other countries, there was no consensus among respondents to the consultation that this would actually be the case. Unsurprisingly, respondents thought that the question whether a UK DMT would increase or reduce overall compliance costs would depend on its design, the extent to which it aligned with the OECD Model Rules, and whether or not international agreement could be reached on safe harbours from the income inclusion rule (IIR) and undertaxed payments rule (UTPR) for jurisdictions with a QDMTT.

There was greater support for the Government’s proposal that a UK DMT should only apply to entities within the scope of Pillar Two and that groups with less than €750m of global consolidated revenue should not be caught. On the issue of whether a UK DMT should apply to all Pillar Two in-scope groups or only to groups headquartered in the UK, respondents generally thought that a UK DMT should apply to both domestic and foreign-headed groups, but that wholly domestic groups should not be liable to a UK DMT. We have previously noted that excluding wholly domestic groups from a DMT charge would represent a point of difference with EU countries as the draft EU directive (discussed further here) applies the Pillar Two rules to domestic large (>€750m euro) groups as well as multinational entities. One point picked up by some respondents to the consultation was that it might be necessary to extend any UK DMT to wholly domestic groups to ensure compatibility with the UK double tax treaties. Presumably this is on the basis that some double tax treaties contain non-discrimination articles prohibiting more burdensome taxation on enterprises owned or controlled by non-residents. The Government has promised to give further consideration to the costs and merits of applying a UK DMT to wholly domestic groups.

On calculation of charge, most respondents thought that the computation of a UK DMT should closely adhere to the Pillar Two Model Rules, emphasising the importance of any UK DMT being treated as a QDMTT. There were mixed views on whether a UK DMT should be reported using existing corporation tax mechanics or whether it should be integrated within the reporting framework being developed for the Pillar Two rules.

The January consultation document had proposed that any UK DMT would apply, at the earliest, to accounting periods ending on or after 1 April 2024. The Government received relatively few responses on this point, but those that did respond mostly thought that the introduction of a UK DMT should be aligned with the implementation date of the UTPR internationally.

The UK Government has confirmed that it will continue to consider the merits of enacting a UK DMT. Given the strength of the arguments on revenue protection it seems highly probable that legislation for a UK DMT will appear, but it is hoped that the government will take on board respondents concerns about additional compliance costs. It is reassuring to note that in considering whether or not to introduce a UK DMT, the government has confirmed that it will take into account progress on:

  • implementation of IIRs and UTPRs in other countries;
  • the process for determining whether a DMT will be classified as a QDMTT; and
  • whether there will be a safe harbour from the IIR or UTPR when a jurisdiction has enacted a QDMTT.


These factors will be key for any UK DMT to meet the Government’s revenue protection and simplification objectives. Given the slower than hoped for progress in implementing the Pillar Two rules across the EU and in the US, taking further time to get any new UK rules right seems wise.

Keep up to date with the latest developments and other useful information on our OECD BEPS 2.0 hubpage.

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