Pillar two - hard work lies ahead

18 March 2022

The OECD released its model rules for the implementation of pillar two of its proposed solution to address the tax challenges arising from the digitalisation of the global economy on 20 December 2021. Pillar two is essentially a set of global anti-base erosion (GloBE) rules to ensure large multinational enterprises (MNEs) pay a minimum level of 15 per cent tax on the income arising in each jurisdiction in which they operate.

The model rules aim to provide governments with, ‘a precise template for taking forward the two pillar solution… agreed in October 2021 by [141] countries and jurisdictions under the OECD/G20 Inclusive Framework on BEPS.’

Pillar two timetable

The OECD’s pillar two implementation timetable indicates that jurisdictions should prepare and enact the necessary legislation by the end of 2022, ready for implementation in 2023. This is an ambitious timeframe for the implementation of any new legislation, but when this is coupled with the fact that the operation of pillar two depends on all 141 jurisdictions implementing the rules consistently, it will be a real achievement for the OECD if the pillar two framework is implemented on time and with minimal variances between jurisdictions.

An even greater success will be achieved if the OECD is able to secure an effective and agreed dispute resolution mechanism, as well as ensuring that jurisdictions do not start to modify and amend their own pillar two regulations following implementation in 2023.

For its part in this global process, the UK government issued a consultation on the implementation of the pillar two rules in the UK on 11 January 2022, which closes on 4 April 2022. This consultation is a substantial document which poses 37 separate and wide-ranging questions – another indication of the complexity of the subject matter. In it, the Government confirms that it anticipates that the parts of the pillar two legislation relating to the so called income inclusion rule (IIR) would be included in Finance Bill 2022-23 and are expected to have effect from 1 April 2023.

The consultation also requests views on the UK implementation of a related undertaxed profits rule (UTPR) and on introducing a domestic minimum tax (DMT) in the UK to complement the pillar two rules, but anticipates that both the UTPR and the proposed DMT would be introduced from 1 April 2024 at the earliest.

A further aspect of pillar two, the ‘subject to tax rule’, which is intended primarily to enable developing countries to levy additional withholding taxes on certain payments, such as interest and royalties, if those payments are undertaxed in the payee jurisdiction, is not covered by the consultation as the OECD’s model provisions are not yet published.

Talking points

The consultation focuses on a number of practical issues in connection with the enactment of the IIR legislation, which it is seeking responses to, including the following key areas.


It is proposed that the IIR will only apply to MNEs (broadly groups comprising all entities that are included in the consolidated financial statements of the ultimate parent entity) whose consolidated annual revenues are greater than €750m in at least two of the previous four years. It will apply to all such MNEs that are headquartered in the UK, with the UK IIR applied to the ultimate parent entity of the group, and UK intermediate parent entities of foreign headquartered groups where the ownership of those UK entities includes minority investors holding a share of more than 20 per cent or the parent entities are located in a jurisdiction that has not introduced pillar two rules. To achieve the intention to ensure a minimum effective 15 per cent tax rate on the income arising in each jurisdiction, foreign permanent establishments will be treated as separate entities, whilst governmental entities, international organisations, non-profit organisations, pension funds and certain investments entities will be excluded from the rules.


Similarly to country-by-country reporting, it is intended that an MNE will file its GloBE return with the tax authority in the jurisdiction of its ultimate parent entity, and that that jurisdiction will then exchange the GloBE return with other tax administrations. In-scope MNEs will be required to submit their GloBE calculations in a standardised format which is to be developed by the OECD during 2022.

The model rules indicate that the submission deadline for the GloBE return must be within 15 months of an entity’s financial reporting period end, with an extension to 18 months in the first year of application, and the consultation suggests that the UK will follow this approach. The consultation also indicates that groups will be required to notify HMRC that they are in-scope and the Government is considering a period of six to nine months from the entity’s or group’s consolidated financial reporting period end for MNEs to register and provide details of which entity will be submitting a GloBE return and in which jurisdiction.

Calculation and collection

The consultation also poses a number of questions in terms of how the relevant top-up tax amounts under the GloBE rules should be calculated, allocated and collected, including:

  • how accounting profit and the adjustments required to determine GloBE profits as well as the tax thereon should be calculated in establishing the relevant effective rate of tax borne;
  • how tax timing differences, losses and tax credits should be dealt with in those calculations;
  • how taxes borne should be allocated to particular entities and jurisdictions;
  • which taxes are in scope; and,
  • the collection mechanism.

However, due to the nature of the international agreements necessary for the implementation of pillar two, in practice the UK government will have very limited scope to diverge from the OECD’s model rules regarding calculation and allocation.

Next steps

The UK consultation document addresses many of the key issues that both the OECD/G20 Inclusive Framework countries and businesses will need to consider and address over the coming months prior to implementation.

The UK and other G7 countries led from the front in reaching a global consensus regarding the design of pillar two, so it may be part of their role to ensure and maintain the global coherence of pillar two post-implementation.

For more information, please get in touch with Suze McDonald or your usual RSM contact.