Pillar two moves a step closer

12 June 2023

Finance (No.2) Bill 2022-23, published on 23 March 2023, includes revised draft legislation to bring the OECD’s pillar two global anti-base erosion (GloBE) rules into UK law. This updates and builds on the draft legislation published in summer 2022, incorporating changes needed to reflect subsequent OECD technical and administrative guidance. In particular, it addresses the UK’s qualifying domestic minimum top-up tax (QDMTT) and the implementation of transitional safe harbour rules based on data contained in a group’s country-by-country (CbC) report.

Finance (No.2) Bill 2022-23 is expected to be substantively enacted by early July 2023, meaning that businesses should then be able to establish a clear understanding of the potential UK tax impact of pillar two for their financial reporting purposes. At the same time, its enactment also clearly demonstrates the challenges to businesses arising from each jurisdiction separately implementing rules designed to operate globally. Issues arising from drafting, timing and local context will need to be addressed for each relevant jurisdiction in which a business operates, alongside interaction with existing requirements such as CbC reporting.


Pillar two emerged from the work by the OECD and its Inclusive Framework of almost 140 countries to reform the international tax system to address the tax challenges arising from digitalisation and globalisation of the economy. It encompasses a set of rules proposed by the OECD to introduce a minimum global corporate income tax rate, which has been set at 15%, and will apply to multinational enterprises with more than €750m of annual global revenues. The regime will be introduced from 2024.

The OECD published its model rules for pillar two in December 2021, followed by an initial commentary. More recently, details of transitional and permanent safe harbours, a draft GloBE information return and agreed administrative guidance have all been issued. While most of the proposed rules are now published there are areas that remain incomplete or where more guidance is needed. More is expected over the coming months.

Draft UK legislation – key changes

The stated aim of the UK government is for UK legislation to adopt the model rules as intended by the OECD – there is no expectation of creating a distinct UK regime. To achieve this, the draft legislation needed to be updated to incorporate the new rules, additional information and clarifications published more recently by the OECD. These include:

  • the rules for a UK QMDTT;
  • the implementation of the three transitional safe harbour tests available in the first three years of the regime;
  • clarification of the treatment of blended controlled foreign company regimes, including the US global intangible low-taxed income (GILTI) regime;
  • further detail on the treatment of debt releases;
  • updates to the transitional rules concerning intra-group transfers and deferred tax assets; 
  • the treatment of partnerships under the GloBE income inclusion rule; and
  • administrative and filing requirements.

The first two of these benefit from a closer look.

UK qualifying domestic minimum top-up tax

The UK QDMTT aims to collect in the UK any additional tax arising under pillar two, which would otherwise be payable by an ultimate or intermediate parent entity in another tax jurisdiction. 

The key distinction is that the UK QDMTT will apply to all businesses that meet the pillar two size threshold, not just multinational enterprises as envisioned by the OECD’s model rules. This is likely to be for reasons of consistency, but will require large domestic businesses to also review their potential tax liabilities under the pillar two rules.

Using CbC report data under transitional safe harbour rules

The OECD has published transitional safe harbour rules, which offer an opportunity for entities in a jurisdiction to be exempted from the pillar two calculations and liabilities where size thresholds are not exceeded. To remove the need for detailed calculations, CbC data may be used.

The UK legislation adopts these safe harbours but requires CbC reports to be ‘qualifying’, in that they must be prepared in accordance with OECD guidance, filed in accordance with legislation implementing that guidance, and prepared on the basis of qualifying financial statements of the multinational group.

This is the first time CbC reports have been exposed to a potential tax authority audit process, rather than simply a review of information provided. Businesses relying on a CbC-based safe harbour will need to review and confirm their processes in relation to the preparation of their CbC report to ensure that the result is robust. 

Next steps – what does this mean for businesses falling within the rules?

The update of the UK’s draft legislation is another reminder that the implementation of pillar two is imminent and comparatively little time remains for businesses to prepare, and update their reporting systems as required.

It also highlights key challenges to businesses as they go through the implementation process and the first years of the new regime, including the following.

  • As was the case when CbC reporting was introduced, different territories may implement their pillar two rules at different times. This may mean that local rules reflect a different stage of development, based on what the OECD has made available at the time of adoption. The UK has updated its draft legislation but more change from the OECD is expected. The European Union (EU) directive to implement pillar two is still based on the OECD model rules alone, and so EU member states may decide to adopt in strict accordance with the directive, or based on the model rules and guidance available at the time of implementation.
  • Local drafting may lead to a different result from the strict application of the model rules. This may be unintentional or, as with the extension of the UK QDMTT to UK-only businesses, deliberate.
  • Pillar two is not something that can be addressed in isolation. Robust governance for a pillar two compliance process will rely on robust governance around financial reporting, CbC reporting and other tax processes.
  • Businesses should keep national implementation under review as they assess their tax risk under pillar two, and their implementation requirements. As legislation is substantively enacted, initial modelling is likely to be required to identify and quantify likely future tax exposures for financial reporting purposes. These areas should be actively addressed and tax teams should engage with stakeholders throughout the business to ensure that there are no surprises when the pillar two regime goes live from 2024.

For more information, please get in touch with Duncan Nott, Sarah Hall, Andrew Seidler or your usual RSM contact.