Is the UK wrong to implement a global minimum tax early?

The Adam Smith Institute has recently released a report questioning the UK’s decision to accelerate the implementation of a global minimum corporation tax rate, entitled “levelling down: how the global minimum corporate tax undermines the UK” (‘ASI report’). Whilst the name of the report may seem sensationalist for some tastes, there may be legitimate questions raised about the UK’s proposed path.

In 2021, the Organisation for Economic Co-operation and Development (OECD) reached a landmark global tax agreement to implement ‘Pillar 2’, which if implemented, will result in a global minimum corporation tax rate of 15% for multinational enterprises with global revenues  over €750m.

In the 2022 Autumn Statement, HM Treasury confirmed that in the 2023 Spring Finance Bill, the UK government will legislate for certain aspects of ‘Pillar Two’, with the draft legislation stating that the new rules will take effect in relation to accounting periods commencing on or after 31 December 2023. EU member states have also agreed to implement equivalent rules to take effect for accounting periods commencing on or after 31 December 2023.

The ASI report considers the potential adverse implication of a global minimum tax for domestic UK corporate tax policy, in particular how it could potentially impact some of the government’s key levelling up initiatives such as investment zones and freeports. Furthermore, the report raises concerns that the new rules could reduce tax competition. The ASI believes this can be beneficial in encouraging more economically efficient forms of taxation, by imposing a floor on corporate income tax for large multinational enterprises and could potentially lead to low-tax jurisdictions pursuing even lower rates of tax, to attract businesses which are not within the scope of the pillar two rules.

Regardless of the ideology of whether a global minimum tax is a good idea or not, the ASI report raises the question of the logic of the UK government accelerating implementation of the legislation and whether this could lead to a first-mover disadvantage.

The report makes the point that the negotiations and technical considerations for pillar two remain ongoing at the OECD – albeit, on the same day the ASI report was released the OECD also released its technical guidance to assist governments with implementation. It is worth noting that the UK government has already published draft legislation, before such OECD technical guidance was issued. Therefore, there is a risk that the UK’s legislation implementing these rules may be enacted before all aspects are finalised at the OECD level. This may result in some differences between the rules enacted in the UK and what is finally agreed at the OECD level, but the key aspects of the UK rules should align with what has already been agreed at the OECD level.

However, the ASI report emphasises that if the UK ends up being an early adopter of pillar two compared to other jurisdictions, it could be less attractive to large multinational enterprises, who could respond by restructuring their UK operations and potentially reducing the UK’s tax base. The ASI report states that, at the very least, early adoption is likely to result in a higher compliance burden for impacted businesses who have to implement the UK rules before undertaking subsequent transitions as other countries introduce their rules. At a time when HMRC seems to be under unprecedented pressure and given that some aspects of pillar two are yet to be finalised at the OECD level, it seems fair to challenge whether this is the best use of HMRC resources at this time.