On July 21, 2022 Her Majesty’s Treasury (HM Treasury) published the Summary of Responses to its public consultation on implementing Pillar 2, of the OECD’s Two-Pillar solution. The document summarises the returns received to the consultation on implementing Pillar 2 in the UK, and sets out the government’s response to the themes raised.
The consultation period ran from January 11, 2022 to April 4, 2022. A total of 51 written responses were submitted to the consultation. In the press release in which the publication of the Summary of Responses was published the HM Treasury states that the government welcomes further representations until September 14, 2022.
Below we will discuss a selection of items that we found interesting when we were scanning through the Summary of Responses.
Implementation date
Almost all respondents raised concerns about the timing of UK implementation. There was a clear consensus that UK implementation should be from the end of 2023. There were various reasons cited for this, which included:
• The challenge of developing systems to comply with a measure as complex as the GloBE Rules in less than 18 months.
• That there is significant outstanding work in the Implementation Framework which is still to be completed.
• That other countries have shifted their implementation timetables to at least the end of 2023. Respondents identified that this, combined with the reasons above, could lead to uncoordinated outcomes and could also risk making the UK less competitive.
Related to timing, respondents also thought the government’s proposal to apply the IIR to accounting periods which straddled the April 1, 2023 commencement date would create significant added complexity.
From the Government response
The UK government understands introducing these rules from April 2023 could risk requiring businesses to adapt their systems in advance of this, and that doing this while these issues are still under discussion would create significant challenges and uncertainty, that would risk undermining the long-term effectiveness of Pillar 2.
The UK government has therefore decided to apply the IIR to accounting periods beginning on or after December 31, 2023 and it intends to legislate the IIR in Finance Bill 2022-23 so businesses have as much certainty as possible on the requirements in the UK legislation, and the maximum time possible to prepare.
Question 10: Do respondents have views on the rules allocating profits between jurisdictions?
In this respect the Summary of Responses contains an interesting remark: “Respondents also noted it was important to set out the interaction between Pillar 1 and Pillar 2”. This is a remark I have heard several times before when discussing the Two-Pillar solution
Question 12: Do respondents have views on the rules on Covered Taxes and their assignment?
There were also a number of comments received about the computational rules for determining and allocating covered taxes. Respondents thought the Model Rules are unclear on which financial statements should be used to compute covered taxes, and in particular deferred tax
Further guidance was requested on how to calculate the amount of CFC charges which are accrued by a Constituent Entity owner in respect of a CFC. Respondents noted that certain regimes allow the pooling of foreign tax credits and mean different approaches could be taken to calculating the CFC charge of an individual CFC.
Question 13: Do respondents have views on how rules on timing differences work including whether there are any uncertainties around how the rules operate that could be further clarified in domestic law?
General
The rules to address timing differences attracted a large number of responses. Some comments focussed on perceived problems with the Model Rules and areas where respondents felt changes to the policy were needed, while others requested additional clarification on the detailed rules.
From the Government response
The government agrees that additional guidance is required on the calculation of the Effective Tax Rate (ETR), and welcomes the points raised in the response to the consultation.
The government will be working closely with international partners to produce this guidance, including the extent to which entity accounts can be used to update estimates. Another issue of priority consideration is clarification on the circumstances when the consolidated accounting treatment or treatment in the entity accounts should be used to compute GloBE Income.
Losses
Many respondents were opposed to Article 4.1.5, which charges a top up when local tax losses exceed the loss in the financial accounts as a result of permanent differences between the GloBE Rules and the local tax base. Respondents considered this provision was not in line with the overarching policy objectives of the GloBE Rules to impose a minimum tax on the profits in a jurisdiction. This is because Article 4.1.5 could result in top up taxes being charged when the MNE made a loss in a jurisdiction. Some respondents also noted that MNEs may lose the benefit of the substance-based carve-out as a result of Article 4.1.5.
From the Government response
The government understands the concerns raised by businesses around Article 4.1.5 potentially leading to top up taxation in a period in which the MNE made a loss in a jurisdiction. While the basic mechanism of this Article is necessary, the government will explore potential options that could address issues relating to the timing of the charge and the ability to access the carve-out. It will explore these issues with international partners and, separately, consider whether concerns could be mitigated by amending the existing UK domestic tax regime.
The valuation Deferred Tax Assets and Deferred Tax Liabilities
Respondents were also concerned by the requirement in Article 4.4.3 to value Deferred Tax Assets and Deferred Tax Liabilities at the minimum rate rather than the local tax rate. Respondents argued this could result in top up charges when tax losses are used because restricting the deferred tax impact on the numerator to 15% would mean the group cannot rely on a higher local tax rate to shelter permanent differences. Some respondents also thought the recast to the minimum rate could create additional volatility in the ETR which could result in top up charges even though a group was highly taxed over time.
From the Government response
On the recast of Deferred Tax to the minimum rate, the government notes the concerns businesses have raised. However, it is important to note that the tax above 15% is not lost, and that the recast only affects when this additional tax is recognised. It is not clear this is necessarily detrimental to business as the outcomes will depend on the profile of tax and profit in the affected years
The government also does not consider changes on the recast are feasible. The recast was agreed as part of negotiations in which a number of countries expressed significant concerns about deferred tax liabilities being recognised at the headline CIT rate. It would also be difficult to revisit the recast without making wider structural changes to the rules to address timing differences.
The recapture mechanism that requires the ETR to be recalculated when a Deferred Tax Liability has not reversed within 5 years
Finally, some respondents were concerned by the recapture mechanism that requires the ETR to be recalculated when a Deferred Tax Liability has not reversed within 5 years. Some responses questioned the need for this recapture mechanism, whereas others focused on the potential complexity involving in tracking when Deferred Tax Liabilities reverse.
From the Government response
The recapture mechanism is an important provision in the Model Rules and was essential to building consensus around the use of DTA to address timing differences. The government recognises the tracking of individual timing differences creates practical challenges for some businesses and will look to ensure there is appropriate Administrative Guidance, so it is clear what is expected. However, the rule by its nature does necessitate items to be tracked individually.
Question 20: Do respondents have views on how the transition rules work, including whether there are any uncertainties around how the rules operate that could be further clarified in domestic law?
Some respondents were opposed to the provision in Article 9.1.3 that prevents a step up in the carrying value of an asset when it is transferred intra-group in the transition period. They thought this would inhibit the transfer of assets from a low-tax to a high-tax jurisdiction and questioned the policy rationale for this provision, arguing this should be viewed as a positive behavioural change that the GloBE Rules were intended to encourage.
They also thought the Article was poorly targeted as it does not distinguish between the purpose for the transaction and applies equally to transactions that were taxed in the selling jurisdiction as a result of the transfer. They thought the provision would consequently lead to significant double taxation when an asset is transferred between high-tax jurisdictions.
There was also uncertainty about the application of Deferred Tax Accounting to transfers affected by Article 9.1.3.
Additionally, some respondents thought there should be a time limit to restrict the application of 9.1.3, in addition to the specific date of 30 November 2021. They thought it would be inappropriate for the 30 November 2021 date to apply to groups which come into scope of the GloBE Rules in subsequent years.
From the Government response
The government recognises there is currently significant uncertainty about the effect of Article 9.1.3 and in particular the Deferred Tax consequences of this Article, and that this uncertainty is affecting current business decisions. It agrees there is a need for further guidance on this point as part of the Inclusive Framework and will look to expedite this with international partners as part of the Implementation Framework as soon as possible.
Question 27: Do respondents have views on making UK constituent entities joint and severally liable for any (UK) GloBE debts?
From the Government response
government shares the view that the reporting obligations should be coordinated between jurisdictions, and that duplicate reporting to multiple jurisdictions should be avoided as far as possible. It will therefore be promoting work with international partners to produce a standardised GloBE Information Return, and a system for centralised reporting so that a MNE should only need to file to a single jurisdiction.
The government understands that businesses will require lead in time to collect the necessary information and adapt systems, so it will look to ensure this work is treated as a high priority in the Implementation Framework.
You can find the full text of the Summary of Responses as published by the UK HM Treasury here.
Copyright – internationaltaxplaza.info
Follow International Tax Plaza on Twitter (@IntTaxPlaza)