As published on: swlondoner.co.uk, Friday 1 September, 2023.
In a move widely anticipated by financial experts, the UK has taken decisive steps to implement the income inclusion rule (IIR) for accounting periods set to commence on or after 31 December.
This development was solidified with the inclusion of the legislation in Part 3 of the Finance (No 2) Act 2023, which garnered significant cross-party support, albeit not without some dissent.
The legislation was granted Royal Assent, marking its official transition into law on 11 July.
Distinguishing itself from several other countries, the UK’s approach to the IIR is characterized by its detailed charging provisions.
This is in contrast to the more common practice of adopting the OECD model rules as a reference.
A notable challenge arose when the government’s consultation on the draft legislation preceded the finalization of technical details at the Organization for Economic Cooperation and Development.
This sequence resulted in the legislation appearing outdated upon its enactment.
Recognising this, the government swiftly proposed amendments to the legislation just a week after its enactment.
These changes aim to mirror the approach detailed in the OECD Administrative Guidance.
These proposed amendments are slated for inclusion in the 2023–24 Finance Bill and are expected to be retroactively effective from the date of the principal legislation’s introduction.
In tandem with these developments, the government unveiled draft legislation for the undertaxed profits rule (UTPR), an initiative the OECD refers to as the undertaxed payments rule.
This too will find its place in the 2023–24 Finance Bill. While the exact commencement date for the UTPR awaits specification via treasury regulations, indications suggest a delay until at least the end of 2024.
The UK’s tax landscape will also see the introduction of the multinational top-up tax (MTT) under Pillar Two.
This will function independently of the regular corporation tax, leading to the UTPR’s establishment as a unique tax charge, distinct from the standard corporation tax deductions.
Additionally, the Finance (No 2) Act 2023’s Part 4 will usher in the domestic top-up tax (DTT), aligning with OECD principles.
Both DTT and MTT are set to be operational for accounting periods starting on or post 31 December.
Assessing the implications
The UK’s proactive stance ensures its position as an early adopter of Pillar Two initiative.
The ripple effects of these new rules hinge on the number of nations that follow suit.
A case in point is the UK’s economic relationship with Ireland, known for its 12.5% corporation tax on trading income.
Current indicators suggest that Ireland, in line with several EU nations, will adopt the IIR and QDMTT from 31 December, alleviating potential concerns for UK parent companies with Irish subsidiaries.
However, 2024 might present challenges for UK conglomerates with affiliations in Singapore and Hong Kong.
Both regions have signalled a delay in IIR implementation until January 1, 2025. Their corporate tax structures, under specific conditions, can lead to notably low effective tax rates.
The new regulations are also poised to reshape certain strategic frameworks favoured by UK conglomerates.
For instance, the IIR might influence multinational corporations that have leveraged the UK’s controlled foreign company rules for group financing activities.
Historical reforms, like the 2013 modifications to the CFC rules, allowed UK companies’ financing subsidiaries to benefit from approximately 5% tax on interest from inter-group loans, provided it didn’t undercut the UK tax base.
While these rules underwent further changes in 2019, the IIR’s introduction might curtail such benefits.
In the immediate future, the DTT’s impact appears minimal, especially considering the recent hike in the UK’s main corporation tax rate from 19% to 25%.
However, the UTPR is poised to redefine the advantages for foreign conglomerates, especially those achieving significant rate differences compared to the UK’s corporate tax.
Furthermore, UK branches of US-based firms will need to navigate the complexities of the UTPR in conjunction with the US’s GILTI regulations and the impending corporate minimum tax.