Treasury confirms timeline for the UK's implementation of the OECD Pillar 2 Tax settlement
In October 2021, over 130 countries in the OECD Inclusive Framework reached an historic agreement on a two-pillar solution to reform the international tax framework in response to the challenges of digitalisation.
techUK and its members welcomed this agreement having long advocated for a multilateral solution for the taxation of the globalised digital economy. We also applaud the UK’s active role in negotiating the international political agreement as well as working toward the development of the technical model rules and multilateral instruments.
The UK’s domestic implementation of Pillar 2
The October 2021 agreement included a timetable setting the goal for countries to introduce Pillar 2 rules into their domestic legislation in 2022, with the expectation to be effective in 2023. In accordance with this, the UK initially planned to apply these rules in Spring 2023, well ahead of the expected implementation date in other nations.
To achieve this, the UK Government consulted with stakeholders on the domestic application of the OECD Model Rules as well as on a series of wider implementation questions.
In response to this consultation, techUK advised government to push the implementation date to 2024 in order to align with other jurisdictions such as the EU. Implementing Pillar 2 before its major trade partners puts UK companies at a competitive disadvantage in the global market and exposes them to the risk of double taxation.
These rules are highly complex, with companies requiring substantial time and resources to develop, build, and test internal compliance systems. techUK members believe it is important for jurisdictions to provide certainty for businesses to enable complex systems modifications as well as provide a transition period to implement the new systems. Therefore, sufficient time should be allowed to ensure proper and consistent implementation of the global rules.
techUK members also believe that consistency with the OECD model rules across jurisdictions is critical for efficient and successful implementation. Fragmented implementation will result in risks of double taxation and unnecessary disputes. Businesses will benefit from higher levels of consistency across jurisdictions and contributing to a more effective collection of the tax.
The Government’s response to the consultation on Pillar 2 implementation
In June 14th 2022, in a letter from the Financial Secretary to the Treasury, Lucy Frazer MP, the UK Government recognised that one of the points raised most consistently across more than 50 responses to the consultation was the need for a sufficient lead-in time before the rules are implemented in the UK and has now confirmed that UK Pillar 2 legislation will first apply to accounting periods beginning on or after 31 December 2023.
That is in recognition of the complexity of the rules, the fact that there remain important policy and administrative issues being discussed within the OECD Implementation Framework, and the need for businesses to take steps and build systems to be able to ensure rule compliance. The Government also recognised that seeking to implement the rules ahead of the likely implementation date in other countries, would compromise the long-term success and sustainability of the regime and put UK businesses at a competitive and administrative disadvantage.
techUK welcomes this announcement and agrees with the Government that this will give businesses an appropriate lead-in time before implementation and allow the policy to benefit from progress on the international process, while maintaining the UK as a leader in implementing these reforms.
Next steps
The Government announced that will publish draft legislation for Pillar 2 during the summer and is engaging with international partners on the Implementation Framework.
techUK members has raised concerns on the interdependencies between the P2 and P1 implementations will be handled. The OECD Pillar 2 rules are functionally connected to the Pillar 1 rules, as reallocated gains from Pillar 1 are included in the computation of the Pillar 2 effective tax rate.
techUK would therefore welcome the opportunity to further discuss with HM Treasury the implementation of Pillar 1.
If members have further questions about techUK’s tax work, please reach out to [email protected].
Neil Ross
As Associate Director for Policy Neil leads on techUK's public policy work in the UK. In this role he regularly engages with UK and Devolved Government Ministers, senior civil servants and members of the UK’s Parliaments aiming to make the UK the best place to start, scale and develop a tech business.