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Pillar Two: the impact on the UK

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I have remarked before that I subscribe to CapEX (which I highly recommend) which provides me with links to articles on current affairs – some of which it commissions itself and some which are in other publications. I am however puzzled as to why they commissioned ‘Levelling down: signing up to the OECD tax plan risks undermining key government policies’. This was written by Connor Axiotes, who describes himself as the director of communications at the Adam Smith Institute (a think tank). My bewilderment is because the article seems axiomatic of the well known saying, ‘Never let the facts get in the way of a good story’.

Mr Axiotes is apparently a fan of freeports but complains: ‘But there is an elephant in the room which could limit the government’s freedom to offer these [freeport] incentives. The OECD’s global minimum corporation tax would impose a minimum rate of taxation (set at 15%) on the revenues of international corporations’. He thinks that the UK rush to implement the OECD proposals will undermine the levelling up agenda.

So where do I start? First, the minimum tax (called Pillar Two) is not a tax on the ‘revenues’ of international corporations. It is a tax on the profits of the small number of multinational enterprises whose global turnover exceeds €750m. In other words, it is a top-up to corporation tax. As such, it has very little effect on freeports because the freeport incentives do not include an exemption from corporation tax. The tax incentives primarily relate to import duties, import VAT and SDLT, none of which are affected by the 15% cap. Indeed, as corporation tax is based on the overall result of all of a company’s activities, it is largely impractical to grant corporation tax relief on the part earned in a freeport. It does have some impact as the relief includes 100% first-year allowance on plant and machinery (up to 30 September 2026 only) and accelerated structures and buildings allowances, both of which reduce taxable profits – and both of which can be disclaimed, i.e. the company can limit the claim in the year of expenditure if the allowances would trigger the minimum tax in that year and claim the balance in later years. The benefit of early capital allowances is also likely to be fairly insignificant in comparison with the exemption from employer’s NICs, the reduced planning restrictions and the tax reliefs on imports.

Secondly, the government’s levelling up agenda has very little to do with tax. It is to do with bringing jobs to deprived areas, and while tax reliefs can encourage business towards a particular area, they have fairly limited effect compared with other factors.

Thirdly, the UK has not ‘rushed’ to implement the Pillar Two proposals. These arose from the OECD’s BEPS project which began in 2013, virtually ten years ago and in which both HMRC and UK large businesses have had a heavy involvement throughout. The minimum tax was first proposed in 2020. The government, like most developed countries, signed up to the minimum tax in 2021 and it issued a consultation paper on the implementation of the tax in January 2022, which is over a year ago. If Mr Axiotes regards that as rushing the legislation, I shudder to think what his ideal timetable for introducing tax changes might be.

Fourthly – and probably most importantly – if the UK does not introduce the legislation, the only one to suffer will be the UK. This is because the top-up tax is primarily chargeable by the country in which the multinational group is based. However, if the group is based in a country that has not implemented the tax, the countries in which the profits are generated become entitled to charge the tax. In other words, the UK legislation applies to only two categories of earnings: worldwide earnings of UK multinationals, and earnings of UK branches of those foreign countries that have not implemented Pillar Two. Not implementing it in the UK would exempt UK earnings of UK multinationals (in most cases a very small part of their global earnings) and UK earnings (if any) of overseas countries which also do not implement it. Most of the benefit of non-implementation would accrue to the US and other overseas governments in the countries in which UK companies have operations, as they would become the beneficiary of what otherwise would have been the UK’s right to impose the tax.

Fifthly, the UK government is not oblivious to the fact that tax incentives can reduce taxable profits and so potentially trigger the minimum tax. That is one of the reasons why it is looking at replacing some tax incentives by tax credits which, contrary to Mr Axiotes’ apparent belief, not only do not reduce profits but are treated as income for accounting purposes so, increase them, and reduce the risk of the minimum tax applying.  

Issue: 1608
Categories: In brief