Multinational Top-up Tax

The multinational top-up tax (MTT) was introduced in the UK in 2023. The MTT is part of the UK's implementation of Pillar 2 of the OECD's Global Anti-Base Erosion (GloBE) rules. These rules are designed to ensure that multinational companies pay a minimum tax rate of 15% on their profits, regardless of where their profits are made. The MTT is a backstop rule that ensures that any top-up taxes that are not paid under another jurisdiction's Pillar 2 rules are paid in the UK.

Who is affected by the Multinational Top-up Tax?

The MTT applies to businesses with annual global revenues exceeding €750 million that have business activities in the UK.

How does the Multinational Top-up Tax work?

The MTT calculates the top-up tax that a business owes by comparing the business's effective tax rate to the 15% minimum tax rate. If the business's effective tax rate is below this, the MTT will calculate the top-up tax that is needed to bring the effective tax rate up to 15%.

The MTT will be applied to a business's global profits and will have effect in respect of accounting periods beginning on or after 31 December 2023. Businesses will however be able to offset any top-up taxes that it has already paid under another jurisdiction's Pillar 2 rules.

What are the objectives of the Multinational Top-up Tax?

The MTT has a number of objectives, which include:

• ensuring that multinational companies pay a certain amount of tax in the UK.
• helping to discourage multinational companies from shifting their profits to low-tax jurisdictions.

What problems does the Multinational Top-up Tax cause for businesses?

• It is complex.
• It is certain to increase the administrative burden on affected businesses.
• It will lead to disputes between businesses and tax authorities.

Multinational Top-up Tax example

A multinational company with annual global profits of €1 billion has a UK subsidiary. The UK subsidiary has profits of £100 million in an accounting period. The effective tax rate on the UK subsidiary's profits is 12%.

The multinational top-up tax (MTT) will calculate the top-up tax that the multinational company owes by comparing the UK subsidiary's effective tax rate to the 15% minimum tax rate.

Multinational Top-up Tax calculation:

MTT = (15% - 12%) x £100 million = £3 million

The multinational company will owe £3 million in MTT on the UK subsidiary's profits.

Offsetting top-up taxes paid under another jurisdiction's Pillar 2 rules

In the above example, the multinational company may be able to offset the £3 million in MTT against any top-up taxes that it has already paid under another jurisdiction's Pillar 2 rules.

For example, if the multinational company has already paid £2 million in top-up tax on the UK subsidiary's profits under another jurisdiction's Pillar 2 rules, the multinational company will only owe £1 million in MTT in the UK.