Question proposed, That the clause stand part of the Bill.

With this it will be convenient to discuss the following:

Government amendments 1 to 3, 21 to 23, 4 to 11, 24 to 29, 12 and 13, 30, 14, and 31 to 37.

Schedule 4.

Clause 19 and schedule 4 introduce the undertaxed profits rule—the third and final part of the internationally agreed global minimum tax known as pillar two. They also amend the existing legislation on multinational top-up tax and domestic top-up tax to incorporate the latest international agreements and stakeholder feedback.

It is essential that multinationals pay their fair share of tax in the UK. Pillar two protects the UK tax base from large multinationals shifting their profits overseas to low-tax jurisdictions, by requiring multinationals that generate annual revenues of more than €750 million to pay an effective tax rate of 15% on their profits in every jurisdiction in which they operate. Where their effective tax rate falls below that, they will pay a top-up tax.

More than 135 members of the OECD inclusive framework have signed up to pillar two and agreed that it will achieve that objective through three rules respectively: a domestic minimum tax, the income inclusion rule and the undertaxed profits rule. First, the domestic minimum tax ensures that multinational enterprises operating in the UK will pay at least an effective rate of 15% to the UK and will not be charged pillar two taxes by a foreign jurisdiction.

Secondly, the income inclusion rule, which is known as the multinational top-up tax in the UK, means that groups headquartered in the UK but operating in other jurisdictions that do not apply domestic minimum tax, will pay top-up tax here in the UK. Thirdly, the undertaxed profits rule, or the UTPR, is a backstop, which means that any top-up tax not collected under the first two rules will still be collected. For instance, if a multinational is headquartered in a jurisdiction that has not introduced pillar two, the UTPR-implementing countries in which the multinational group operates will share the top-up tax between them.

Those three rules together ensure that a group will be subject to pillar two taxes on worldwide activities, as long as it has a presence in at least one implementing country. The OECD expects that to apply to 90% of multinationals in 2025. The UK has already introduced the first two rules and is legislating for the UTPR in the Bill. The staggered introduction is in line with OECD recommendations, and consequently on the same timeline as in many other jurisdictions, and it is intended to help businesses transition into the new regime.

The Government are also legislating for amendments to the UK’s adoption of the income inclusion rule and the domestic minimum tax, which took effect in the UK from 31 December 2023, as they did in a host of countries around the world. Multinational enterprises are preparing to submit their first tax returns and to pay any top-up tax due in mid-2026. In their preparations ahead of that, groups have identified elements of the rules that require additional clarification or adjustment—essentially, software updates to the rules. These points are discussed in an international forum, with the UK and more than 135 members of the inclusive framework agreeing solutions. The OECD then publishes guidance that implementing countries may add to their domestic legislation. The Bill incorporates many of those updates that have been agreed multilaterally in the past year and includes clarifications to the existing legislation, in addition to implementing the UTPR.

I will now turn to the changes made by clause 19. The clause details the calculation that groups must use to determine how much top-up tax the UK will collect through the new UTPR, which is in proportion to the UK’s share of the assets and employees of the group. Special rules are set out for groups with a joint venture group ringfenced from the ordinary members of the group.

The legislation also includes a simplification known as the UTPR safe harbour, which applies until December 2026. Groups are excluded from the UTPR in the headquarter jurisdiction if the headline tax rate there is at least 20%. In many cases, a group will be subject to the UTPR only in the headquarter jurisdiction, and those jurisdictions may implement a domestic minimum tax by December 2026, in which case the UTPR will no longer apply. The safe harbour prevents groups from having to undertake detailed compliance obligations in relation to the UTPR in the intervening period.

Another simplification measure helps multinational enterprises that are in the earliest phase of their international expansion. It excludes groups from the UTPR for five years if they have a presence in six or fewer territories, with tangible fixed assets of €50 million or less, outside of their primary country.

I will now turn to our amendments to clause 19, which are technical in nature. The most significant are as follows. First, we are introducing an anti-arbitrage rule—announced in a ministerial statement last year—that prevents multinationals from entering into avoidance transactions to exploit a temporary simplification in the rules known as the country-by-country reporting safe harbour. Secondly, we are making an improvement to the domestic minimum tax-charging mechanism to ensure that members of a group are allocated the right amount of a group’s top-up tax. Thirdly, there are updates to rules on flow-through entities, blended controlled foreign company regimes, cross-border allocations of tax and the country-by-country reporting safe harbour, in accordance with the latest OECD guidance. Fourthly, we are enabling HMRC to specify qualifying pillar two taxes by regulation when they have passed the peer review process. The legislation provides that, prior to the completion of the peer review process, groups can assess whether a tax is likely to be qualified, allowing them to prepare their accounts on that basis. Fifthly, there are technical amendments that will take effect for accounting periods beginning after 31 December 2024, except for the anti-arbitrage rule, which applies from the date it was announced via written ministerial statement, in March 2024.

Taxpayers can make an election so that a certain group of amendments will apply retrospectively from the introduction of the pillar two taxes on 31 December 2023. The amendments contain some measures that are likely to be helpful to most taxpayers, and others that may not be helpful to all. No taxpayer is forced to accept the retrospective application of a potentially detrimental measure, but taxpayers wishing to secure a retrospective application of measures helpful to them will also have to accept the retrospective application of measures that may not be. If no election is made, the amendments will apply only on a prospective basis. Certain other amendments cannot be detrimental to taxpayers in any circumstances. These are not part of the election and will automatically have retrospective effect from 31 December 2023.

Amendments 1 to 14 and 21 to 23 ensure that the legislation works as intended, by making small corrections to it, as well as two additions to align with the latest internationally agreed advice. The two additions clarify when and how groups need to override values in financial statements when calculating their liabilities and how a group recalculates its pillar two liability in respect of a previous accounting period, meaning that additional tax is due. Amendments 31 to 37 reflect comments received from stakeholders since the publication of the Bill. Collectively, they deliver a less onerous administrative process for groups wishing to elect for certain changes in the Bill to apply retrospectively to them.

In conclusion, clause 19 and schedule 4 introduce the important undertaxed profits rule backstop to pillar two and make technical amendments to existing legislation. I therefore commend them, and Government amendments 1 to 14 and 21 to 37, to the Committee.

It is a great pleasure to serve on the Committee under your chairmanship, Mr Mundell. As we heard from the Minister, clause 19 and schedule 4 amend the parts and schedules of the Finance (No. 2) Act 2023 that implement the multinational top-up tax and domestic top-up tax. Part 2 of schedule 4 introduces the undertaxed profits rule into UK legislation, and part 3 makes amendments to the multinational top-up tax and domestic top-up tax. These taxes represent the UK’s adoption of the OECD pillar two global minimum tax rules, and we are supportive of the measures before us.

In October 2021, under an OECD inclusive framework, more than 130 countries agreed to enact a two-pillar solution to address the challenges arising from the digitalisation of the economy. Pillar one involves a partial reallocation of taxing rights over the profits of multinationals to the jurisdictions where consumers are located. The detailed rules that will deliver pillar one are still under development by the inclusive framework. As the Minister said, pillar two introduces a global effective tax rate, whereby multinational groups with revenue of more than €750 million are subject to a minimum effective rate of 15% on income arising in low-tax jurisdictions.

The multinational and domestic tax top-ups were introduced in the Finance Act 2023, as the first tranche of the UK’s implementation of the agreed pillar two framework. Measures in the Bill extend the top-up taxes to give effect to the undertaxed profits rule. That brings a share of top-up taxes that are not paid under another jurisdiction’s income inclusion rule or domestic top-up tax rule into charge in the UK. The undertaxed profits rule will be effective for accounting periods beginning on or after 31 December 2024.

Following discussions with the Chartered Institute of Taxation, I have a number of points to raise with the Minister. First, as the institute points out, there is an open point around the application of the transitional safe-harbour anti-arbitrage rules. The OECD’s anti-arbitrage rules for the transitional safe harbours are drafted very broadly, and may therefore go further than originally anticipated. Will the Minister clarify HMRC’s view of the scope of those rules?

There are also questions about taxpayers’ ability to qualify for the transitional safe harbours. A transitional safe harbour is a temporary measure that reduces the compliance burden for multinationals and tax authorities. There has been some uncertainty as to whether a single error in a country-by-country report could disqualify all jurisdictions from applying the transitional safe harbours. HMRC has recently indicated that it would be open to permitting re-filings of country-by-country reports where errors are spotted. Can the Minister provide further clarity on HMRC’s proposed approach?

The UK’s legislation will need to be updated regularly to stay in line with the OECD’s evolving guidance. What steps is the Minister taking to ensure that clear guidance is provided in a timely manner? The new top-up taxes and undertaxed profits rule are complicated. Schedule 4 runs to over 40 pages and includes an eight-step method to determine the proportion of an untaxed amount to be allocated to the UK. It is important that the Government minimise the cost of implementation and compliance. How will the Minister ensure that it is kept to a minimum?

While I welcome the work the UK is doing at a global level, there are still significant issues. I was interested, as I am sure the Minister was, to see that one of the first actions of President Trump, just hours after he took office, was to issue a presidential memorandum stating:

“This memorandum recaptures our nation’s sovereignty and economic competitiveness by clarifying that the global tax deal has no force or effect in the United States.”

It states in clear and unambiguous terms:

“The Secretary of the Treasury and the Permanent Representative of the United States to the OECD shall notify the OECD that any commitments made by the prior administration on behalf of the United States with respect to the global tax deal have no force or effect within the United States absent an act by the Congress adopting the relevant provisions of the global tax deal.”

The OBR estimates that pillar two is expected to generate £2.8 billion by the end of this Parliament. What impact could the US position have on the future operation of pillar two and the UK’s ability to levy top-up taxes on multinationals as planned? The same memorandum issued by President Trump notes that

“a list of options for protective measures” will be drawn up within 60 days. What action are the Government taking to engage with the US Treasury and to prepare for such actions? Has the Chancellor raised this with her opposite number?

The Minister referred to the more than 30 Government amendments that have been tabled to schedule 4, which correct errors in the calculation of the multinational top-up tax payable under the UTPR provisions that would have resulted in an excessive liability; secure that eligible payroll costs and eligible asset amounts are allocated from flow-through entities in a manner that is consistent with pillar two model rules; and ensure that multinational top-up tax and domestic top-up tax apply properly in cases involving joint ventures. They are all perfectly sensible, but the number of amendments tabled underlines the complexity of the issue.

As I mentioned, this is a two-pillar system. The corporate tax road map confirmed the Government’s support for the international agreement on a multilateral solution under pillar one and the intention to repeal the UK’s digital sales tax when that solution is in place. The digital sales tax raised £380 million in 2021-22, £567 million in 2022-23 and £678 million in 2023-24. I would welcome an update from the Minister on pillar one and the future of the digital sales tax.

The Opposition will not be opposing the clause, but I look forward to the Minister’s response to the specific points I have raised, including those on developments under the new Trump Administration and on implementation.

I thank the shadow Minister for his support for the provisions before us and our general approach.

First, it is the case that we are amending the Bill in Committee, but that is because, as his colleagues may remember from their time in government, these are complex rules and it is important that pillar two rules work as intended. This is a complex international agreement and it represents one of the most significant reforms of international taxation for a century. It is to a degree inevitable that revisions would be needed as countries and businesses introduce pillar two and set it in progress. It is complex, but we should not forget that pillar two applies only to large multinational businesses, and the reason it is being introduced is to stop those businesses shifting their profits to low-tax jurisdictions and not paying their fair share here in the UK. The rules need to respond to that, and we need to make sure that they work for all sectors and all types of businesses.

The shadow Minister is right that, although we are talking about pillar two, there is of course a pillar one as part of this package. The Government are committed to implementing both pillars. In pillar one, there is amount A and amount B. Amount A reallocates taxing rights over part of the residual profits of the largest and most profitable multinationals. That has been substantively agreed. A small number of jurisdictions have issues with amount B, which looks to simplify aspects of transfer pricing for baseline distribution. The Government are hopeful that those issues can be quickly resolved to allow the pillar one package to be delivered. He will know that the Government maintain the commitment to cease the digital services tax once pillar one comes into play.

The shadow Minister asked about safe-harbour anti-arbitrage rule. We acknowledge that the rule is imperfect and applies in cases where we would prefer it did not. It reflects an internationally agreed position and any failure to implement it faithfully could have prejudiced recognition of the UK’s taxes as qualified, with serious detrimental effects. That having been said, the rule is not a taxing provision. It limits the availability of an administrative easement, the safe harbour, rather than charging tax. It was introduced to combat structures that would have allowed groups to qualify for safe-harbour status in jurisdictions with very low tax rates, which would have been a material threat to the integrity of the pillar two project. In that context, we do not think it was unreasonable for the drafting to err on the side of breadth. If the opportunity arises, though, it is our intention to seek agreement to improve the rule in the light of the extensive stakeholder comment that it has drawn.

The shadow Minister also asked about errors with country reporting. I reassure him that we are committed to simplifying the rules. HMRC will seek to apply the rules in accordance with the information given out through the OECD model rules and proportionately, wherever possible within the law.

Finally, the shadow Minister asked about the international context. I will not give a running commentary, but it is worth saying that pillar two is—I am sure he would agree—a historic and important initiative in countering multinational base erosion and profit shifting, and it helps to ensure a fair approach to how countries compete for cross-border investment. It has been agreed by 140 countries and has been implemented or is in the process of being implemented by the UK, the EU member states, Canada, Australia, Japan, New Zealand, South Korea and more. The UK will, of course, be open to discussing concerns and ways to alleviate them that uphold the policy aims of pillar two and can be supported by all members of the inclusive framework.

Question put and agreed to.

Clause 19 accordingly ordered to stand part of the Bill.