What is OECD Pillar 2 in the UK ?

International tax is rarely anyone’s favourite reading, but 2024 has brought a significant development: the UK’s implementation of the OECD’s “Pillar 2” rules. These rules form part of a global agreement, currently adopted by 147 countries and territories, aimed at ensuring large multinational companies pay at least a minimum level of tax in every jurisdiction where they operate.

HMRC has rolled out its version of these rules, but even HMRC acknowledges that the details are complex and still evolving. In their own briefings, they have made clear that the official guidance will be updated over time and that complete technical certainty is not yet available. This article is therefore not a technical manual. Instead, it offers a bigger-picture overview to help you determine whether you may be affected, understand the UK’s approach, and identify the steps you should consider taking now.

Why OECD Pillar 2 Exists

For years, governments have been concerned about “base erosion” — the shifting of profits to low-tax jurisdictions, reducing the overall corporate tax paid. With the rapid growth of digital business models, it became increasingly possible for companies to generate substantial revenues in a country without having a significant physical presence there.

In October 2021, OECD and G20 members reached an agreement on a two-pillar solution. Pillar 1 deals with reallocating taxing rights for certain large digital companies, which is outside the scope of this article. Pillar 2, however, sets a global minimum effective tax rate of 15% on corporate profits, regardless of where those profits are generated. The principle is straightforward: if one jurisdiction does not impose sufficient tax, another jurisdiction will collect the shortfall, avoiding a “race to the bottom” in global corporate taxation.

Who Is in Scope in the UK

The UK’s rules apply to large multinational groups with global consolidated revenues exceeding €750 million in at least two of the last four financial years. The scope is not limited to groups with overseas subsidiaries; a single UK entity that meets the revenue threshold can also fall under the rules. Generally, the group must include at least one member in the UK and one member in another jurisdiction. However, the Domestic Top-Up Tax can apply to purely UK-based groups if they are sufficiently large.

The UK’s Two New Taxes

The UK has implemented Pillar 2 through two separate taxes. The first is the Multinational Top-Up Tax (MTT), which applies where UK-parented groups have operations in other countries with an effective tax rate below 15%. It also applies to UK subsidiaries of overseas groups if the parent’s jurisdiction has not fully implemented Pillar 2.

The second is the Domestic Top-Up Tax (DTT), which applies to profits generated in the UK that are taxed at below 15%. The DTT ensures that the UK collects the difference, rather than allowing another country to collect it under the OECD framework. Importantly, even where no extra tax is due, in-scope groups must still register and file the required returns.

How the ‘Top-Up’ Works – Without the Maths

If a group’s operations in any jurisdiction pay less than a 15% effective tax rate, the rules require a “top-up” so that the total tax reaches 15%. This can happen through the Income Inclusion Rule, where the parent company’s country collects the top-up; the Qualified Domestic Minimum Top-Up Tax, where the jurisdiction in which the income is generated collects the difference; or the Undertaxed Profits Rule, which acts as a backstop if neither of the other two rules applies. In the UK, the MTT follows the Income Inclusion Rule, while the DTT functions as a Qualified Domestic Minimum Top-Up Tax.

Registration and Filing Obligations

Even if no top-up tax is ultimately payable, an in-scope group must register with HMRC’s Pillar 2 Online Service. Registration must be completed within six months after the end of the first in-scope accounting period. Groups must provide details of the parent entity, the member responsible for filing, contact information, and the relevant accounting periods.

The filing deadlines are also specific. For the first year a group falls within scope, returns are due 18 months after the year end. In subsequent years, the deadline shortens to 15 months after year end. Two filings are required: the Global Information Return, which is a standardised data submission used to assess effective tax rates across all jurisdictions; and the UK Self-Assessment Return, which covers the UK’s MTT and DTT position.

Transitional Safe Harbour

To ease the administrative burden during the initial years, HMRC has introduced Transitional Safe Harbour provisions for the first three years. These allow groups to use existing Country-by-Country Reporting data to determine whether a jurisdiction qualifies as “safe” for the period. If a jurisdiction meets the safe harbour criteria, no full top-up tax calculation is required for that jurisdiction in that year. The tests available include a revenue threshold, a simplified effective tax rate calculation, and a routine profits test.

Why This Matters Beyond the Obvious

The reach of these rules extends well beyond traditional UK tax concerns. They are internationally coordinated, and tax data will be exchanged between jurisdictions. This means a UK tax position can be influenced by the operations of foreign subsidiaries or even the actions of an overseas parent company. Being in scope creates reporting and compliance obligations even in the absence of an additional tax liability, and failure to comply can result in penalties, heightened scrutiny from HMRC, and reputational risks.

HMRC’s Position and Support

HMRC has been transparent in stating that Pillar 2 is complex and evolving. They have created a dedicated compliance team for Pillar 2 taxes and compliance, and further detailed guidance is expected to be published in later of 2025 and updated onward.

The Wider Commercial Context

The practical impact of the UK’s Pillar 2 rules will be most significant for international businesses that source products or services from jurisdictions with lower effective tax rates or lower operating costs. This includes companies engaged in global e-commerce, as well as those with production facilities in regions such as parts of East and South Asia, Eastern Europe, and certain Latin American or Caribbean jurisdictions. Some of these jurisdictions have lower statutory tax rates or preferential regimes, and historically, businesses have structured their operations to take advantage of these environments. While such arrangements may be entirely lawful, the OECD’s goal is to ensure that, overall, a group’s global profits are subject to at least a 15% effective tax rate, regardless of where they arise.

From the UK perspective, these measures are designed to level the playing field for domestic and international businesses, ensuring that all large groups contribute a fair share of tax when accessing the UK market. The same principles apply across all OECD member states, which means that understanding Pillar 2 is becoming a necessity for any internationally active group.

Key Takeaway for OECD Pillar 2 in the UK

From 31 December 2023, the UK began implementing the OECD’s Pillar 2 rules as part of a global push to guarantee a minimum effective tax rate of 15% for large multinational companies. The complexity of the framework means that early engagement and accurate scoping are critical. Even HMRC acknowledges that technical details will continue to evolve, so the immediate priority for businesses is to determine whether they are in scope, register on time, and maintain compliance with the basic requirements. In the world of international tax, it is better to have a precise answer later than a wrong answer now.

Seek Professional Help

If you’re unsure about how OECD Pillar 2 affects your business, don’t leave it to guesswork. Focus on what you do best — running your business — and let us handle the complexities. At Elaga Accountancy, our experienced accountants act as your trusted financial controller, guiding you through every step of compliance and strategy. No matter how complicated the rules may seem, we’ll make them manageable, so you can have peace of mind knowing your tax affairs are in good hands.

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