ICAEW.com works better with JavaScript enabled.


TAXguide 06/23: A basic guide to pillar two

Technical release

Published: 04 Sep 2023 Update History

Exclusive content
Access to our exclusive resources is for specific groups of students, users, members and subscribers.
Pillar two is part of a package of initiatives agreed at OECD level by territories worldwide to tackle the challenges of taxing multinational enterprises (MNEs) cross-border. In the UK, it will be known as the multinational top-up tax and domestic top-up tax that will apply for accounting periods beginning on or after 31 December 2023.

The base erosion and profit shifting project (BEPS for short) began in 2015. The initial purpose behind this work was to reduce the ability for MNEs to shift profits across their various entities and the territories they operate in to minimise their worldwide tax liabilities.

More recently, the OECD has focused on defining where profits should be recognised by MNEs around the world and ensuring that at least a minimum amount of tax is paid in the territories in which they operate. This led to the drafting of pillars one and two, which were endorsed by the G20 finance ministers in July 2021.

Pillar one is all about redistributing the taxation of profits derived by very large multinational groups among the territories it operates in to better reflect its market jurisdictions. Those initially in scope will be groups with consolidated revenue of at least €20bn and net profits of more than 10%.

By contrast, pillar two is about increasing the tax payable by large groups where the amount paid within particular territories falls below a defined minimum effective tax rate (ETR) (15%). It is important to recognise that the ETR is calculated based on the pillar two rules and is not necessarily the same as the nominal tax rate in the country concerned.

Of the 140 members of the OECD/G20 inclusive framework on BEPS,137 OECD/G20 countries and jurisdictions representing more than 90% of global gross domestic product (GDP) have agreed to join the official statement on the two-pillar solution.

What’s included within pillar two?

There is a set order to which the various elements of pillar two apply globally.

This starts with the subject to tax rule (STTR). This is a treaty-based rule that applies at a gross level for taxing specific types of intergroup payments, largely from developing countries, at a 9% rate. The STTR takes priority over the rules described below. Any STTR amounts paid are intended to be creditable under those other rules.

Next is the qualifying domestic minimum top-up tax (QDMTT). This is the top-up tax paid to the local tax authority in relation to any low tax profits in that country, rather than to other countries under the income inclusion or undertaxed profits rules.

Then there is the income inclusion rule (IIR), which dictates that large multinational groups will pay a minimum level of tax in every country they operate in of 15% of an adjusted accounting profit figure. This takes into account taxes already been paid under either the STTR or the QDMMT.

Finally, there is a backstop rule, which is the under taxed profits rule (UTPR), which applies to tax the ultimate parent entity where low tax profits that have not been subject to tax under the STTR, QDMTT, or IIR.

The UK is implementing the IIR and the QDMMT into its own domestic tax legislation. The IIR is referred to as the multinational top-up tax (MTT) whereas the QDMTT is referred to as the domestic top-up tax (DTT).

The MTT and DTT apply in the UK for accounting periods beginning on or after 31 December 2023. The UTPR will not be introduced before accounting periods beginning on or after 31 December 2024.

The commentary below uses the terminology included in the UK’s domestic tax legislation implementing pillar two.

What is the domestic top-up tax and who will it apply to?

The DTT will apply to UK members of multinational enterprises, members of UK enterprises, and stand-alone UK enterprises, for accounting periods beginning on or after 31 December 2023.

As with the MTT, it will apply where the group had annual revenue of €750m or more in its consolidated financial statements in at least two of the four accounting periods preceding the tested accounting period. A stand-alone entity located in the UK (to which DTT, but not MTT, can apply), will meet the revenue threshold test if it exceeds the €750m threshold in two of the four periods prior to the tested period. The revenue will be taken from the qualifying financial statements of the entity (those prepared in accordance with acceptable financial standards).

The DTT will introduce a new tax on UK members within a domestic or multinational enterprise group and will ensure that any top-up tax due on UK profits is collected in the UK. In such cases, DTT will be charged when the group’s profits arising in the UK are taxed at below the minimum rate of 15%. As a QDMTT, any DTT liability should be fully offset against any pillar two liabilities that may arise in other jurisdictions.

DTT is calculated and administered in a largely similar way to MTT, with some exceptions. This section therefore only details areas where there are differences between the two taxes. One of the main differences is that a wholly UK group (or, indeed, a stand-alone UK entity) can fall within DTT, unlike MTT.

An entity (which could be a company, partnership, trust, or other body for which separate financial accounts are prepared) will be a ‘qualifying’ entity for DTT purposes if:

  • it is located in the UK;
  • it is not an excluded entity for DTT purposes;
  • it is not an investment entity; and
  • it meets the revenue threshold test as a single entity, or is a member of a group that meets the revenue threshold test.

How is the DTT calculated?

As with the MTT, the effective tax rate is calculated on a jurisdictional basis and if necessary ‘topped-up’ to an effective tax rate of 15%.

Given the UK’s main corporation tax rate is now 25%, the DTT will only apply in a limited number of cases, largely where there is considerable divergence between accounting profit and the taxable profit for the entities concerned. Bearing in mind that deferred taxes are also taken into account, this is likely to be where there are significant permanent tax deductions, such as R&D tax relief.

Who will the multinational top-up tax apply to?

The UK’s MTT only applies to MNEs with some commercial presence in the UK (eg, through a parent company, subsidiary, or permanent establishment (PE)). Such groups are known as qualifying multinational groups (QMGs).

The group (or stand-alone company where that company has an overseas PE) must have had annual revenue of €750m or more in its consolidated financial statements in at least two of the four accounting periods preceding the tested accounting period.

Some types of entities are excluded. These include:

  • governmental entities;
  • international organisations (such as those comprised primarily of governments);
  • pension funds;
  • non-profit organisations; and
  • in some cases, investment funds and UK real estate investment trusts.

The UK’s MTT will apply to UK parented MNEs, or where the group is parented by a company resident in a territory without an MTT equivalent.

It will apply when the non-UK members of a multinational group have an effective tax rate of less than 15% as a result of taxes imposed in the territory concerned.

Completing the claims process

A UK parented group would pay top up tax to HMRC in respect of any subsidiaries or PEs that have been ‘undertaxed’ in the territory in which they resident. This means that their effective tax rate in that territory is less than 15% (subject to any QDMTTs discussed above).

In some cases, the tax could be paid by an intermediate parent entity or a partially owned parent entity, rather than the ultimate parent company. This might apply, for example, where the ultimate parent entity is based in a territory that does not apply the IIR locally.


A multinational group is parented by a company resident in a country that does not have an IIR. The parent company has a 100% subsidiary based in the UK. The UK intermediate company has a 100% subsidiary based in Ireland which is undertaxed. Unless any QDMTT is payable in Ireland in respect of the Irish company’s profits, the UK intermediate company will be subject to the additional tax bridging the gap between 15% and the Irish company’s effective tax rate.

Note that there are also rules to deal with situations where, for example, there are additional shareholders in some of the companies within the group structure.

The top-up tax is the amount required to bring the overall tax on the profits up to the 15% ETR. As explained below, calculating the ETR is not just a case of dividing the amount of tax paid by a company by its taxable profits.

How is the ETR calculated?

The starting point is the accounting profit or loss before tax for each entity (other than PEs) as reported, or as they would be determined for that member, in preparing the ultimate parent entity’s consolidated financial statements (before the elimination of intragroup transactions).

If certain conditions are met, a method based on an alternative accounting standard and information in the separate financial accounts of the member may be used.

For members that are PEs, the profits to be used are the member’s profits:

  1. if the member has separate financial accounts, as reflected in those accounts; and
  2. if not, as reflected in the underlying profits accounts of the main entity, attributed between the PE and the main entity using the provisions contained in the relevant tax treaty (or using domestic tax rules where there is no treaty in place).

This is then adjusted for various things, some of which are summarised below.

Next, work out the tax attributable to the adjusted income or loss.

The first step is to identify all the covered taxes. This includes not only taxes on the profits of the entities in the territory concerned but also:

  • taxes incurred under an eligible distribution tax system (such as in Estonia where a company is only subject to tax on its profits when it distributes those profits to its shareholder)
  • taxes imposed on the member as a substitute for a tax that generally applies in the territory of the member (eg, withholding taxes); 
  • taxes charged by reference to the capital of the company, or by reference to its capital and profits. This could apply, for example, to the equivalent of a company wealth tax.

The total amount of taxes charged is then adjusted for amounts including:

  • taxes on income or gains that have been excluded from the member’s adjusted profits;
  • any amount not expected to be paid within three years after the end of the accounting period in question.

There are also some adjustments for deferred taxes. Deferred taxes for the period are capped at 15% in cases where deferred tax has been booked at a higher statutory rate in the group’s accounts. The rules also include a recapture mechanism that adjusts for certain deferred tax liabilities that have not reversed (ie, the tax has not actually been paid) within five years.

Then add up all the income (and deduct losses) for all the entities in the territory concerned to arrive at a total (A). The sum of the taxes suffered by the entities in that territory is B. Divide A by B to arrive at the ETR.

What UK-centric amounts are included in this calculation?

Note that the UK’s MTT applies in respect of the taxes charged in overseas territories and hence the UK tax rules are irrelevant in calculating those taxes. However, this guide includes some examples of the UK equivalents of income and expenses that could be included in calculating adjusted income and expense were the IIR to apply in other territories in respect of under-taxed UK entities. This is also relevant in calculating the DTT.

Amounts included in adjusted income and expense:

  • qualifying refundable tax credits are treated as income for these purposes. This where the credit entitles the company to receive it within four years of meeting the conditions for doing so. This therefore includes systems similar to the UK’s research and development expenditure credit (RDEC). It excludes things like dividend tax credits which are classed as a “disqualified refundable imputation tax”;
  • tax credits for overseas tax paid.

Amounts not included in adjusted income and expense:

  • most dividends (except holdings for over one year representing less than 10% of interests in the company concerned);
  • excluded equity gains and losses, which include fair value adjustments and impairments, other than those arising in respect of portfolio holdings of less than a 10% interest in the entity concerned; 
  • “improper” or illegal payments (eg, bribes and kickbacks);
  • adjustments for changes in accounting policies and prior period errors;
  • an adjustment to profit is made equal to the net amount calculated as the amount of increase in the value of the company pension fund minus any contributions made by the company into the fund during the year.

There are also adjustments for certain types of industries, such as life assurance businesses and international shipping profits

How is the top-up tax calculated?

Once the ETR has been calculated, the top-up tax is essentially the difference between this and the 15% for the total of the entities operating in the territory concerned. So, for example, if the ETR in a territory is 12%, then the top-up tax would be 3%. But 3% of what?

First, take the net of the adjusted profit and loss figures for each of the entities operating in the territory concerned.

Then deduct from this net amount a substance-based income exclusion in respect of the entities operating in the jurisdiction, which is:

  • 5% of the carrying value of tangible assets (taking the average of the opening and closing position) plus; 
  • 5% of total payroll costs (including salaries, payroll taxes and social security contributions in respect of employees).

Note that these percentage carve outs are larger in the first 10 years of the tax, as set out in para 1, Sch 16, Finance (No.2) Act 2023. The tangible asset carve-out starts at 8% and the payroll cost carve out starts at 10%. Both taper down to 5% by 2033.

Then take that total net amount and multiply it by the top-up tax percentage.

£m %
Total taxes taken into account in territory (A) 250
Adjusted (GloBE) profits in that territory (B) 2,500
Effective tax rate (ETR) (A/B) 10
Effective tax rate (ETR) (A/B) (800)
Net adjusted GloBE income (C) 1,700
Top up tax (C x (15% - ETR)) 85

This example assumes that there is not a QDMTT in the non-UK territory in which the profits arise, which would otherwise take precedence over taxing rights.

Who is the multinational top-up tax chargeable on?

Under the UK’s MTT rules, the top-up tax is allocated to the responsible members in the group. The default position is that the highest-level parent company in the UK pays the tax, in proportion to its ownership interests in those entities that have low taxed income.

There are some situations where this does not happen. For example:

  • the country in which the lower-taxed entities are resident may have adopted the QDMTT, in which case this might apply first such that there is no remaining tax payable under the MTT;
  • the amount of MTT that is attributed to a responsible member will be calculated by reference to the member’s inclusion ratio. The inclusion ratio will be determined based on the proportion of the profits that would be allocated to the responsible member if it were to prepare consolidated financial statements.

Are there any exemptions from applying the DTT and MTT rules?

A transitional safe harbour rule allows groups to use figures calculated for the purposes of country-by-country reporting (CbCR) to assess whether they are likely to face a top-up tax under MTT for a territory. If these simplified calculations indicate that there would be no MTT chargeable, the group is treated as having no tax charge and does not have to undertake the full ETR calculations.

The safe harbour applies on a territory-by-territory basis and consists of three tests. A group will qualify for the safe harbour as long as one of these tests are met:

  • The threshold test, which is similar to the de minimis test in the main part of the rules. 
  • The simplified ETR test, which gives an approximation of the ETR. 
  • The routine profits test, which assesses whether the substance-based income exclusion (SBIE) would cover any profits made in the territory. 

These tests approximate the calculations that would be required for MTT. If any of the tests are met, this indicates that there would be no top-up tax chargeable under MTT in the accounting period.

The safe harbour applies to DTT as well except that a wholly domestic group is not required to produce a CbC report. Hence, such groups must calculate the figures for revenue and profit (loss) before income tax, in the same way that they would have been calculated were the group or entity to prepare a CbC report.

To access the transitional safe harbour, a group must make an election for the safe harbour to apply for a territory for a period.

An election may be made for accounting periods beginning on or before 31 December 2026 and ending on or before 30 June 2028. If the group has already completed the full MTT calculations for a territory, they cannot make the election again for subsequent periods.

This “once out, always out” approach applies because the purpose of the safe harbour is to reduce the compliance obligations of the group when preparing systems for MTT compliance when first entering the regime.

What practical steps will groups need to take to be compliant with the MTT and DTT?

MTT applies to a multinational group as a whole. But, to simplify compliance, a single entity in the group is responsible for dealing with all aspects of administration relating to the MTT with HMRC. This entity is referred to in the legislation as the ‘filing member’.

By default, the group’s ultimate parent is the filing member. However, it is possible to nominate a different company within the group to be the filing member. The filing member for DTT will be the same as the MTT filing member.

For a nomination to be valid:

  • the nominated filing member must be a company; 
  • it must be a member of the group; and 
  • the nomination must be made in writing. 

The nominated company does not need to be a UK company, or have a previous registration with HMRC, although groups may decide it is convenient to use such a company.

The filing member is responsible for:

  • registering with HMRC if the group qualifies for MTT;
  • notifying HMRC when details of the filing member have changed;
  • submitting information returns or overseas return notifications;
  • completing the self assessment return; 
  • making or revoking elections; and 
  • ensuring that the group keeps accurate records in respect of MTT.

Where the filing member is the group’s ultimate parent, and that ultimate parent is not a company, the obligations of the filing member may be met by:

  • any general partner, in the case of a limited partnership; 
  • the partnership, in the case of a limited liability partnership; 
  • any partner, in the case of any other partnership; 
  • any trustee, in the case of a trust.

If the filing member fails to meet an obligation, or the group’s self assessment is found to be incorrect, the filing member may be liable to:

  • penalties for failure to comply with any of its obligations;
  • penalties for inaccuracies.

UK-headed groups should bear in mind that they be subject to both the DTT and the MTT. For example, they might apply the DTT in respect of UK entities and the MTT in respect of entities undertaxed in other territories (if the STTR does not apply to the group’s profits in those territories).

Similarly, non-UK headed groups will need to identify any differences between the UK DTT rules and any applicable IIR rules of a parent entity, to determine whether any additional data points will be required in order to perform the calculations.


OECD term UK term Meaning
Income inclusion rule (IIR) Multinational top-up tax Allows entities to be subject to additional tax where a group fails to meet the minimum level of tax in any particular territory.
Ultimate parent entity (UPE) Ultimate parent The highest company in a chain of 51%+ owned companies that is required to prepare a set of consolidated financial statements.
Intermediate parent entity Intermediate parent member Subsidiaries (or sub-subsidiaries etc) of the UPE that might be taxed instead of the UPE when the territory in which the UPE is resident has not adopted the IIR into domestic tax legislation
Constitute entity Constitute entity Any permanent establishment or subsidiary that forms part of the consolidated group of companies.
Effective tax rate Effective tax rate This is not just the tax rate paid by a group of companies on its taxable profits but rather a comparison of a collection of taxes paid in a particular territory with the (adjusted) accounting profits attributable to companies in that territory.
GloBE income Adjusted profits This is the accounting profit of entities in a particular territory, having made various adjustments.
Qualifying domestic minimum top-up tax (QDMTT) Domestic top-up tax A QDMTT is a top-up tax charged by a territory on the profits of entities located in that territory, to ensure that they pay a minimum level of tax, in accordance with the pillar two rules. This ensures they do not receive a charge under any other pillar two tax introduced by another jurisdiction
Undertaxed payments rule (UTPR) Qualifying undertaxed profits tax The UTPR is the second tax in the GloBE rules. It works alongside the IIR as a backstop to ensure that the full amount of the top-up charge is collected and that the minimum effective tax rate of 15% is enforced.

Further reading

  1. Policy paper, draft legislation and explanatory note for the UK’s new multi-national top-up tax
  2. HM Treasury and HMRC consultation on implementation of Pillar Two
  3. UK legislation implementing the multinational top-up tax
  4. UK legislation implementing the domestic top-up tax
  5. OECD’s “Pillar Two rules in a nutshell”
  6. OECD’s Pillar Two model rules for domestic implementation of 15% global minimum tax
  7. OECD’s commentary on the global anti-base erosion (GloBE) model rules
  8. OECD’s examples of the GloBE rules
  9. HMRC’s draft guidance on the MTT and DTT
Tax Faculty

This guidance is created by the Tax Faculty, recognised internationally as a leading authority and source of expertise on taxation. The Faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.

Open AddCPD icon

Add Verified CPD Activity

Introducing AddCPD, a new way to record your CPD activities!

Log in to start using the AddCPD tool. Available only to ICAEW members.

Add this page to your CPD activity

Step 1 of 3
Download recorded
Download not recorded

Please download the related document if you wish to add this activity to your record

What time are you claiming for this activity?
Mandatory fields

Add this page to your CPD activity

Step 2 of 3
Mandatory field

Add activity to my record

Step 3 of 3
Mandatory field

Activity added

An error has occurred
Please try again

If the problem persists please contact our helpline on +44 (0)1908 248 250
Open AddCPD icon

Add Verified CPD Activity

Introducing AddCPD, a new way to record your CPD activities!

Log in to start using the AddCPD tool. Available only to ICAEW members.

Add this page to your CPD activity

Step 1 of 3
Download recorded
Download not recorded

Please download the related document if you wish to add this activity to your record

What time are you claiming for this activity?
Mandatory fields

Add this page to your CPD activity

Step 2 of 3
Mandatory field

Add activity to my record

Step 3 of 3
Mandatory field

Activity added

An error has occurred
Please try again

If the problem persists please contact our helpline on +44 (0)1908 248 250