Pillar Two implementation in Australia: current state of play

On 22 August 2024, the Australian House of Representatives passed a new law that introduces a 15% global minimum tax and a domestic minimum tax for large multinational companies with yearly global revenues over €750 million. This move follows the Australian Government's 2023-2024 Budget plan, which included adopting the OECD/G20 Two-Pillar Solution to tackle tax challenges brought on by the digital economy. The bill is now being reviewed by the Senate.

This article analyses the key aspects of this legislation, explores its implications, and offers strategic recommendations to assist businesses in effectively navigating these new requirements.

Australia legislation framework

The Australian primary legislative framework on Pillar Two implementation comprises three bills:

1. Imposition Bill: Taxation (Multinational—Global and Domestic Minimum Tax) Imposition Bill 2024: establishes the imposition of top-up tax.
2. Assessment Bill: Taxation (Multinational—Global and Domestic Minimum Tax) Bill 2024: provides implementation framework for the imposition of top-up tax.
3. Consequential Bill: Treasury Laws Amendment (Multinational—Global and Domestic Minimum Tax) (Consequential) Bill 2024: addresses consequential provisions for administration of top-up tax.

OECD Pillar Two Global Anti-Base Erosion (GloBE) Rules Framework

Purpose

The GloBE Rules aim to implement a global minimum tax rate of 15% to deter MNE Groups from shifting profits to low-tax jurisdictions. By setting this minimum threshold, the rules aim to prevent profit shifting and base erosion, and to ensure fair tax payments across jurisdictions.

Key mechanisms

1. Income Inclusion Rule (IIR):
   • Function: Allows jurisdictions to impose a top-up tax on the income of multinational parent entities when their effective tax rate in other jurisdictions is below 15%.
   • Application: The IIR ensures that the parent entity will be taxed on the shortfall between the local tax rate and the 15% minimum.
2. Undertaxed Profits Rule (UTPR):
   • Function: Acts as a backstop to impose a top-up tax on profits not adequately taxed under the IIR.
   • Application: The UTPR applies if profits are reported in jurisdictions with an effective tax rate below 15% and are not covered by the IIR.

Domestic minimum tax option

• Function: Jurisdictions can apply a domestic minimum tax before considering the IIR and UTPR, giving them the option to prioritize their own tax claims on profits within their borders.

Applicability of the GloBE rules in Australia

Effective dates

• IIR and Domestic Minimum Tax: Applies to fiscal years starting on or after 1 January 2024.
• UTPR: Applies to fiscal years starting on or after 1 January 2025.

Scope

• MNE Groups: Applies to MNE Groups with annual revenues exceeding €750 million.

Application

• IIR or Global Minimum Tax: allow Australia to apply a top-up tax on a resident multinational ‘parent’ company, where the group’s income in another jurisdiction is being taxed below the global minimum rate of 15 per cent.

• Domestic Minimum Tax: allow Australia to apply a top-up tax on a resident subsidiary member of MNE Groups located in Australia in order to bring the effective tax rate up to the 15 per cent minimum rate.
• UTPR: allow Australia to apply a top-up tax on a resident subsidiary member of a multinational group if the group’s income in another jurisdiction is being taxed below the global minimum rate of 15 per cent and where no IIR applies.

Lodgment obligations

Lodgment forms

It is anticipated that four new obligations will be introduced, which entities may be required lodge:

1. GloBE Information Return (GIR)
2. Foreign Lodgment Notification
3. Australian IIR/UTPR Tax Return (AIUTR)
4. Domestic Minimum Tax Return (DMTR)

GIR is an information return that provides data to help tax administrators evaluate an MNE's compliance with the GloBE Rules, as described in the OECD Pillar Two Framework.

Foreign lodgment notification, AIUTR and DMTR forms are under development in Australia and will be available before the first lodgment deadline, due by 30 June 2026.

Lodgment timelines

• GIR and Foreign Lodgment Notification: Due 18 months after the end of the first fiscal year (for example the lodgment due date for 31 December and 30 June year end balancers will be 30 June 2026 and 31 December 2026, respectively) and 15 months after the end of subsequent years.
• AIUTR and DMTR: Due 18 months after the end of the first fiscal year, with potential extensions for deadlines.

OECD safe harbours

Several safe harbours defined in the OECD Framework are available to simplify compliance: 

1. Transitional Country-by-Country Reporting (CbCR) Safe Harbour: Allows use of existing CbCR data for compliance up to fiscal years beginning on or before 31 December 2026.
2. Qualified Domestic Minimum Top-up Tax (QDMTT) Safe Harbour: Eliminates the need for GloBE calculations if a jurisdiction applies QDMTT.
3. Non-Material Constituent Entity Simplified Calculations Safe Harbour: Provides simplifications for non-material entities.
4. Transitional UTPR Safe Harbour: Details are under development.

Australia intends to align with OECD guidelines and will not offer additional concessions.

Our key observations

1. Compliance challenges: businesses face varying levels of readiness, with many anticipating significant compliance hurdles. The GloBE Rules introduce complex requirements that may strain existing systems and processes.
2. Compliance challenges: businesses face varying levels of readiness, with many anticipating significant compliance hurdles. The GloBE Rules introduce complex requirements that may strain existing systems and processes.
3. Australian-specific issues:
   
   • Administrative penalties: concerns about penalties and clarity on enforcement are anticipated.
   • Safe harbours: reliance on OECD safe harbours will be crucial for compliance.
   • Interaction with existing regime: questions about how GloBE Rules will interact with the current Australian tax regime need careful interpretation.

Our recommendation

1. Assess readiness: perform a thorough Pillar Two readiness assessment to determine your business’s preparedness and develop a compliance strategy addressing identified challenges and resource needs.
2. Conduct modelling: evaluate the potential for global and domestic minimum taxes in jurisdictions where your business operates and adjust its global tax strategy accordingly.
3. Plan for data management: manage data capture requirements for the GIR and invest in system upgrades or manual processes to streamline data collection and ensure accuracy.
4. Engage with advisers: consult with tax advisers to navigate the GloBE Rules and leverage their expertise for impact assessments and to understand data requirements.
5. Monitor legislative developments: stay informed about legislative progress and actively participate in consultations to voice concerns and seek clarifications.

By proactively addressing these areas, your business can be well-positioned to effectively manage the complexities of the GloBE Rules and ensure compliance with the new global and domestic tax measures.