- The Australian Treasury has released draft legislation for consultation to implement global and domestic minimum taxes as an adoption of the OECD Two Pillar solution, which include an Income Inclusion Rule, an Undertaxed Profits Rule and a Domestic Minimum Tax (DMT) with safe harbor rules.
- In-scope multinational entities will be required to lodge three new returns in an approved form to the Australian Tax Office, including a GloBE information Return, an Australian GloBE Tax Return and a DMT return. Amendments to existing tax accounting standards requiring new financial reporting disclosures in respect of Pillar Two have been made.
- The Australian Treasury is also consulting on a Discussion Paper on interactions between the draft legislation and the existing income tax laws including the hybrid mismatch rules, the foreign hybrid entity rules, the controlled foreign company rules and foreign income tax offsets.
On 21 March 2024, the Australian Treasury released Exposure Draft (ED) primary legislation and subordinate legislation, in the form of Rules, for Australia's proposed adoption of the Organisation for Economic Co-operation and Development (OECD) Global Anti-Base Erosion (GloBE) Pillar Two global and domestic minimum tax rules, for consultation.
The ED primary legislation outlines the key aspects of the global and domestic minimum taxes, including the imposition of top-up tax, through an Income Inclusion Rule (IIR), an Undertaxed Profits Rule (UTPR) and a Domestic Minimum Tax (DMT).
The proposed Rules are in line with the OECD's Model Rules and outline the key aspects of the computation of GloBE income and top-up tax, including Transitional Country by Country Reporting (CbCR) Safe Harbors.
Treasury also released a discussion paper on the interaction of global and domestic minimum taxes with certain existing income tax laws.
Submissions on the primary legislation and discussion paper are due by 16 April 2024, and submissions on the subordinate legislation are due by 16 May 2024.
The release of the drafts will allow Australian-based and global groups with a presence in Australia to progress their Pillar Two implementation projects, including to address the technical impact of the rules as well as the organization's data and systems readiness to comply with and report on the rules.
Key features of the Exposure Draft legislation
Overview
Consistent with the Government's announcement in the May 2023-24 Budget, the ED primary legislation proposes to implement:
- A global minimum tax by imposing top-up tax through an IIR, applying to fiscal years commencing on or after 1 January 2024
- A UTPR, applying to fiscal years commencing on or after 1 January 2025
- A DMT applying to fiscal years commencing on or after 1 January 2024
The ED Assessment Bill sets out the necessary framework for the Rules, and the ED Imposition Bill will impose top-up tax in respect of the IIR, UTPR and DMT. The ED Consequential Amendment Bill contains consequential and miscellaneous provisions to facilitate the administration of the top-up tax, including the preparation of three new returns for filing in Australia for in-scope multinational groups (MNE Groups).
The three bills are accompanied by the ED Rules, which propose to implement the domestic framework for the calculations required to determine the top-up tax liability. The Rules are intended to be consistent with the OECD's Model Rules, Commentary and Administrative Guidance.
A summary of the key features of the proposals and the administrative requirements follows.
IIR, UTPR and DMT charging rules
The IIR applies by imposing the top-up tax amount on the applicable Parent Entity generally closest the top of the corporate structure (the "top-down" approach). The IIR considers any low-taxed constituent entities subject to an effective tax rate (ETR) below the 15% minimum tax rate in that jurisdiction and imposes a top-up tax on the ultimate parent entity, in proportion to their ownership of the constituent entity.
The UTPR serves as a backstop to the IIR and permits other jurisdictions to impose top-up tax (by denying deductions or an equivalent adjustment) on certain low-taxed constituent entities in the MNE Group that are resident in foreign jurisdictions and are not subject to top-up tax under an IIR.
The DMT applies to Australian operations that are part of a MNE Group. The DMT imposes the top-up tax on Australian entities that are subject to an ETR below the 15% minimum tax rate. The DMT requires the use of Australian financial statements and AUD currency in most cases — a divergence from Model Rules that require parent-entity consolidated financial statement and reporting currency, potentially creating an additional compliance burden for Australian subsidiaries.
Applicable MNE Groups
The global and domestic minimum taxes apply to MNE Groups, with consolidated annual revenue of at least €750m in at least two of the four fiscal years immediately preceding the test year.
An MNE Group is a group with an Ultimate Parent Entity (UPE) (head entity) and a Constituent Entity (entity controlled by the UPE) located in a different jurisdiction.
The revenue threshold is listed in Euros to avoid annual rebasing calculations and to minimize the difference between the Australian threshold and the thresholds set by other jurisdictions.
Consistent with the OECD Model Rules, only limited exemptions to the Rules will apply. These are all specifically defined under the Rules and include investment funds and real estate investment vehicles that are a UPE, pension funds (not extended to specifically reference Australian complying superannuation funds being in scope), governmental entities, international organizations, nonprofit organizations and income associated with international shipping.
The Rules
The ED Rules are largely in line with the OECD's Model Rules. They include key operative aspects of the OECD's Model Rules, such as computation of GloBE income and top-up tax, details on the application of the rules to investment and tax-transparent entities and transitional provisions for Applicable MNE Groups.
The Rules are triggered by the threshold of the ETR for each country in which the MNE Group operates. Broadly, the ETR for all entities of the MNE Group is determined on a jurisdictional basis by dividing the Adjusted Covered Taxes of the entities in the respective jurisdiction by their GloBE Income. If the ETR is below the global minimum tax rate of 15% in a jurisdiction, the MNE Group is subject to a top-up tax and this tax could be collected under an IIR, UTPR or DMT.
The Rules also operate to ensure that future administrative guidance released by the OECD can be incorporated in a timely and efficient manner, through the relevant Minister's regulation-making power.
- Safe harbor rules
Safe harbor rules are included in the Rules to aid the administrative burden in computing the complex top-up tax calculations by deeming top-up tax for a jurisdiction to be zero for a fiscal year if certain conditions are met.
The Transitional CbCR Safe Harbor is designed to provide transitional relief for MNE Groups in the initial years and operates through the use of information contained in an MNE's Qualified CbC Report and Qualified Financial Statements.
The Rules also provide for a permanent simplified calculations safe harbor (which is generally yet to be agreed at the OECD level) and a QDMTT safe harbor.
- Availability of franking credits on top-up tax
The payment of top-up tax under a DMT will give rise to franking credits; however, top-up tax under the global minimum tax rules, including under the IIR and UTPR, is an international form of tax and will not give rise to franking credits.
- Returns
The ED legislation proposes to introduce three new returns for in-scope MNEs to complete and submit to the Australian Taxation Office (ATO):
- A GloBE Information Return is a standardized return and is consistent with the GloBE Rules. The GloBE Information Return may be lodged overseas and then exchanged with the Commissioner of Taxation.
- An Australian GloBE Tax Return will contain information for purposes of administering the GloBE Rules to assess and collect IIR and UTPR top-up tax.
- A DMT Return will contain information for purpose of administering the GloBE Rules to assess and collect Domestic top-up tax.
These returns must be completed and submitted to the ATO in an approved form.
The Australian GloBE Tax Return and the DMT Return are required to be filed within the time specified for filing the Globe Information Return. Filing must be completed within 15 months after the end of every fiscal year, except for the first fiscal year of implementation, called the transition year, where returns must be completed within 18 months of the end of the fiscal year.
The Commissioner does not have discretion to defer filing of the GloBE Information Return but may defer filing of the Australian GloBE Tax Return and the DMT Return.
Administrative penalties apply to the Applicable MNE Group in respect of false and misleading statements about GloBE top-up tax or domestic top-up tax liabilities or for failing to file a return.
Note that in the transition year, the ED indicates that the ATO should consider not applying penalties or sanctions in connection with the filing of the GloBE Information Return, where an MNE Group has taken "reasonable measures" to ensure the correct application of the rules.
- Record keeping
The ED legislation requires entities to keep records necessary for the collection and recovery of GloBE top-up tax and domestic top-up tax.
Entities are required to keep records that fully explain whether the entity of an Applicable MNE Group has complied with the legislation.
Record-keeping requirements apply to entities located in Australia notwithstanding that the GloBE Information Return may be lodged overseas and then exchanged with the Commissioner.
Australian law interaction discussion paper
The ED primary and secondary legislation closely aligns to the OECD model rules and there is little consideration given to Australian-specific issues.
Treasury is also consulting on a Discussion Paper to assist stakeholders in providing feedback on interactions between the ED primary legislation and existing income tax laws. The discussion paper seeks feedback on the hybrid mismatch rules, the foreign hybrid entity rules, controlled foreign company rules and foreign income tax offsets.
Some areas in which the ED and accompanying explanatory materials are silent and where further guidance and/or law development would be welcome include Australian tax consolidation issues with respect to merger and acquisition (M&A) transactions, treatment of Australian Research & Development incentives and unique Australian entities, such as Managed Investment Trusts and the future Intangibles law and interaction with foreign GloBE Rules.
Financial reporting implications
Amendments have been made to existing tax accounting standards (IFRS1 IAS 12/AASB2 112 and AASB 1060) requiring new financial reporting disclosures in respect of Pillar Two, including for periods in which Pillar Two legislation is enacted, or substantively enacted but not yet in effect.
Although ED legislation has now been released in Australia, this does not amount to "substantive enactment" of the legislation necessary for covered groups to report under the standards. Bills must be passed by both Houses of Parliament before the legislation can be considered "substantively enacted."
For additional information concerning this Alert, please contact:
Ernst & Young (Australia), Sydney
- David Short
- Nadine Redford
- David Burns
- Jim Axiomakarou
- Lachlan Cobon
- Alfonso J Capito
- Stefan Hempelmann
Ernst & Young (Australia), Melbourne
- Tony Merlo
- Liz Cullinan
- Richard Goodwin
- Caroline Wright
- Sam Humphris
Ernst & Young (Australia), Perth
- Andrew Nelson
Ernst & Young (Australia), Auckland
- Matt Andrew
Ernst & Young LLP (United States), Australia Tax Desk, New York
- Naomi Ross
Ernst & Young LLP (United Kingdom), Australia Tax Desk, London
- James Poulos
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.
