On 21 March 2024, Federal Treasury released long anticipated exposure draft legislation materials on addressing Australia’s adoption of a global and minimum tax in Australia, based on the Organisation for Economic Co-operation and Development (OECD) Global Anti-Base Erosion (GloBE) Model Rules.
The exposure draft follows the Australian federal government’s 2023-24 budget announcement on 9 May 2023 which confirmed an intention to implement the principles and key components of the Pillar Two rules. Associated Pillar One rules which deal with taxing rights on residual or “non-routine” profits are still in development and not discussed here.
Pillar Two: Global Minimum Taxation
Pillar Two introduces a co-ordinated framework to establish a global Effective Tax Rate (ETR) of 15% for MNEs with global revenue above €750 million (approx. AUD$1.2 billion), with the intention that income is appropriately taxed in the jurisdiction of operation. This set of rules establishing a Global Minimum Tax are known as the OECD’s GloBE Rules.
Pillar Two is being implemented across the globe, with local tax jurisdictions enacting components of the GloBE framework as appropriate for their needs and applies to Multinational Enterprises (MNEs) with annual global revenue above the threshold. The rules aim to establish a global minimum rate of taxation on income arising in each jurisdiction of operation, with mechanisms to impose a “top-up tax” on profits where the effective tax rate falls below the baseline 15% minimum rate, subject to substance-based carve-out rules and other specific exclusions.
The complexity of the Pillar Two rules may in theory create various unforeseen taxing outcomes, particularly where differences in implementation globally result in an IIR (or UTPR) obligation for intermediary entities within the structure. This is due to the interplay of these rules cross-border and capture of untaxed revenue.
At the time of the budget announcement, the proposed legislation would enact a 15% global minimum tax by way of introducing an Income Inclusion Rule (IIR) for large multinational enterprises headquartered in Australia, and a 15% Domestic Minimum Tax (DMT) to capture Australian constituent entities of multinational groups, and Undertaxed Profits Rule (UTPR) where neither the IIR or DMT (or other Qualified Domestic Top-Up Tax “QDMTT”) have applied. The proposed implementation dates of these rules, subject to availability of Transitional Safe Harbour (TSF), are as follows:
- 15% Global Minimum Tax (GMT) applying to years starting on or after 1 January 2024 for large MNEs headquartered in Australia by establishing an Income Inclusion Rule (IIR);
- 15% Undertaxed Payments Rule (UTPR) applying to years starting on or after 1 January 2025 in respect of any top-up tax allocated to a constituent entity not collected by the parent entity or other intermediary under the IIR; and
- 15% Domestic Minimum Tax (DMT) applicable to years starting on or after 1 January 2024 for Australian constituent entities MNEs headquartered elsewhere.
The EU and various other jurisdictions have already established or are in the process of establishing similar rules, however some key markets have indicated they are unlikely to adopt the rules (at least in the coming years or have been silent on adoption). These jurisdictions are most notably the United States of America and China, as well as certain other key Latin American, Middle Eastern and African jurisdictions.
By not adopting the rules in these jurisdictions, the taxing obligation under Pillar Two is, in many cases, pushed down to the constituent entities and other intermediary entities within the group’s structure. This is expected to have a significant impact on taxes collected by jurisdictions instigating a UTPR or DMT (or QMDTT) and may also result in low-taxed income capture under the IIR where an intermediate parent of the group (at the sub-holding level) applies this rule.
GloBE Compliance
Compliance with the GloBE framework in Australia will consist of lodging one or more of the following forms:
- GloBE Information Return: The GloBE Information Return provides the ATO with general information about the entity, its broader MNE group, all information relevant to determining top-up obligations, and various other information.
- Australian GloBE Tax Return: Australian GloBE Tax Return is a supplementary form to the GIR which must be submitted by the GloBE Parent Entity (if an Australian entity) or is the designated local constituent entity to disclose the amount of GloBE top-up tax payable in Australia. This form must be submitted even if the GloBE top-up tax amount for the relevant financial year is $Nil.
- DMT Return: DMT Return is a further supplementary form which administers an Australian constituent entity’s top-up tax liability under the DMT. Submission of the form is required even if the DMT top-up tax amount for the relevant financial year is $Nil.
The current draft exposure legislation indicates that a single DMT Return may be submitted by a designated constituent entity, rather than each local constituent entity in turn; each constituent entity is taken to have submitted the DMT return at the time of lodgement by the designated local entity. This obligation includes constituent entities that are Australian GloBE Permanent Establishments, regardless of whether the Main Entity is in Australia.
More detailed discussion and analysis of the GloBE Model Rules and Pillar Two implementation in Australia is to come.