Tax Alert

Exposure draft legislation released for Pillar Two in Australia

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March 22, 2024

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Treasury has released draft legislation for the implementation of the OECD’s Pillar Two minimum tax regime in Australia, confirming that a global and domestic minimum tax will apply in Australia with effect from 1 January 2024.

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22 March 2024

In Brief

On 21 March 2024, exposure draft legislation to implement a global and domestic minimum tax in Australia was released for consultation by Treasury. As part of implementing this measure, exposure draft primary legislation, exposure draft subordinate legislation in the form of Rules, and accompanying explanatory materials have been released.

The measures included in the exposure draft legislation and Rules will:

Impose top-up tax under the Income Inclusion Rule (IIR) and a Domestic Minimum Tax (DMT) from fiscal years commencing on or after 1 January 2024;
Impose top-up tax under the Undertaxed Profits Rule (UTPR) from fiscal years commencing on or after 1 January 2025;
Implement the framework for the imposition of top-up tax consistent with the OECD’s Global Anti-Base Erosion (GloBE) Model Rules, Commentary, Agreed Administrative Guidance and Safe Harbour Rules; and
Introduce consequential provisions necessary for the administration of top-up tax.

In addition to the above, Treasury has released a consultation paper seeking feedback on interactions with Australia’s hybrid mismatch rules, foreign hybrid entity rules, foreign income tax offsets, and controlled foreign company rules.

Submissions on the exposure draft primary legislation and consultation paper are due 16 April 2024, with submissions on the exposure draft subordinate legislation due 16 May 2024.

In Detail

What is Pillar Two?

Under an OECD Inclusive Framework, more than 135 countries agreed to enact a Two-Pillar solution to address the challenges arising from the digitalisation of the economy.

Pillar Two introduces a global minimum Effective Tax Rate (ETR) via a system where multinational enterprise (MNE) groups with consolidated revenue over EUR 750 million are subject to a minimum ETR of 15% on income arising in low-tax jurisdictions.

When do the Australian Pillar Two rules come into effect?

Consistent with previous Government announcements, the IIR and DMT will apply to fiscal years commencing on or after 1 January 2024, with the UTPR applying to fiscal years commencing on or after 1 January 2025.

Despite the retrospective commencement, applying the IIR and DMT with effect from as early as 1 January 2024 achieves a start date that is in line with both the date stipulated by the OECD’s Two Pillar Solution and the commencement time for numerous other jurisdictions implementing the GloBE Rules as part of the coordinated international approach.

Inbound groups will need to pay particular attention to the commencement date in jurisdictions where the parent entity or any intermediate holding companies in the ownership chain are located. With the rules commencing from 1 January 2024 in Australia, there is the possibility that a later start date in the parent entity jurisdiction could create additional compliance obligations for the Australian group. For example, for jurisdictions such as Japan where the Pillar Two rules will come into effect for income years starting on or after 1 April 2024, the Australian subsidiaries of a Japanese parented group with a 31 December year end would be subject to the Australian Pillar Two rules from 1 January 2024, whereas their Japanese parent and broader group would be first subject to the Japanese Pillar Two rules one year later from 1 January 2025.

Approach to implementation in Australia

To implement the global and domestic minimum tax regime in Australia, exposure draft primary legislation, subordinate legislation in the form of Rules, and accompanying explanatory materials have been released for comment, before the final legislation is introduced into Parliament (expected later this year).

The Rules comprise the key operative aspects of the OECD’s GloBE Model Rules and provide the specific legislative machinery and computations required to be undertaken to determine the amount of top-up tax liability that may arise.

Accompanying the Rules are three complementary Bills which form part of a set of legislation required to implement the GloBE Rules and a DMT in Australia:

The Imposition Bill which will impose top-up tax, in respect of the IIR, UTPR and the DMT;
The Assessment Bill which will implement the framework for imposition of top-up tax for the IIR, UTPR and the DMT consistent with the GloBE Rules; and
The Consequential Bill which contains consequential and miscellaneous provisions necessary for the administration of the top-up tax in respect of applicable MNE groups.

As the OECD continues to release Agreed Administrative Guidance to clarify and refine the design aspects of the Model Rules, a key challenge that is already facing jurisdictions which have enacted Pillar Two legislation is how to efficiently update this legislation for the ongoing changes. By designing the Rules as a legislative instrument for the purposes of the Legislation Act 2003, it is intended that the substantive computation of top-up tax, consistent with the GloBE Rules, is to be determined under the Minister’s rule-making power. This approach is aimed at ensuring that future administrative guidance released by the OECD can be more easily adapted and incorporated in a timely and efficient manner, while retaining an appropriate level of parliamentary oversight.

The exposure draft provides that the Australian provisions are to be interpreted in a manner which is consistent with specified OECD documents (similar to the approach adopted in Australia’s transfer pricing provisions), including the GloBE Model Rules, Commentary, Agreed Administrative Guidance and Safe Harbour Rules. However, to the extent of any inconsistency, the Australian provisions prevail.

Who do the Rules apply to?

The Assessment Bill sets out when an MNE group is subject to the GloBE Rules. This happens when the MNE group satisfies the following two criteria:

the group’s corporate structure satisfies the requirements to be an MNE group (broadly, the group must operate through entities or permanent establishments in more than one jurisdiction); and
the MNE group has consolidated annual revenue of at least EUR 750 million in at least two of the four fiscal years immediately preceding the test year.

The concept of a group is defined having regard to those entities that are consolidated on a line-by-line basis into the group’s consolidated financial statements (or would be, if they were prepared). There are numerous entity types specifically defined within the Rules, for example, “Excluded Entities”, “Investment Entities”, “Partially-owned Parent Entities”, “Stateless Entities”, and many others. For this reason, and for the purpose of testing who the Rules apply to, a Pillar Two assessment typically starts with a detailed examination of the group structure to define the MNE group and the jurisdictions in which it operates.

Monetary thresholds in the GloBE Rules, such as the consolidated annual revenue threshold of EUR 750 million, are denominated in EUR to avoid annual rebasing calculations and to minimise the difference between the Australian threshold and thresholds set by other jurisdictions. Translation of amounts to EUR is to be completed using the average of the quoted daily rates of exchange for the month of December included in the fiscal year immediately preceding the particular fiscal year being tested.

How do the rules apply?

The objective of the Assessment Bill is to ensure MNE groups pay a minimum level of tax on the income arising in each of the jurisdictions where they operate. It does so by imposing a top-up tax on profits in a jurisdiction whenever the ETR, that is determined for that jurisdiction, is below the minimum rate of 15%.

The determination of a jurisdiction’s ETR involves a data heavy, complex computation which transforms the typically well understood concept of an accounting ETR into the resulting Pillar Two ETR. The calculation starts with the usual concepts of profit after tax, current tax expense and deferred tax expense and then makes a series of adjustments to arrive at “Adjusted Covered Taxes” and net “GloBE Income”, which are used to calculate the jurisdiction’s ETR.

Where a jurisdiction’s ETR is below 15%, the IIR or the DMT may then impose a top-up tax on the relevant profits.

Are franking credits available for top-up tax paid?

In accordance with the Consequential Bill, the payment of top-up tax under the DMT will give rise to franking credits, however as GloBE top-up tax is a top-up of low taxation in countries outside Australia, it is an international form of tax and will not give rise to franking credits.

As part of the consultation process, Treasury is seeking views on timing issues in respect of franking credits and debits. In particular, at what point in time, or for what period of time, does an entity of an MNE Group need to be a franking entity for top-up tax under the DMT to give rise to a franking credit in the relevant franking account?

Application of safe harbour provisions

Certain safe harbour rules are included within 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.

There are three safe harbours that may apply to an MNE group in a jurisdiction for a fiscal year, including:

Transitional Country-by-Country Reporting (CbCR) Safe Harbour - operates in the initial three years of the GloBE Rules through the use of simplified jurisdictional revenue and income information contained in an MNE’s “Qualified CbC Report”, and jurisdictional tax information contained in an MNE’s Qualified Financial Statements;
Permanent Simplified Calculations Safe Harbour - currently a framework to allow for the future development of a permanent safe harbour test (although currently applicable to non-material constituent entities); and
Qualified Domestic Minimum top-up tax (QDMTT) safe harbour - applicable where a jurisdiction’s QDMTT is determined to have QDMTT safe harbour status for a fiscal year.

Given the potential for significant compliance savings available to MNE groups through the application of the safe harbours, particularly the Transitional CbCR Safe Harbour, it is strongly recommended that an assessment of the application of these rules is undertaken in the near future. Understanding whether there are jurisdictions within the group that may not qualify for a safe harbour will allow groups sufficient time to dedicate the required resources to gathering the required data to undertake the full Pillar Two calculations.

Interaction with existing income tax laws

Given the implementation of Pillar Two will see an expansion of global and domestic minimum taxes applied in a number of jurisdictions, consequential amendments will be required to ensure that legislation implementing the global and domestic minimum taxes will have appropriate interactions with certain tax integrity and other rules in the existing income tax laws.

Treasury has released a consultation paper seeking feedback on interactions with Australia’s hybrid mismatch rules, foreign hybrid entity rules, foreign income tax offsets, and controlled foreign company (CFC) rules, noting that the interactions may require consequential amendments to the current income tax laws.

Broadly, the policy approach taken is that Australian income tax laws will continue to apply prior to any application of the global and domestic minimum taxes. However, a foreign jurisdiction’s DMT, in some circumstances, will take precedence over Australia’s income tax laws.

Specifically, the consultation paper considers the following approaches should be taken:

Hybrid mismatch rules - Broadly, Treasury is of the view that the Australian hybrid mismatch rules should continue operating on the following basis:
- No changes are required to the definition of “subject to Australian income tax” as the operation of Australia’s global and domestic minimum taxes will not affect whether an amount is subject to Australian tax;
- Amendments will be required to ensure that a foreign jurisdiction’s global and domestic minimum taxes will not have an impact for the purposes of identifying whether a payment is “subject to foreign income tax”; and
- The anticipated amendments to the “subject to foreign tax” concept will also ensure that a foreign jurisdiction’s global and domestic minimum taxes will not be taken into account in determining whether a payment is subject to foreign income tax at a rate of 10% or less under Australia’s targeted integrity rule (in Subdivision 832-J of the Income Tax Assessment Act 1997).
Foreign hybrid entity rules - Australia’s foreign hybrid entity rules should continue operating without regard to the imposition of foreign global and domestic minimum taxes. In this regard, amendments would be required to ensure that taxes paid under an IIR, UTPR or DMTare disregarded for the purposes of determining whether foreign income tax is imposed on the foreign hybrid entity.
Foreign income tax offsets (FITO) - Treasury considers it is appropriate that taxes imposed under a foreign Qualified Domestic Minimum Tax (QDMT) could give rise to a FITO, while taxes imposed under a foreign IIR or UTPR will not.
Foreign income tax paid by CFCs - Treasury’s view is that Australia’s CFC rules should not provide a notional allowable deduction for any taxes paid under an IIR or UTPR as CFC taxes are already factored into the calculation of the jurisdictional ETR under the IIR and UTPR. In contrast, Treasury considers that a notional allowable deduction could be provided for top-up tax paid under a foreign jurisdiction’s QDMT. This would ensure consistent treatment with that of FITOs noted above.
Other issues - In addition to the above, there are other interactions with existing and draft income tax legislation relating to the concepts of ‘subject to tax’ and ‘subject to foreign tax’. Treasury is still considering its view on these interactions, but notes that the operation of a foreign DMT, IIR or UTPR would not affect whether an amount is ‘subject to tax’ for the purposes of such provisions.

It is noted that very little information has been included in the exposure draft and supporting materials relating to the interaction of the global and domestic minimum tax Rules with Australia’s tax consolidation regime. This is specifically relevant given that certain features of the tax consolidation regime, for example the resetting of tax bases following an acquisition, do not appear to neatly align with the Rules relating to corporate restructurings and holding structures in Chapter 6. This may be an area of interaction which requires further detail to be published through the consultation period.

Reporting obligations

The Consequential Bill establishes that the following returns will need to be given to the Commissioner:

A GloBE Information Return – an obligation to lodge this standardised return with the Commissioner is consistent with the GloBE Model Rules.
An Australian GloBE Tax Return – this return supplements the GloBE Information Return and contains information for the purposes of administering the GloBE Rules to assess and collect IIR top-up tax and UTPR top-up tax.
A DMT Return – this return supplements the GloBE Information Return and contains information for the purposes of administering the GloBE Rules to assess and collect DMT. Currently all entities or permanent establishments of an applicable MNE group that are located in Australia are required to lodge a separate DMT Return. Treasury is seeking views on whether there are circumstances in which lodgment of the DMT Return by each entity/permanent establishment might not be warranted, in particular in the context of tax consolidated groups.

The GloBE Information Return requirement may be satisfied through the MNE group filing the return in a foreign jurisdiction which has the required information exchange protocols with Australia and notifying the Commissioner (similar to the current Australian filing requirements for the CbC Report). It is currently proposed that where the Commissioner does not receive the GloBE Information Return from the relevant foreign tax authority, the Commissioner may require a local filing, although Treasury is seeking stakeholder comments in relation to this.

Financial reporting implications

Although exposure draft legislation has now been released in Australia, this should not amount to substantive enactment of the rules, which is a relevant threshold for considering the application of financial accounting standards and required financial statement disclosures. Substantive enactment in Australia typically requires legislation to have passed both houses of Parliament.

As amendments have been made to the existing tax accounting standards (IAS 12/AASB 112 and AASB 1060) to incorporate specific Pillar Two disclosure requirements in financial statements, the status and application of the legislation will need to be monitored in the lead up to and after 30 June 2024 in order to determine what additional disclosures may be required.

Where do I start?

There is a lot of detail included in this release of the exposure draft legislation and supporting materials to be considered in working out how best to tackle the implementation of the Pillar Two rules in Australia.

In addition to undertaking steps to identify the MNE group and assess the availability of safe harbours, the following resources are available to help identify the required action items and establish an implementation plan for dealing with Pillar Two:

Who are the potential stakeholders to be briefed?

The Pillar Two rules are a fundamental change to the international tax system and will involve substantial changes for MNE groups - including how and where tax is collected, compliance and filing obligations, data collection, internal reporting and financial reporting.

From an organisational perspective, key stakeholders to brief may include the Board, C-Suite, investors and external auditors.

How do I approach Pillar Two compliance requirements?

The Pillar Two rules will cause a step change in how companies approach, and deliver, global tax compliance. In addition it provides an opportunity to consider to what extent a centralised or decentralised finance and tax model is appropriate for the business, with the Pillar Two concepts and requirements lending themselves to a more centralised approach.

The following resources provide further insights on these important aspects of the Pillar Two regime:

PwC Tax Insights: Is Pillar Two the game changer for tax compliance?
PwC Tax Insights: Is Pillar Two a reason to rethink your decentralised finance and tax model?
Technology such as PwC’s Pillar Two Engine, a centralised rules-based tool that can be implemented in different ways depending on whether a business wants to outsource Pillar Two capability as a cloud-hosted managed service or insource the licensed version to do the calculations in-house, or a mix of both, can help address the compliance requirements.

The Takeaway

Australia’s introduction of a global and domestic minimum tax regime represents yet another significant development in the taxation laws applying to MNE groups. With the rules already in effect for some taxpayers, it is imperative that MNE groups that are within the scope of the regime consider the impact of the exposure draft legislation, determine the impact on their group and actively engage in consultation with Treasury on the design of the final legislation.

Contact us

If you would like to further discuss Pillar Two, reach out to our team or your PwC adviser.

Chris Stewart

Partner, Tax, Brisbane, PwC Australia

+61 407 005 521

Angela Danieletto

Partner, Sydney, PwC Australia

+61 410 510 089

Helen Fazzino

Partner, Tax, Melbourne, PwC Australia

+61 438 388 819

Jonathan Malone

Partner, Global Tax, Sydney, PwC Australia

+61 408 828 997

Michael Bona

Global Tax Leader, Brisbane, PwC Australia

+61 405 136 010

Mike Taylor

Partner, Tax, Melbourne, PwC Australia

613 8603 4091

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