The OECD two-pillar approach to address the digitalisation of the economy will significantly impact tax functions of multinational entities. These historic changes will affect effective tax rates (ETRs), significantly increase compliance obligations, impact legal structures, change deal values, and force multinational enterprises (MNEs) to source data that might be difficult to obtain.
With financial statement disclosure obligations already in effect, and the need to develop and implement new processes to meet extensive Pillar Two compliance obligations in coming years, it is critical that action plans are being set into motion as soon as possible to address the implementation of Pillar Two in Australia.
The key implementation focus areas and current action items will vary depending on whether the Ultimate Parent Entity (UPE) of the MNE group is located either in Australia or overseas with an Australian inbound investment. Further information on how to prepare for the implementation of Pillar Two and manage related financial reporting disclosure and compliance obligations for both of these scenarios is provided below.
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 ETR via a system where MNE groups with consolidated revenue over EUR €750 million (~ AUD $1.2 billion) are subject to a minimum ETR of 15% on income arising in low-tax jurisdictions. This threshold is different to the existing Significant Global Entity (SGE) concept (which broadly refers to a group with annual global income of AUD $1 billion or more).
Whilst designed to primarily assist governments as they consider moving forward with the implementation of Pillar Two, the recently released OECD publication, ‘Minimum Tax Implementation Handbook’, provides a helpful overview of the key provisions.
The OECD has recommended that the Pillar Two rules become effective in 2024, with the exception of the Undertaxed Profits Rule (UTPR), which is recommended to become effective in 2025.
A number of jurisdictions around the world have either implemented or released draft legislation with effect from these start dates, with many more committing to do the same. MNE groups will therefore need to assess in what jurisdictions they may be subject to Pillar Two rules, and the applicable dates that those rules apply.
As part of the 2023-24 Federal Budget, the Australian Government announced the implementation of the Global Anti-Base Erosion (GloBE) Rules, a key component of the OECD’s Pillar Two framework, as follows:
The Government has also announced that it will implement a domestic minimum tax of 15%, with effect for income years commencing on or after 1 January 2024. This tax will apply to Australian operations of MNE groups and will ensure that Australia retains taxing rights over undertaxed Australian profits. Unlike taxes collected under the IIR and UTPR, the domestic minimum tax is intended to give rise to franking credits, subject to OECD peer review.
To date, draft legislation to implement the Pillar Two rules in Australia has not yet been released.
There are many ways to approach the Pillar Two challenge. The right approach needs to be unique to each MNE group, considering factors such as people, process and technology. The key focus areas fall into the following categories:
These focus areas will help you execute compliance with confidence and assist in answering questions such as:
To address these focus areas, Pillar Two engagements are typically structured across a series of interrelated phases. For example:
Undertaking this analysis will allow impacted taxpayers to adequately prepare for the related compliance obligations that will be required under Pillar Two, as set out below.
The implementation of Pillar Two will see a significant increase in tax compliance obligations for MNE groups that are within the scope of the rules, including the requirement to prepare and lodge the following:
The ATO is currently undertaking targeted public consultation with selected taxpayers, likely to be in scope of the proposed measures and their advisors, with a focus on potential administration, compliance and systems impacts. The ATO has also recently contacted self-declared SGEs to advise them of potential obligations under Pillar Two and alert them to the potential need to consider additional resources, systems and processes to meet any Pillar Two GloBE obligations arising both in Australia and in other jurisdictions. As previously noted, the revenue threshold for being considered an SGE (AUD $1 billion) is lower than the threshold for being within scope of the Pillar Two rules (~ AUD $1.2 billion).
Additional financial statement reporting obligations may arise for in-scope MNE groups, with amendments recently being made to IAS 12/AASB 112 and AASB 1060 to incorporate specific Pillar Two disclosure requirements in financial statements.
In-scope MNE groups will need to take a holistic approach to determine how data will be sourced, processed, calculated and reported for Pillar Two compliance purposes. Every company will be unique in the challenges they will face and thus, there is no one-size-fits-all solution that can address the Pillar Two challenges and complexities.
In-scope MNE groups will need to customise an approach, centred around foundational building blocks – resources, data requirements, existing enterprise systems, and other technology (e.g. tax provision software). A connected end-to-end process needs to be designed to support the Pillar Two operating model and compliance process, ideally leveraging as much from the current data and technology ecosystem as possible.
Current action items relating to the implementation of Pillar Two in Australia will vary to some degree, depending on whether a MNE group is headquartered in Australia and invests overseas or whether it is an inbound investment of an overseas parent entity.
Outbound organisations
As the IIR primarily applies to the UPE of an MNE group, or another intermediate parent entity if the UPE is not located in a jurisdiction that has or will implement an IIR, for an Australian headquartered MNE group it will be the Australian UPE that will be responsible for undertaking the Pillar Two calculations for the MNE group and paying top-up tax, applying Australia’s IIR. Based on the Federal Government’s previous announcements, this will apply for income years commencing on or after 1 January 2024.
Australian UPEs should look to undertake the steps outlined above with respect to creating an action plan around Pillar Two, commencing with an assessment of the availability of the transitional CbCR safe harbour and/or undertaking modelling of the potential impact of Pillar Two on the MNE group.
These steps will assist with potentially imminent financial statement reporting obligations (including satisfying any required auditing procedures supporting these disclosures), broader stakeholder management, as well as setting the MNE group up to address the required submission of the GIR and potentially a domestic minimum tax return in the coming years.
Inbound organisations
As the Pillar Two rules primarily apply to the UPE of the MNE group, it may be the case that the primary responsibility for Pillar Two readiness and compliance rests with the offshore UPE. . However, Pillar Two compliance requires a globally coordinated approach. In this regard, significant involvement by the tax (and other) teams of local subsidiaries may still be required.
For Australian inbound organisations, it will be necessary for local teams to consider the impact of a domestic minimum tax in Australia, gather and assess the extensive information required to complete Pillar Two calculations and, as noted above, manage the local financial statement disclosure requirements and compliance obligations that will apply in Australia. These obligations can also extend further where the UPE (or other intermediate parent entities) of the group is located in a jurisdiction that has not yet chosen to implement the Pillar Two rules, or will be implementing but with a commencement date that is later than the start date of the rules in Australia.
To prepare for the implementation of Pillar Two, we recommend that inbound organisations undertake the following steps.
The complexity, novelty and uncertainty that Pillar Two presents compounds the existing global compliance and regulatory challenges for MNE groups. Pillar Two’s global adoption, including the anticipated divergence in local rules, poses additional complexities that cannot be underestimated. To prepare for Pillar Two, MNE groups will need to focus on data, systems, technology and processes as the foundation for global and statutory compliance.
If you would like to further discuss this alert, reach out to our team or your PwC adviser.
Chris Stewart
Angela Danieletto
Partner, Tax, PwC Australia
Helen Fazzino
Partner, Tax, PwC Australia
Jonathan Malone
Michael Bona
Partner, International Tax & Trade Leader, PwC Australia
Mike Taylor
Partner, Tax, PwC Australia
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