Introduction of Global Minimum Tax and Australian Domestic Minimum Tax

Over 135 countries (including Australia) have agreed to enact a two-pillar solution proposed by the OECD to reform international tax rules in response to the increasing challenges arising from the globalisation and digitalisation of the economy. 

These rules can impose requirements on larger global groups where Australia is the ultimate parent entity (UPE), an intermediate company or an end-of-the-line subsidiary [1]. 

Under Pillar Two, the Global Anti-Base Erosion (GloBE) Model Rules will require an ‘in-scope’ Multinational Enterprise (MNE) Group (MNE Groups with consolidated accounting revenue of greater than €750m) to pay a top up tax, if their Effective Tax Rate (ETR) in a particular jurisdiction is less than 15%).

The GloBE Rules will require ‘in-scope’ MNE Groups to calculate their income, and the ‘covered taxes’ on that income, using a uniform set of rules, on a jurisdictional basis. Where the calculation results in an ETR of less than 15%, there may be an obligation for top-up tax to be paid for that particular jurisdiction.  Under the rules, the top-up tax would be collected under either:

1. the Income Inclusion Rule (IIR) which imposes top-up tax on a parent entity on a ‘top-down basis’; or
2. the Undertaxed Profits Rule (UTPR), which is intended to apply as a fallback rule if low-taxed income is not fully collected under the IIR and which can be applied in the jurisdictions of fellow group members.

As part of the 2023-24 Federal Budget, the Federal Government announced the implementation of the GloBE Rules proposed by the OECD, with effective dates as follows:

• The IIR, effective for income years commencing on or after 1 January 2024; and
• the UTPR, effective for income years commencing on or after 1 January 2025,

In addition to the above, the Australian Government announced that it will implement a Domestic Minimum Tax (DMT) of 15%, with effect from income years commencing on or after 1 January 2024. Under the DMT, where an Australian member of an ‘in-scope’ MNE Group has a top-up tax obligation, rather than the jurisdiction of the relevant parent entity collecting the tax under the GloBE Rules, the rules will operate to ensure that Australia has priority taxing rights. The expectation is that where top up tax is payable under the DMT, there should be no additional top up tax payable under the GloBE Rules but note there will still be reporting obligations under both (discussed in more detail below).

To date, draft legislation for the GloBE Rules and DMT has not been released by the Federal Government.

Compliance Obligations

The adoption of the GloBE Rules and DMT will give rise to a significant increase in tax compliance obligations for ‘in-scope’ MNE Groups, including:

• The obligation to prepare and lodge a GloBE Information Return (GIR). This will be lodged by the UPE of the group but will require local support and may also need to be lodged with the ATO locally;
• A DMT return. The ATO have confirmed that a separate DMT return will need to be prepared in addition to the annual income tax return; and
• Additional financial statement reporting obligations for ‘in-scope’ MNE Groups under AASB.

Importantly, it is expected that the obligation to prepare and lodge a DMT return will be subject to the same SGE compliance rules as all other documents required to be lodged with the ATO. That is, significant penalties are likely to be lodged if not lodged by the due date.

How RSM can support

The complexity of the GloBE Rules calculations necessitates that a MNE should commence preparing for Pillar 2 as soon as possible.

RSM offer a range of ‘fit for purpose’ support for MNE Groups that are preparing for the introduction of the GloBE Rules and DMT. Our support depends on whether the MNE Group is Australian or Foreign headquartered, which we propose under a phased approach, being:

Foreign headquartered MNE Group

Phase One - Confirm responsibility for GloBE Rules and intended approach

We will support you to work with the global finance team to confirm who will take carriage and responsibility of reporting. 

For completeness, this is a very important consideration as the US for example have not adopted Pillar Two and as such will not have any reporting obligations. Notwithstanding, the GloBE Rules have been intentionally designed such that where the UPE’s jurisdiction has not adopted the rules, the next parent in the group will have the reporting obligations. For many groups, this could crystallise significant compliance obligations in Australia.

Phase Two: Local Transitional Safe Harbour Assessment

Providing local to support to consider the availability of any of the (TSH) rules. Where a jurisdiction of a ‘in-scope’ MNE Group can rely on the transitional safe harbour rules, there will be significant reduction in the overall compliance time and costs involved. Our recommendation would be to consider the potential application of the safe harbour rules as early as possible.  

Phase Three: Impact Modelling

Undertaking local jurisdictional impact modelling to determine if the data required to prepare a GloBE or DMT calculations is readily available. At this stage, we propose to defer work on phase three until the legislation has been finalised.

Phase Four: Financial statement reporting

Working with your global finance team to ensure that any reporting obligations under the relevant accounting standards at the parent level and locally under AASB 112 or 1060.

Australian headquartered MNE Group

Phase One: In-scope Assessment

Assistance with determining if the MNE Group would constitute an ‘in-scope’ MNE Group for the purposes of the GloBE Rules and DMT.

Phase Two: Transitional Safe Harbour Assessment

Consideration of the availability of any of the TSH rules.

Phase Three: Impact Modelling

Where the TSH rules cannot be relied upon, undertake jurisdictional impact modelling to determine if the data required to prepare a GloBE or DMT calculations is readily available. This is an important consideration as it may require an investment in the group’s existing reporting tools and processes to ensure compliance.

Phase Four: Financial statement reporting

Working with your finance team to ensure that any reporting obligations under AASB 112 or 1060 are appropriately managed and reflected in the consolidated financial statements.

FOR MORE INFORMATION

If you would like to learn more about the topics discussed in this article, please contact RSM's Tax team or your local RSM office.

_{[1] Particularly for US parented groups, as the US is not participating in this project, the rules can effectively impose substantive compliance obligations on Australian subsidiaries.}