On 21 March 2024, draft legislation was released to implement the new Pillar 2 (or ‘GloBE’) rules (the Rules).
The draft legislation will introduce a new tax regime and new compliance for multinational (MNE) groups that have an Australian presence and consolidated global revenue of Euro 750 million annually.
The intention is to ensure that MNE groups are paying a minimum of 15% of adjusted accounting profit in each jurisdiction in which they operate.
How does Pillar 2 work?
If you are subject to the new GloBE rules, the Rules may apply to allocate top up tax to the ultimate parent entity or the broader MNE group where a jurisdictional effective tax rate for a MNE group member (or ‘constituent entity’) falls below the GloBE minimum tax rate of 15% in their respective jurisdiction.
Broadly, there are 3 rules that can allocate the top up tax to the MNE group.
- Income inclusion rule (IIR) – where the ultimate parent entity is resident in a Country that has enacted the Rules, this rule imposes top-up tax on the ultimate parent entity. This rule applies in priority to the undertaxed profits rule (discussed below).
- Qualified Domestic Minimum Top-Up Tax (DMT) – Australia is imposing a DMT to ensure it collects the top-up tax where the Australian effective tax rate is below 15% (rather than the ultimate parent paying the top up tax overseas).
- Undertaxed profits rule (UTPR) – where the ultimate parent entity is not resident in a Country that has enacted the Rules (for example the USA), this rule allocates the top up tax to countries with constituent entities based on relative amounts of tangible assets and employees.
The IIR and DMT are drafted to apply for financial years commencing on or after 1 January 2024 and the UTPR is drafted to apply to financial years commencing on or after 1 January 2025.
Am I subject to the new Rules?
The rules apply if you are a member of a MNE group with consolidated revenue of over Euro 750 million in any 2 of the last 4 income years. A MNE group is a parent entity with at least one other controlled entity (or permanent establishment) resident in another jurisdiction.
Some entities are excluded from the rules (such as Government entities, pension funds and not-for profit entities). However, the revenue from those entities is still included for threshold testing purposes.
There are simplified compliance options, which are discussed below.
What does it mean if I am subject to the new Rules?
In short, not only potential top up tax but a lot more compliance. The Rules are introducing three new tax returns that must be lodged with the Australian Taxation Office:
- GloBE Information Return – essentially an information return. This return contains general information about the corporate structure, the effective tax rate computation, computation and respective allocation of any top up tax liabilities and disclosure of any elections.
- Australian GloBE tax return – an Australian specific return that forms the basis of the assessment for GloBE top-up tax for Australian tax purposes.
- DMT Return – also an Australian-specific return, however this return forms the basis for the Commissioner’s assessment of DMT (one of the 3 rules or charging mechanisms).
Ok, I’m in the Rules. What are the simplified compliance options?
There are simplified compliance options (safe harbours) that can be relied on where eligible. Broadly, there are 3 temporary safe harbour options (including a de minimis test) and they rely on the data contained in the Country-by-Country (CbC) reports.
However, where a safe harbour is not elected into in the first income year of application, it can no longer be elected into and you cannot change the safe harbour option once it has been selected.
Importantly, even if a concession is applied you still need to lodge one or more returns (which will include significant disclosures).
Do we need to disclose anything in our financial statements?
Where legislation is substantively enacted (that is, passed by both Houses of Parliament), disclosures are required in the financial statements. Typically, disclosures expected would be any potential top up taxes forecast (and its potential impact on tax expense) and commentary regarding the rules and its impact to the reporting entity.
What should we do next?!
In order to prepare for the implementation of the Rules in Australia, we recommend the following:
1. Prepare an impact assessment, where you should consider and document:
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- whether you are within scope of the new rules
- model whether you and any MNE group entities in Australia will qualify for a safe harbour
- model whether there is expected to be any top up tax in a jurisdiction
- ensure your CbC reporting meets the temporary safe harbour requirements on sources of data, so you can utilise concessions in the short term
- determine the information you will require to prepare the safe harbour calculations going forward and / or the Pillar 2 calculations
- determine information you will require to prepare the three income tax returns
2. If you prepare financial statements for Australia, monitor the status of the draft legislation and consider what disclosures may be required once substantively enacted. Talk to your auditors
Talk to your Pitcher Partners tax specialists, should you have any questions or would like to begin assessing the impact on your organisation
