Potential additional tax disclosures in 30 June 2022 financial statements for some country-by-country reporting entities (CBCREs)

An international collaboration has been formed by over 135 countries and jurisdictions, including Australia, in a bid to address concerns about global corporate tax base erosion and to end tax avoidance. The purpose of the collaboration is to introduce a global minimum tax rate of 15%, and to reduce the shifting of income from ‘high tax’ to ‘low tax’ jurisdictions.

In this article, we outline the Pillar Two rules, which Australian entities will be affected, how they will be affected, and when the rules could become effective in Australia. We also discuss the potential additional tax disclosure in 30 June 2022 financial statements for some country-by-country reporting entities (CBCREs), if they could be subject to a ‘top up’ tax.

Anti-Global Base Erosion (GloBE) rules

In December 2021, the Organisation for Economic Co-operation and Development (OECD) released a draft legislative framework known as the GloBE, or Pillar Two, rules. This framework is expected to be used by individual countries that signed the agreement to amend their local tax laws. In March 2022, the OECD released detailed technical guidance on Pillar Two of the rules.

At the date of publishing this article, no countries or jurisdictions have enacted the rules locally. Nevertheless, Australian entities should consider potential future implications on their tax charge if the Pillar Two rules become law.

Which Australian entities will be affected?

The Pillar Two rules are proposed to apply to taxpayers with more than €750 million EUR in consolidated revenues. Applying exchange rates at the date of publishing this article, this translates to approximately $1.1 billion AUD of consolidated revenue. This exceeds the revenue threshold of $1 billion AUD for significant global entities (SGEs), meaning that some SGEs may not be caught by the requirements. However, it is possible that Australian legislation introducing the Pillar Two rules will align the annual income threshold with the SGE definition.   

How will Australian entities be affected?

Australian entities or groups with more than approximately $1.1 billion AUD in consolidated revenue, and an effective tax rate of less than 15%, may be impacted by the additional Pillar Two ‘top-up tax’. The effective tax rate will be determined using a complex mechanism, which takes into account each entity’s financial accounting income, plus various adjustments. The entities that may be affected are those with overseas operations, or subsidiaries in low or no taxed jurisdictions. However, there are concessions where the Australian Controlled Foreign Company (CFC) rules apply, or where there is a substantial business being carried on in the relevant country.

When could the Pillar Two rules become effective in Australia?

The OECD has indicated that it expects countries that have agreed to implement the Pillar Two rules will implement them ‘by 2023’. However, application in Australia will depend upon how quickly the government passes legislation to this effect. There is a possibility this will occur in time for the 30 June 2023 tax year.

Disclosures in financial statements

Neither IAS 12 Income Taxes, nor IAS 34 Interim Financial Reporting specifically require disclosure of potential tax changes that have not been enacted. Nevertheless, Australian entities should consider disclosing information regarding the potential future effects of the Pillar Two rules for 30 June 2022 interim and annual financial statements. This is given that Australia is part of the international collaboration regarding the GloBE rules. Disclosure is only required if the entity or group will potentially be impacted by the ‘top up’ tax. Blanket disclosure by all Australian entities is not required.

An example of disclosures for a Group is shown below:

More information

Please refer to our BDO Global website for more information.

Need assistance?

Please contact our Corporate & International Tax Management team if you require assistance implementing the Pillar Two rules, or our IFRS & Corporate Reporting team for the financial reporting implications of the new rules.