The Pillar 2 Global and Domestic Minimum Tax Regime is now law in Australia

Pillar 2 Minimum Tax legislation receives Royal Assent

The Australian Pillar 2 Global and Domestic Minimum Tax (GDMT) laws have now passed the final steps to become enacted law in Australia. The Bills imposing the legislation received Royal Assent on 10 December 2024 and the GDMT Rules, in the form of a legislative instrument, listed on the Federal Register of Legislation on 23 December 2024 with commencement from 24 December 2024.

What you need to know

The GDMT laws and rules are now enacted and effective for financial years commencing on or after 1 January 2024.

As the GDMT laws received Royal Assent and the GDMT Rules were registered before 31 December 2024, the new tax regime is considered as enacted by 31 December 2024. The timing of the enactment of these measures is particularly important for multinational groups who are required to make disclosures in their financial reports for the financial year ended 31 December 2024, and interim financial reporting disclosures for later year ends (e.g. 31 March, 30 June 2025 etc.), where required.

Year-end financial reporting for clients with 31 December reporting dates

Multinational groups with a financial reporting date of 31 December 2024 need to consider the statutory reporting requirements in relation to Pillar 2. Further detail can be found below.

Interim reporting for clients with other financial reporting periods

Multinational groups with financial reporting periods ending after 31 December 2024 (e.g. 31 March, 30 June 2025 etc.) should be proactive in considering their interim and year-end financial reporting obligations in relation to Pillar 2. Further detail can be found below.

Tax reporting obligations

The first GDMT tax reporting obligations applicable to clients with Fiscal Years ending on 31 December 2024 will be due by 30 June 2026. To the extent that an entity has a presence in Australia, lodgement of the following forms will be required with the Australian Taxation Office (ATO):

1. GloBE Information Return;
2. Australian IIR/UTPR tax return; and
3. Australian DMT tax return.

Further detail can be found below.

BDO Comment

Year-end financial reporting

In relation to the year-end financial reporting for clients with 31 December reporting dates, BDO recommends the following steps:

• Confirm whether the group is subject to Pillar 2
• Review the group structure with reference to the jurisdictions in which the group has activities and whether these jurisdictions have implemented Pillar 2
• Consider the group’s eligibility to apply the Transitional CbCR Safe Harbour provisions
• If the Transitional CbCR Safe Harbour rules do not apply, determine the group’s Australian tax profile and effective tax rate in Australia
• To the extent that a top-up tax liability is expected to arise in Australia, calculate the expected top-up tax payable, and record the relevant provision
• Consider any qualitative disclosures that may assist the users of financial statements in understanding the group’s exposure to Pillar 2 in Australia, including but not limited to key low-tax jurisdictions and a description of transactions or commercial circumstances driving a Pillar 2 liability
• Consider the compliance and lodgement requirements for Australian entities.

Interim reporting

Organisations should consider the following in informing their approach to interim financial reporting and Pillar 2 disclosures:

• Subsidiaries or branches in jurisdictions that are likely to have an Effective Tax Rate of less than 15 per cent
• Transactions or commercial circumstances that may result in low-tax outcomes
• To the extent that low-tax jurisdictions are identified, an estimate of the expected Effective Tax Rate, and an estimate of any top-up tax that may be payable in low-tax jurisdictions
• Consider the eligibility for the Transitional CbCR Safe Harbour provisions in Australia and commentary outlining factors considered in determining eligibility.

Tax reporting obligations

With regards to the tax reporting obligations, affected multinational groups with a presence in Australia should:

• Identify any entities that are required to lodge GDMT returns in Australia;
• Consider the potential application of the Transitional CbCR Safe Harbour and Permanent Safe Harbour provisions
• Review the group’s financial reporting and tax information infrastructure; and
• If required, plan and execute any changes or updates to financial systems and tax reporting infrastructure well in advance of the reporting deadlines.

Contact us

If you would like further information in relation to the application of Pillar 2, please reach out to your local BDO corporate & international tax adviser.

Pillar Two Global and Domestic Minimum Tax legislation passes both Houses of Parliament

There has been some progress in relation to the Global Minimum Tax Pillar Two legislation.

This week, the three Bills implementing the Pillar Two Global and Domestic Minimum Tax measures in Australia passed through both Houses of Parliament. Enactment of these measures should be a formality with Royal Assent expected very shortly, making the Bills law.

However, as the Subordinate Legislation containing the bulk of the Rules is yet to be tabled in parliament, uncertainty remains in relation to the financial reporting implications for groups with a 31 December 2024 financial year end date.

We will be providing further guidance as more information becomes available.

What you need to know

On Tuesday and Wednesday this week, the three principle enabling Bills for the Australian Global and Domestic Minimum Tax regime passed through the Senate and are now awaiting Royal Assent. These Bills comprise:

• Taxation (Multinational – Global and Domestic Minimum Tax) Imposition Bill 2024 (Imposition Bill)
• Taxation (Multinational – Global and Domestic Minimum Tax) Bill 2024 (Main Bill)
• Taxation Laws Amendment (Multinational – Global and Domestic Minimum Tax) (Consequential) Bill 2024 (Consequential Bill).

These Bills should receive Royal Assent shortly. However, most of the Pillar Two rules are contained in a separate legislative instrument, being the Taxation (Multinational – Global and Domestic Minimum Tax) Rules 2024 (Subordinate Legislation). The Subordinate Legislation has not been registered or introduced into parliament yet.

The passing of the Bills is particularly important for taxpayers who need to consider the impact of disclosures required in relation to the new Pillar Two regime, as part of their financial reporting obligations for the 31 December 2024 year end. The ultimate position is dependent on whether the Pillar Two legislation and rules meet the ‘substantively enacted’ threshold in accordance with the Australian Accounting Standards Board’s guidelines.

Although the three enabling Bills have been passed by parliament, we understand the substantive enacted status of the Australian Pillar Two law is dependent on when the legislative instruments containing the Subordinate Legislation is registered on the Federal Register of Legislation under the Legislation Act 2003.

If the substantively enacted threshold is met prior to 31 December 2024, groups preparing accounts for the year ending 31 December 2024 will be required to consider their Pillar Two related disclosure obligations, with very tight reporting deadlines. As the Bills are linked to a legislative instrument containing the detailed rules, which is yet to be registered, some uncertainty remains as to whether these will be registered such that substantive enactment status is achieved prior to 31 December 2024.

Groups with a 31 December 2024 year-end reporting obligation need to be well prepared to address Pillar Two disclosure requirements if substantive enactment status is achieved prior to 31 December 2024, and if not before 31 December 2024, then early in the new year.

BDO Comment

The BDO corporate tax and IFRS & corporate reporting teams are working closely to provide you with further updates on the Australian Pillar Two legislation and Rules, particularly what it means for taxpayers and 31 December 2024 corporate reporting entities, as further information becomes available.

For clients impacted by the measures, BDO recommends:

• Considering all financial reporting disclosure requirements
• Determining whether the group is captured by the measures, and if captured, carefully identifying the entities captured
• Evaluating the group’s eligibility for the Transitional Safe Harbour and simplified calculation methodologies
• Planning the organisation’s approach to reporting, including decisions around whether to prepare and lodge internally, outsource, or a hybrid approach
• Reviewing existing finance infrastructure and any interrelated systems, and the quality of data contained within those systems
• If organisational change is required, managing any impacted stakeholders, and planning the change process well in advance
• Seeking advice in relation to application of the rules, particularly where uncertainty exists.

If you would like further information in relation to the application of Pillar Two, please reach out to your local BDO corporate & international tax adviser. 

Global and domestic minimum tax legislation passed by House of Representatives 

The bills implementing the global minimum tax and domestic minimum tax in Australia are one step closer to becoming law, after having been passed by the House of Representatives, and are now in the Senate. The Senate Economics Legislation Committee has issued a report recommending the passing of the bills.

What you need to know

What are the measures?

The measures apply to multi-national entities (MNE) with consolidated group revenue greater than or equal to 750 million euros. They are based on the OECD’s Pillar 2 guidelines, which have also been followed by many other OECD member countries in implementing the global minimum tax and domestic minimum tax in their jurisdictions.

The legislation implements the following:

1. A 15% global minimum tax (GMT) for MNEs through the following:
   1. Income Inclusion Rule (IIR) applicable to income years starting on or after 1 January 2024. The IIR would apply where the group’s parent company is a resident of Australia, and it imposes top-up tax on the group’s parent company in relation to any subsidiary that has an ‘effective tax rate’ of less than 15%;
   2. Undertaxed Profits Rule (UTPR) applicable to income years starting on or after 1 January 2025. The UTPR would apply where group’s parent company is not a resident of Australia or another country that has implemented the GMT, but one or more subsidiaries are residents Australia. It imposes top-up on the Australian subsidiary if there are other subsidiaries in the group that have ‘effective tax rates’ of less than 15%. The top up tax is spread amongst the Australian subsidiaries and other subsidiaries in countries that have implemented a UTPR regime.
2. 15% Domestic Minimum Tax (DMT) applicable to income years commencing on or after 1 January 2024. The DMT applies a top-up tax on an Australian resident MNE where it has an effective tax rate of less than 15%. Where the DMT is payable by to an MNE, the DMT will reduce the GMT that would otherwise apply in relation to that MNE.

BDO Comment

MNEs with consolidated group revenue of 750 million euros or more should be well on the way in considering how they may be impacted by the rules. It is important to note that impacted clients with operations in Australia and/or other jurisdictions should consider their reporting obligations, noting that calculations and reporting are required regardless of whether any top-up tax is payable in Australia and/or other jurisdictions.

Reach out to your local BDO tax adviser if you would like further information or assistance in relation to the measures.

What you need to know about Pillar Two draft legislation

Further to BDO’s update on 28 March 2024, Jim Chalmers announced the release of draft legislation implementing the global and domestic minimum tax regime in Australia, following from its announcement as part of the 2023-24 Federal Budget.

The government is seeking stakeholders’ views on the exposure draft subordinate legislation and explanatory statement with the consultation process open until 16 May 2024.

Who is affected?

• Pillar Two applies to groups with a global presence with consolidated revenue of €750 million or more (approximately AUD$1.2 billion) for at least two of the last four years.

Why has Pillar Two been implemented?

• Pillar Two is part of the OECD/G20’s Two Pillar Solution combatting tax avoidance by multinationals and implements a global minimum tax of 15 per cent.

What are the implications for affected clients?

• Lodgement and payment obligations in addition to ordinary income tax obligations.
• Pillar Two will imposes additional top-up tax on profits taxed at less than 15 per cent.
• Additional calculation and lodgement obligations required irrespective of whether additional tax is payable.
• The additional lodgement include:
  • GloBE Information Return
  • Australian GloBE Tax Return
  • Domestic Minimum Tax Return
• Potential financial statement disclosures required for entities with a financial year ending 30 June 2024 if substantially enacted by 30 June 2024.

When do the measures apply?

• The first lodgements are due by 30 June 2026
• Top-up tax provisions apply to income years as follows:
  • Domestic Minimum Tax - Income years commencing on or after 1 January 2024
  • Income Inclusion Rule - Income years commencing on or after 1 January 2024
  • Undertaxed Profits Rule – Income years commencing on or after 1 January 2025

What are the implications if lodgement obligations are not satisfied?

• Penalties apply for failure to lodge and align with those applicable to significant global entities (SGEs), ranging from $156,500 to $782,500.

What is Pillar Two?

In October 2021, Australia along with 135 other OECD/G20 member nations being part of the Inclusive Framework on Base Erosion and Profit Shifting (Inclusive Framework), agreed to the ‘Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy’ (the Two-Pillar Solution). The Two-Pillar Solution aims to ensure that multinational corporations pay their fair share of tax in relation to profits earned where they operate.

Pillar Two broadly aims to implement a global minimum tax rate of 15% for large multinational enterprise groups (MNEs) with annual global turnover exceeding €750 million. Top-up tax is imposed under the charging provisions being the Domestic Minimum Tax (DMT), Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR).

The draft Australian legislation proposes the introduction of the Global Anti-Base Erosion Rules (GloBE Rules) which comprise the following interconnected taxing components:

1. 15% global minimum tax for MNEs through the:
   • Income Inclusion Rule (IIR) - applicable to income years commencing on or after 1 January 2024 which imposes the top-up tax on Australian parent entities on behalf of group members with an effective tax rate of less than 15%.
   • Undertaxed Profits Rule (UTPR) - applicable to income years commencing on or after 1 January 2025, which applies if the parent entity of the group is located in a country that has not implemented the 15% global minimum tax. The UTPR imposes the 15% minimum tax on the members of the group that are in countries that have not implemented the 15%minimum tax in relation to the members of the group with less than 15% effective tax rate.
2. 15% Domestic Minimum Tax (DMT) - applicable to income years commencing on or after 1 January 2024. This imposes a top-up tax on Australian members of the multinational group that have an effective tax rate of less than 15%, where the domestic minimum tax has been imposed it will reduce any tax payable under the IIP and/or the UTPR. Australia proposes to implement the DMT.

Taxpayers subject to the Rules

The Rules apply to large MNEs with annual global consolidated revenue exceeding €750 million, excluding intra-group revenue transactions, for at least two of the four previous income years. This means that groups can determine whether they are subject to the GloBE Rules at the start of each financial year.

A MNE is a group with a parent entity and at least one other controlled entity in another jurisdiction, or an entity with a permanent establishment in another jurisdiction.

The Rules provide exclusions for certain entities including entities that are generally either income tax exempt or tax neutral. Excluded entities include Government Entities, Not-for-profit entities, Parent Entities that are Investment Entities or Real Estate Investment Vehicles, and certain other special purpose service and non-profit entities.

How the provisions apply to impose top-up taxes

The DMT will apply in Australia to charge top-up tax domestically in Australia on low-taxed profits earned by Australian entities that are subject to the GloBE Rules. Top-up tax is charged to the extent that an Australian entity’s effective tax rate is below 15%. 

The IRR will apply in Australia to levy top-up tax in relation to low-taxed entities by imposing top-up tax on the Australian parent entity with a controlling interest in a low-taxed group member entity. A top-down approach applies meaning that:

• where the Ultimate Parent Entity (UPE) is located in an implementing jurisdiction, it will generally be liable for top-up tax; and
• where this is not the case, another entity further down the ownership chain with a Controlling Interest may be liable.

The UTPR is designed to act as a backstop by imposing top-up tax on low-taxed income earned by entities that are not subject to the DMT or IIR. In Australia the UTPR would be imposed on Australian entities that are subsidiaries of a foreign parent entity that is in a jurisdiction that has not implemented the IIP and there are entities in the group that have effective tax rates of less than 15% and those entities are in jurisdictions that have not implemented the DMT. Its application is expected to be minimal given the broad scope and number of implementing jurisdictions.

Franking Credits for top-up tax paid

Franking credits are available for DMT paid under the Australian legislation on the basis the DMT is considered a domestic corporate income tax, with franking debits arising for any DMT refunds received.

Franking credits are not available for top-up tax paid in Australia resulting from the application of the IIR or UTPR due to the top-up tax under an Australian IIR or UTPR being effectively tax paid on behalf of low-taxed entities operating in other jurisdictions outside Australia.

Interaction with specific Australian international income tax provisions

As part of the consultation process, Treasury has released a discussion paper providing stakeholders with the opportunity to provide feedback on the proposed policy relating to international aspects of the Australian income tax legislation. These measures include:

• Foreign Income Tax Offsets (FITOs) – the proposed policy allows FITOs in relation to foreign DMT but is denied for foreign IIR or UTPR top-up tax.
• Hybrid mismatch rules – it is proposed that the existing approach to hybrid mismatches continues to apply, being that the hybrid mismatch rules will not take into account top-up taxes imposed under a qualified domestic minimum top-up tax (QDMTT) regime, IIR or UTPR. This is because hybrid mismatch rules target the tax treatment of arrangements; whereas global and domestic minimum taxes are imposed on financial accounting profits.
• Foreign hybrid entity rules – certain foreign hybrid limited liability partnerships and companies that are deemed partnerships for Australian income tax . These rules are expected to continue operating without change post implementation of the GloBE Rules. Treasury considers outcome should not change due to being levied tax under global minimum tax or QDMT.
• Controlled Foreign Company Rules – should not allow a notional deduction for top-up taxes paid under a QDMT or UTPR. This is because CFC taxes paid in Australia as a result of attribution of the CFC’s attributable income are accounted for in the effective tax rate calculations for the CFC.

The compliance and reporting obligations

The following annual compliance and reporting obligations are proposed for MNEs who are subject to the Pillar Two regime, comprising:

1. A GloBE Information Return - This annual return will be consistent with the GloBE Model Rules and will need to be lodged with the Australian Tax Office (ATO). Information disclosed includes the group’s corporate structure, jurisdictional effective tax rate calculations, group top-up tax allocations and any elections made.
2. A DMT Return - This return will require information for the purpose of administering the GloBE Rules and specifically assess and collect any DMT liability. At this stage all Australian entities that are members of MNE Groups will be required to lodge a DMT Return with the ATO, whether or not they have to pay DMT. However, feedback is being sought in relation to this requirement including concessional lodgement obligations for consolidated income tax group members.
3. An Australian GloBE Tax Return - This return will require information to enable the ATO to assess and collect any IIR and UTPR top-up tax liabilities. Where an IIR is applicable in Australia and the liable entity identified, that entity is required to lodge, even where the top-up tax payable is nil. These requirements also apply to permanent establishments (PEs) requiring the main entity to lodge on the PE’s behalf.

Assessments, Payments and Penalties

Top-up tax payments are due by the end of the 15^th month after the end of a Fiscal Year. A concession has been provided for the first year such that payments and lodgements are not due until the end of the 18^th month following the first fiscal year end, meaning that the first round of lodgements are not due until 30 June 2026 (i.e. for entities with tax years starting 1 January 2024). An extension has also been provided to entities with a shortened first Fiscal Year such that lodgements and payment obligations do not fall period to 30 June 2026.

Administrative penalties applicable to the GloBE Rules in Australia are as follows:

• False or misleading statements – doubled for applicable MNE Groups where the statement is made in relation to GloBE top-up tax or DMT liability.
• Administrative penalties for failure to lodge a return, notice or other document – 500 penalty units, consistent with those applicable to SGEs

The OECD Safe Harbours articulate a common understanding with regard to penalties and transitional arrangements, noting that penalties should not be applicable so long as ‘reasonable measures’ have been taken to ensure the correct application of the GloBE Rules. It is expected that Australia will adopt this approach given Australia’s cooperation with the Inclusive Framework to date, and the inclusion of this in the Explanatory Memorandum.

Documents released for consultation

The government has released the following documents as part of a consultation process with all key stakeholders. The consultation process invites submissions to be made to Treasury by 16 May 2024.

• Primary Legislation – Imposition Bill imposing top-up tax under the Domestic Minimum top-up tax, the Income Inclusion Rule and the Undertaxed Profits Rule;
• Secondary Legislation – Assessment Bill establishing the liability and framework for the global and domestic minimum taxes, including specific rules for the calculation of relevant amounts;
• Consequential Amendments Bill - containing consequential and miscellaneous provisions necessary for the administration of the global and domestic minimum taxes; and
• Discussion paper - in relation to approach to overall policy and potential amendments to specific areas of Australian International income tax legislation as part of the Pillar Two implementation process. Specifically, these issues include the hybrid mismatch rules, Controlled Foreign Company rules, Foreign Hybrids and FITOs.

IFRS® Accounting Standards

Financial Reporting Obligations

The legislation released is in draft form and should not be considered to have been substantively enacted in its current state. Although not yet substantively enacted, careful monitoring will be required as to the legislation’s progress through the consultation process and ultimately through parliament. As 30 June 2024 approaches, entities with 30 June year ends will be well placed to monitor the progress of the legislation to ensure that any relevant financial statement disclosures are made in relation to Pillar Two tax impacts.

More information is available through previous insight articles on the financial reporting obligations in respect to Pillar Two tax impacts:

• Pillar two disclosures in 30 June interim and annual financial statements
• Simplified Disclosure introduced about International Tax Reform – Pillar Two Model Rules
• Pillar Two disclosures in 31 December 2023 interim and annual financial statements

Our team of tax experts have the range and depth of experience to support your business – whatever your goals may be. For more information on our corporate and international tax services, reach out to our tax team.

Draft legislation implementing global and domestic minimum taxes in Australia released

On Thursday 21 March, Treasurer Jim Chalmers made an announcement in relation to the release of draft legislation implementing global and domestic minimum taxes in Australia.

The release follows the Government’s announcement in the 2023-24 Federal Budget to implement a 15% global minimum tax and domestic minimum tax for multinational companies. The measures are part of an international co-operation led by the OECD, in implementing Pillar Two of the Two Pillar Solution to addressing the tax challenges arising from the digitalisation of the economy in Australia.

The draft measures broadly apply to multinationals with consolidated revenue greater than or equal to 750 million euros.

The Rules

The draft legislation implements the following:

1. 15% global minimum tax for multinational enterprises through the:
   • Income Inclusion Rule (IIR) applicable to income years starting on or after 1 January 2024 which imposes tax on the parent entity of the group if it is located in Australia for any of the members of the group that have less than 15% effective tax rate
   • Undertaxed Profits Rule (UTPR) applicable to income years starting on or after 1 January 2025, which applies if the parent entity of the group is located in a country that has not implemented the 15% global minimum tax. The UTPR imposes the 15% minimum tax on the members of the group that are in countries that have implemented the 15% minimum tax in relation to the members of the group with less than 15% effective tax rate
2. 15% domestic minimum tax applicable to income years commencing on or after 1 January 2024. This imposes additional tax on Australian members of the multinational group that have an effective tax rate of less than 15%, where the domestic minimum tax has been imposed it will reduce the tax payable under the IIP and the UTPR.

Draft Documents for Consultation

The following were released by Treasury for consultation:

• Primary legislation including the core technical and administrative measures
• Subordinate legislation including finer details in relation to calculations and metrics used in implementing the Rules
• A discussion paper seeking feedback regarding potential amendments to certain tax provisions that will need changes to account for Global and Domestic minimum taxes to ensure that there are no unintended domestic income tax consequences. These measures include the hybrid mismatch rules, foreign hybrid entity rules, foreign income tax offsets and controlled foreign company rules.

BDO is reviewing the draft legislation and considering making submissions as part of the Treasury consultation process. Feedback is due in relation to the primary legislation and subordinate legislation by 16 April 2024 and 16 May 2024 respectively.

BDO Comment

Should you have any questions regarding the Pillar Two measures, please contact your BDO tax adviser for further guidance and visit our tax services page to see how we can help.