One step closer to BEPS Pillar Two: Bills introduced for global minimum tax

Introduction

The introduction of the BEPS Pillar Two Bills into the Australian Parliament marks a pivotal moment for multinational enterprises (MNEs) as they navigate the evolving global tax landscape.

The implementation of a 15% global minimum tax and domestic minimum tax under the Organisation for Economic Cooperation and Development (OECD) G20 Inclusive Framework is intended to ensure that MNEs contribute a fair share of tax wherever they operate. This legislative development marks Australia taking a step closer to enacting these new taxes, compelling MNEs to assess and prepare their compliance and reporting strategies. Failure to do so could result in potential fines for non-compliance, making it crucial for these enterprises to stay ahead of the regulatory curve.

The package of Bills contains the Taxation (Multinational—Global and Domestic Minimum Tax) Imposition Bill 2024, Taxation (Multinational—Global and Domestic Minimum Tax) Bill 2024 and the Treasury Laws Amendment (Multinational—Global and Domestic Minimum Tax) Consequential Bill 2024.

Background

Pillar Two seeks to address the tax challenges arising from the digitalisation of the economy under Action 1 of the Base Erosion and Profit Shifting (BEPS) project.

The Global Anti-Base Erosion Model Rules (the GloBE Rules) for Pillar Two ensure that in-scope MNEs will be subject to a global minimum tax rate of 15%. The GloBE Rules include the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR):

• The IIR applies by allocating the top-up tax amount on the parent entity generally closest to the top of the corporate structure (the "top-down" approach). The top-up tax amount relates to low-taxed constituent entities that are subject to an effective tax rate (ETR) below the 15% minimum rate in that jurisdiction.
• The UTPR serves as a backstop to the IIR. It permits other jurisdictions to impose top-up tax (by denying deductions or an equivalent adjustment) on certain constituent entities to the extent that a low-taxed constituent entity in an MNE group is not subject to tax under an IIR.

These rules provide a systematic solution to ensure all in-scope MNE groups are subject to a minimum 15% effective tax rate in the jurisdictions in which they operate (the global minimum tax).

A domestic top-up tax is also imposed against Australian entities that are subject to an ETR below the 15% global minimum rate.

Bills introduced

The package before Parliament consists of the following 3 Bills, with an accompanying Explanatory Memorandum:

• The Taxation (Multinational—Global and Domestic Minimum Tax) Imposition Bill 2024 imposes top-up tax, namely the Australian IIR top-up tax, the Australian UTPR top-up tax and the Australian Domestic Minimum Tax or DMT
• The Taxation (Multinational—Global and Domestic Minimum Tax) Bill 2024 (the Assessment Bill) establishes the liability and framework for these taxes, and
• The Treasury Laws Amendment (Multinational—Global and Domestic Minimum Tax) Consequential Bill 2024 (the Consequential Bill) contains consequential and miscellaneous provisions affecting tax legislation necessary for the administration of these taxes. This includes provisions addressing the lodgment of new tax returns (and a GloBE Information Return), assessment and collection of the taxes, penalties, private rulings, appeal procedures and record-keeping obligations.

The Assessment Bill also empowers the government to make additional Rules by legislative instrument to ensure relevant OECD guidance can be incorporated as part of the overall framework. For example, the meaning of "Top-up Tax Amounts" for each of the above taxes will be delegated to Rules. As part of the public consultation on the framework, draft Taxation (Multinational—Global and Domestic Minimum Tax) Rules 2024 had been released in March 2024, which included the detailed calculations required to arrive at a liability to top-up tax.

The Consequential Bill also includes amendments to various divisions in ITAA 1997 to clarify their interaction with the new taxes and their impact, if any. This includes the hybrid mismatch rules (Div 832), foreign hybrid entity rules (Div 830), Foreign Income Tax Offset provisions (Div 770) and the Controlled Foreign Company rules in Pt X of ITAA 1936.

The Australian DMT and Australian IIR top-up tax will apply to fiscal years starting on or after 1 January 2024, while the Australian UTPR top-up tax would apply to fiscal years starting on or after 1 January 2025.

Next steps

The Bills are currently before the Senate Economics Legislation Committee for inquiry and review by 14 August 2024. As the Bills can potentially become law by as early as the end of August, MNEs must prioritise the review and preparation of their compliance and reporting strategies. The introduction of these bills is a clear signal that the time for action is now, and MNEs must be prepared to meet the demands of this new tax landscape.

The establishment of the global and domestic minimum tax framework is not just a regulatory requirement but a fundamental shift in the global tax paradigm aimed at addressing base erosion and profit shifting. By proactively aligning with these new regulations, MNEs can mitigate risks, ensure compliance, and contribute to a more equitable global tax system.