This article provides an update on the status of the reforms.
Pillar One
Pillar One aims to ensure fairer distribution of profits and taxing rights among countries over the largest multinational enterprises. Key elements of Pillar One include:
- Reallocation of certain taxing rights for large multinational enterprises from their home countries to market jurisdictions where their users and customers are located (referred to as Amount A)
- Streamlined application of the arm’s length principle to in-country baseline marketing and distribution activities (referred to as Amount B)
- Removal of all digital services taxes and commitment not to adopt such measures in the future.
Amount A and the removal of digital services taxes will be implemented through a multilateral convention and, where necessary, through correlating changes to domestic law. The detailed implementation plan released in October 2021 envisioned that work on the multilateral convention and explanatory statement would be concluded by early 2022, with the objective of enabling it to enter into force in 2023. Model rules for domestic law changes to implement Amount A were also scheduled for release in early 2022. Technical work to implement Amount B was planned for completion by the end of 2022.
Since October 2021, the OECD has undertaken consultation on draft rules under Amount A in relation to nexus and revenue sourcing, tax base determinations and determining whether a group is within scope. Public input has also been sought for the regulated financial services and extractives exclusions under Amount A, as well as on the tax certainty process for Amount A. On 11 July 2022, the OECD released a Progress Report on Amount A for consultation reflecting the technical work completed to date, including a consolidated version of the operative provisions on Amount A in the form of domestic model rules. Rules on administration of the new taxing right not covered in the progress report, such as provisions on tax certainty, are expected to be released before October 2022.
With respect to Amount B, the OECD indicated in February 2022 that a public consultation document would be issued in mid-2022. The OECD Secretary-General Tax Report released in July 2022 noted that good progress had been made advancing work on Amount B, which would be delivered by year end.
The implementation of Pillar One hinges upon ratification of the multilateral convention. To that end, the OECD has revised the timeline for Pillar One, with the aim to finalise the new multilateral convention by mid-2023 for entry into force in 2024. OECD Secretary-General Mathias Cormann noted that the revised timeline would allow greater engagement with the citizens, business and parliamentary bodies that would ultimately have to ratify the agreement.
Pillar Two
Pillar Two aims to put a floor on tax competition on corporate income tax by introducing a global minimum corporate tax rate of 15%. Key elements of Pillar Two include:
- The Global anti-Base Erosion (GloBE) rules, consisting of an:
- Income Inclusion Rule (IIR), which will impose a top-up tax on a parent entity for low-taxed income of a constituent entity
- Undertaxed Payment Rule (UTPR), which will deny deductions or require an equivalent adjustment to the extent that low-taxed income of a constituent entity is not subject to tax under an IIR
- A treaty-based subject to tax rule (STTR) to protect the right of developing countries to tax certain base-eroding payments, such as interest and royalties, where they are not taxed up to a minimum rate.
The GloBE rules will have the status of a “common approach”, that is, while members of the Inclusive Framework are not required to adopt the GloBE rules, they must accept application of the GloBE rules by other members. Jurisdictions that choose to adopt the rules must administer them in a way that is consistent with the outcomes provided for under Pillar Two. The STTR will be implemented in relevant bilateral treaties with Inclusive Framework members. The detailed implementation plan released in October 2021 envisioned Pillar Two being brought into law in 2022 to be effective in 2023, with the UTPR coming into effect in 2024.
The technical work relating to the GloBE rules is now close to complete, with the OECD having released model rules for domestic implementation of the GloBE rules in December 2021, along with accompanying commentary and illustrative examples in March 2022. An implementation framework to facilitate the coordinated implementation of the GloBE rules will be developed by the end of 2022. Consultation on the issues to be addressed by the GloBE implementation framework was undertaken in March 2022. For the STTR, a draft model treaty provision and multilateral instrument to facilitate implementation due to be released in March 2022 has not yet been issued.
Changes to domestic legislation to introduce the GloBE rules have already been scheduled by all G7 countries, the European Union and a number of G20 countries. Most appear to be planning for an entry into force in 2024, representing a slight delay from the envisioned commencement of 2023. The OECD Secretary-General has acknowledged the likely 2024 implementation, stating that it would provide sufficient time for developing the implementation framework to limit risks of double taxation and facilitate good coordination between tax administrations.
The road ahead for Australia
The new Labor government has indicated that it intends to implement the OECD’s Two-Pillar Solution. The implementation of Pillar One in Australia will be informed by the OECD’s progress on the multilateral convention — now slated for finalisation in mid-2023 to come into effect in 2024. On the other hand, implementation of Pillar Two is largely subject to changes in domestic legislation. It appears increasingly unlikely that the GloBE rules to introduce a global minimum corporate tax will be effective in Australia by 2023, with only 8 parliamentary sitting weeks planned for the remainder of 2022 and the likely commencement in 2024 for other jurisdictions.
