There have been key changes to Australian taxation for Multinational Enterprises (MNE’s) with global revenue of EUR $750 million (AUD $1.2 billion).  Australia has committed to implementing tax laws to align with the OECD initiative known as Pillar 2, to ensure the Australian and global tax base is protected.

Tax outcome

Australia will enforce a 15% global minimum tax on MNE’s and a domestic minimum tax operating in its jurisdiction.

Outcome

MNE’s to pay at least 15% tax on their profits (effective from 1 January 2024), regardless of where the profits are reported. A global outlook not solely relating to Australia

Purpose

To prevent profit shifting and erosion of the tax base across jurisdiction where companies can shift profits to low or no tax jurisdictions.

Implementation

Countries such as Australia that have signed on to the framework will introduce domestic laws to ensure that they enforce this minimum tax. The implementation includes rules like the Income Inclusion Rule (IIR), which would impose a top-up tax on profits from low-tax jurisdictions (effective from 1 January 2024), and the Undertaxed Payment Rule (UTPR – effective from 1 January 2025), which seeks to deny deductions for payments made to low-tax jurisdictions.

Impact

The introduction of Pillar 2 is expected to reduce the incentive for tax competition among countries, where a jurisdiction with lower tax rates currently attracts multinational business activity. It aims to prevent profit shifting to tax havens by making it less attractive for companies to move profits to jurisdictions with lower tax rates.

Key challenges

There will be an increase in compliance obligations:

• Requires companies to calculate and report the effective tax rate (ETR) of each entity in an MNE group that is resident or has a PE in Australia, as well as the ETR of each entity in a MNE group that receives payments from or makes payments to an Australian entity.

• Income inclusion de minimis rule (legal principle that prevents the law from intervening in matters that are considered trivial) of AUD $1.6 million or 2% of the MNE’s group total income whichever is lower. There are other conditions and carve outs that may exempt an entity from the top up tax if the entity’s income is derived from substantive economic activities in the jurisdiction where it is resident or where it has a PE.

• The substance-based carve-out applies if the entity’s payroll expenses and tangible assets in the jurisdiction exceed a certain percentage of its income in the jurisdiction, which is determined by applying a formula that takes into account the industry sector and the profitability of the entity.

• The Switch Over Rule (SOR) applies as a backstop to the IIR and the UTPR, in case they do not fully capture the low-taxed income of an MNE group.

• The Undertaxed Payment Rule (UPTR) noted above requires the payer entity to either deny a deduction for the payment, or subject the payment to withholding tax, at a rate that is equal to the difference between the minimum rate and the ETR of the payee entity. The same de minimis rule applies as the Income inclusion Rule (IIR).

• Subject to tax rule (STTR) a further back up rule, to the other rules, in case they do not fully capture the low-taxed income of an MNE group. The STTR is a model treaty provision that allows jurisdictions to impose limited additional taxation on certain cross-border payments between connected companies where the recipient is subject to a nominal corporate income tax rate below 9%. The STTR applies to interest, royalties and a specified list of other payments (Covered Income), including all intra-group service payments.

• New processes required by MNE’s to review and determine how data will be sourced, collected, filtered, calculated and presented for the Global Anti-Base Erosion Model Rules reporting (GloBE Rules) and domestic Pillar 2 returns, as well as financial statement reporting obligations. New processes to be designed and new systems put in place to satisfy these requirements.

Next steps

• Companies need to reconsider their current corporate structures and strategies, and the possible risks that the rules will create. Hall Chadwick can assist Australian MNCs with analysis of the rules and provide guidance and advice on how to comply with and optimise the rules.
• Australia requires additional local filings, including documentation and evidence that the multinational has calculated and complied with the global minimum tax rate.
• The full details are yet to be released, so it’s important to be alert for updates to the above.

Disclaimer: This is not advice. You should not act solely on the basis of the material contained in this post. These are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of these areas.