Beps Pillar 2: Global and Domestic Minimum Taxation

Pitcher Partners ABN 84 797 724 539 Level 38, 345 Queen Street, Brisbane, QLD 4000 GPO Box 1144, Brisbane, QLD 4001

BEPS Pillar Two:

Global and Domestic Minimum Taxation

What is Pillar Two?

How does it work?

Pillar Two seeks to ensure income is taxed appropriately, utilising complex mechanisms that will require new financial data from tax departments.

Pillar Two establishes a floor for tax competitiveness and removes the benefit of transferring earnings.

In the 2023–24 Budget, the Australian Government announced its intention to implement key aspects of Pillar Two from the OECD/G20 Two-Pillar Solution. This framework aims to address tax avoidance and challenges stemming from the digitalisation of the global economy. Many OECD member countries are also adopting these guidelines, including establishing a Global Minimum and Domestic Minimum Tax. As of 27 November 2024, the bills have passed the Senate and now await Royal Assent. We anticipate the relevant legislation to pass Royal Assent.

The legislation aims to establish the following: •

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15% Global Minimum Tax: For large multinational enterprises (MNEs) through: −

Income Inclusion Rule (IIR): Applicable to fiscal years starting on or after 1 January 2024; and

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Undertaxed Profits Rule (UPR): Applicable to fiscal years beginning on or after 1 January 2025.

According to the OECD’s most recent estimates, implementing the proposed 15% tax is expected to result in annual global revenue gains of around US$220 billion (approximately A$327 billion), or 9% of global corporate income tax revenues.

Who could be affected?

The global and domestic minimum taxes will apply to MNEs with an annual global revenue of €750 million or more (approximately A$1.2 billion at the time of writing).

It will initially have a direct impact on significant global entities (“SGEs”) or their subsidiaries but, as is often the case, the legislation could later be extended to include more entities in the middle market.

15% Domestic Minimum Tax: Effective for fiscal years starting on or after 1 January 2024.

Pitcher Partners is an association of independent firms. An Independent Queensland Partnership ABN 84 797 724 539.

Liability limited by a scheme approved under Professional Standards Legislation. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities.

Key Provisions include: •

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The IIR imposes a top-up tax on Australian parent companies for any subsidiaries with an effective tax rate below 15%; The UPR will apply to groups where the parent company is not a resident of Australia or a country with a Global Minimum Tax but has subsidiaries residing in Australia. It will impose a top-up tax on the Australian subsidiary if other subsidiaries have effective tax rates below 15%; and Domestic Minimum Tax applies a top-up tax to Australian resident MNEs with an effective tax rate below 15%. The Domestic Minimum Tax reduces the amount of Global Minimum Tax payable

Key steps in determining topup tax liability for an MNE

income, where an MNE’s effective Australian tax rate falls below 15%.

The Australian Taxation Office will develop systems for MNEs to lodge the Global Anti-Base Erosion Information Return and manage any topup tax liabilities.

With Donald Trump's election win, there is a potential that the US may choose to oppose the implementation of the Pillar Two regime. If this occurs, Australian companies with subsidiaries in low-tax jurisdictions through a US intermediary could face additional challenges. Specifically, the Australian parent company may be required to pay extra top-up taxes, as the US intermediary may not contribute to this payment.

Large MNEs will be required to submit at least three new returns annually: •

Global Anti-Base Erosion Information Return

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Australian IIR/UTPR Tax Return

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Domestic Minimum Tax Return(s)

Navigating provisions under Pillar Two? Given that Australian entities typically face tax rates between 25% and 30%, it may initially appear that Domestic Minimum Tax provisions will not apply. However, the actual computation of the Domestic Minimum Tax includes tax effect accounting and statutory tax balances, necessitating a deeper analysis.

Consequently, even if an entity’s nominal tax rate exceeds the 15% threshold, it does not guarantee an effective tax rate greater than 15% for Domestic Minimum Tax purposes. This consideration is crucial for both Australian businesses with international operations and foreign companies with Australian subsidiaries.

How could it affect you?

The Global Minimum Tax rules enable Australia to apply a top-up tax on MNEs whose overseas income is taxed below 15%.

Domestic Minimum Tax ensures Australia has the first claim on top-up tax for low-taxed domestic

There are, however, a number of exceptions and concessions provided by the OECD that may assist companies in meeting the 15% minimum tax threshold. Typically, most OECD countries will be eligible to apply these concessions for a period of three years from the initial application date of the Pillar Two requirements.

One of which hinges on the timely recognition of deferred tax assets or concessionally treated tax assets. When these assets unwind, the entity’s effective tax rate should remain consistent to that of the Australian corporate tax rate, ensuring that

tax concessional treated amounts do not have the effect of reducing the effective tax rate under the Pillar Two rules.

Compliance with Global Minimum Tax rules will require comprehensive corporate tax consideration. These tax considerations include making relevant transfer pricing adjustments and adhering to applicable accounting standards when assessing both current and deferred tax positions.

Next Steps…

MNEs with consolidated revenue of €750 million or more should immediately assess the potential impacts from these rules.

Companies operating in Australia and other jurisdictions must consider their reporting obligations, as additional calculations and reporting will be required regardless of top-up tax liabilities.

Potential global ramifications of Pillar Two? Countries that have traditionally used low tax rates to attract foreign investment may find these strategies less effective under Pillar Two, impacting their economic growth and investment attractiveness.

In response to Pillar Two, some countries may adopt refundable tax credits and substance-based carve-outs to maintain competitive advantages.

These methods may be able to sidestep the restrictions of the Global Minimum Tax.

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First Lodgements Due: 30 June 2026.

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Penalties for Non-Compliance: Penalties align with those for SGEs, ranging from $156,500 to $782,500.

This document is intended to be a high-level summary. We note that the ramifications of this complex matter are wide-ranging.

Please get in touch if you require any clarification or further information on Pillar Two and how it might affect you.

While developed and high-tax countries might benefit from reduced profit shifting, the actual impact of Pillar Two will differ significantly across countries, depending on their specific economic and tax environments.

Simon Chun Tax Partner p +61 7 3222 8447 e schun@pitcherpartners.com.au

Tom Splatt Tax Partner p +61 7 3222 8308 e tsplatt@pitcherpartners.com.au

Murray Graham Tax Partner p +61 7 3222 8470 e mgraham@pitcherpartners.com.au

Adelaide | Brisbane | Melbourne | Newcastle | Perth | Sydney Pitcher Partners is an association of independent firms. An Independent Queensland Partnership ABN 84 797 724 539.

Liability limited by a scheme approved under Professional Standards Legislation. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities.

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