On 27 November 2024, Australia’s Parliament passed the long-anticipated Pillar Two rules, aligning with the OECD’s global initiative to establish a minimum tax rate of 15 per cent for large multinational enterprises (MNEs).
These rules are a key part of the global Base Erosion and Profit Shifting (BEPS) project, designed to ensure that MNEs pay a fair share of tax regardless of their operational jurisdictions.
To assist you in navigating the new Pillar Two rules we have included in this article an accompanying fact sheet summarising the details of the global and domestic minimum tax rules in Australia and how your organisation can prepare for the rules to ensure compliance the obligations of Pillar Two.
What are the Pillar Two Rules?
- Pillar Two sets a global minimum effective tax rate (ETR) of 15 per cent on the profits of large MNEs operating in multiple jurisdictions. If an MNE’s profits in a particular jurisdiction are taxed below this threshold, a top-up tax can be applied to bring the ETR up to 15 per cent. This is achieved through the implementation of the Income Inclusion Rule (IIR), Domestic Minimum Tax (DMT) and the Undertaxed Profits Rule (UTPR).
Who do the rules apply to?
- The Australian Pillar Two rules impact:
- Large MNEs: Groups with global consolidated revenue exceeding €750 million (approximately AUD1.2 billion) in at least two of the previous four fiscal years.
- Domestic subsidiaries: Australian entities that are part of an MNE group meeting the revenue threshold.
- Inbound and outbound groups: Both Australian-based multinationals and foreign-headquartered MNEs with Australian operations are captured under the rules.
Are there any exemptions or exclusions from the rules?
- There are transitional safe harbour provisions with the Pillar Two rules, which if applicable eliminates the need for ‘in-scope entities’ to undertake detailed ETR calculations and results in zero top-up tax to be paid in Australia. These safe harbour provisions are designed to simplify compliance and reduce administrative burdens for MNEs.
Broadly, Australian in-scope entities may be exempt from the rules if based on ‘Qualified CBC Reports’ and/or ‘Qualified Financial Statements’, it can demonstrate satisfaction of either the De minimis Test or the Simplified ETR Test or the Routine Profits Test.
Certain excluded entities may automatically be exempt from the rules including government entities, international organisations, non-profit organisations and pension funds, as well as ultimate parent entities (UPEs) which are either an investment fund or a real estate investment fund.
When do the rules apply?
- The Australian Pillar Two rules commence for income years starting on or after 1 January 2024. Specifically, the IIR and DMT will commence for income years starting on or after 1 January 2024, while the UTPR will commence for income years starting on or after 1 January 2025.
- The first returns and tax payments in Australia under the Pillar Two rules are due 18 months after year-end, which will be 30 June 2026 for the first in-scope entities and thereafter 15 months after year-end. As at the date of this publication, the approved form and format of the returns to be filed in Australia have not been released.
How should taxpayers prepare?
- Taxpayers impacted by these rules should act now to ensure readiness. Key steps include:
- Scoping and exemption: Conduct a detailed analysis determine whether you are a MNE group that meets the revenue threshold and whether any exemptions or safe harbour provisions apply for your entities in Australia.
- Data readiness: determine the data sources required, develop procedures for data collection and review and update your accounting and reporting systems as needed to capture the data required for compliance.
- Engage in modelling exercises: Understand the financial impact of top-up taxes under various scenarios.
- Filing preparedness: Work with your internal financial teams, tax, accounting and legal advisors to ensure all compliance and planning measures align with the new rules.
- Stakeholder communication: Engage with boards, investors, and other stakeholders to explain the implications of these changes.
Summary
Australia’s adoption of the Pillar Two rules marks a significant step in global tax reform, reflecting the country’s commitment to addressing base erosion and profit shifting. While these rules aim to promote fairness and transparency, they bring substantial complexity to the tax landscape.
Taxpayers should act promptly to understand the implications of the rules and implement robust strategies to ensure compliance. By taking a proactive approach, businesses can navigate the changes effectively and minimise disruptions to their operations.
Contact us for further guidance on how to prepare for the Pillar Two rules and ensure your business is ready for 2025.
