Australia to implement Pillar Two global minimum tax – In a significant development for multinationals, the Government will implement key aspects of Pillar Two of the OECD/G20 Two Pillar Solution to address tax base erosion. The proposed measures seek to establish a 15% global minimum tax rate and a 15% domestic minimum tax rate for large multinational enterprises with annual global revenue of EUR750 million (approximately AU$1.2 billion) or more.
Interfunding exemption under the FIRB regime - The Government will seek to reduce regulatory burden by introducing a new ‘interfunding’ exemption under the FIRB regime.
Minimum effective tax rate
In a much-anticipated development, the Government will implement key aspects of Pillar Two of the OECD/G20 Two‑Pillar Solution to address tax base erosion.
The proposed measures seek to establish a global minimum tax rate and a domestic minimum tax rate for large multinationals enterprises (MNEs) with annual global revenue of EUR750 million (approximately AU$1.2 billion) or more.
The measures are based on the OECD Global Anti-Base Erosion Model Rules (Model Rules). The Model Rules are designed to ensure large MNEs pay a minimum effective level of tax on the income arising in each jurisdiction where they operate.
While there is a large amount of detail yet to come, the measures will broadly operate as follows:
Global minimum tax
- The global minimum tax rules will impose a 15% global minimum tax rate for large MNEs with the ‘Income Inclusion Rule’ applying to income years starting on or after 1 January 2024 and the ‘Undertaxed Profits Rule’ applying to income years starting on or after 1 January 2025.
- The rules will effectively allow Australia to apply a top up tax on a resident MNE parent or subsidiary company where the group’s income is taxed below 15% overseas.
- More specifically, according to the Model Rules:
- the ‘Income Inclusion Rule’ imposes the minimum tax at the level of the parent entity of the relevant MNE group, in proportion to its ownership interests in those entities that have low taxed income; and
- the ‘Undertaxed Profits Rule’ operates as a backstop to ensure that the minimum tax is still paid in circumstances where an entity with low taxed income is held through an ownership chain which happens to prevent the low-taxed income being brought into charge under the Income Inclusion Rule. The Undertaxed Profits Rule does this by imposing an adjustment (such as a denial of a deduction) that increases the subsidiary’s tax.
Domestic minimum tax
- The domestic minimum tax rules will impose a 15% domestic minimum tax rate for large MNEs and will apply to income years starting on or after 1 January 2024.
- While not a common scenario, the rules will give Australia first claim on top-up tax for any low-taxed domestic Australian income. The domestic minimum tax ensures that Australia collects the revenue that would otherwise have attracted another country’s global minimum tax.
The measures build on the Government’s ‘Multinational Tax Integrity Package’ which was announced in the previous 2022–23 Budget and which proposed changes in relation to:
- Thin capitalisation (read previous KWM alert here).
- Deductions for payments in relation to intangibles that are connected with low tax jurisdictions (read previous KWM alert here).
- Public tax reporting for ‘country-by-country’ (CbC) reporting entities.
Next steps
Treasury will start working on draft legislation to implement Pillar Two. There is expected to be a fulsome public consultation process, including broad engagement with the tax industry. Questions about whether existing global disclosures such as CbC reports or audited statutory accounts can be used or modified to satisfy Pillar Two should, in particular, be explored.
The rules will need to be designed carefully to ensure there is a level playing field and double taxation is avoided, particularly in light of existing global tax rules such as the United States’ Global Intangible Low Taxed Income (GILTI) regime.
Like with the hybrid mismatch rules, MNEs are likely to experience substantial complexity and compliance costs in establishing and maintaining processes to comply the Pillar Two. MNEs should closely monitor the upcoming developments and consider making a submission in the forthcoming consultation.
FIRB regime– Interfunding exemption
In a welcome development, the Government stated it will amend the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) to exempt passive or low-risk ‘interfunding’ transactions from mandatory notification obligations and fees.
‘Interfunding’ is broadly where a fund invests in a separate fund and both funds are controlled by one responsible entity. The forthcoming draft legislation will provide further detail on the transactions that will and will not qualify.
No prior approval will be required for qualifying interfunding investments. However, unsurprisingly, such transactions, where applicable, would still be reviewable national security actions under the FATA.
The change is to apply prospectively, from the commencement date of the amending legislation.
This was one of the areas identified for legislative change to reduce regulatory burden in the February 2022 paper entitled Enhancing Australia’s Foreign Investment Framework: Government Response to the Evaluation of the Foreign Investment Reforms and Discussion Paper. It is particularly welcome as the FIRB regime has recently seen a doubling of fees the introduction of the Register of Foreign Ownership of Australian Assets (expected to come into force on 1 July 2023). See our previous alerts here and here.
Digest what was (or wasn’t) in the Federal Budget, what that means, and whether we now anticipate significant tax reform.
