Executive summary

The Australian Parliament has passed legislation to implement in domestic law Pillar Two of the Organisation for Economic Co-operation and Development (OECD)/G20 two-pillar solution, including a 15% global minimum tax and domestic minimum tax (DMT). This reflects a significant milestone in Australia's implementation of the OECD's Pillar Two global minimum tax solution. In-scope groups need to prepare for the financial reporting and compliance obligations that will be required as a result of this new law.

This follows the release of Exposure Drafts (EDs) for public consultation in March 2024 and the introduction of the Bills into Parliament in July 2024. The legislation is now awaiting Royal Assent.

The primary legislation consists of three Bills:

1. Taxation (Multinational — Global and Domestic Minimum Tax) Bill 2024 (Assessment Bill)
2. Treasury Laws Amendment (Multinational — Global and Domestic Minimum Tax) (Consequential) Bill 2024 (Consequential Bill)
3. Taxation (Multinational — Global and Domestic Minimum Tax) Imposition Bill 2024 (Imposition Bill)

The Assessment Bill includes the key aspects of the global and domestic minimum taxes, including the imposition of top-up tax through an Income Inclusion Rule (IIR) and a DMT applying to fiscal years starting from 1 January 2024 and an Undertaxed Profits Rule (UTPR), applying to fiscal years starting from 1 January 2025. The IIR and DMT have retrospective commencement for fiscal years starting on or after 1 January 2024. The retrospective commencement from 1 January 2024 is in line with that stipulated by the OECD.

The Consequential Bill contains consequential and miscellaneous provisions to facilitate the administration of the top-up tax, including the preparation of new returns that are required to be filed in Australia by in-scope multinational enterprise groups (MNE Groups).

The majority of Australia's Pillar Two rules are contained in the subordinate legislation. The subordinate legislation, in the form of Rules, comprise the key operative aspects in line with the OECD's Model Rules, including Transitional Country-by-Country Reporting (CbCR) Safe Harbors. The Rules are a legislative instrument that is required to be executed by the Minister, which may occur prior to 31 December 2024, and will be tabled in Parliament when it next sits in 2025. The Rules will also have retrospective commencement to fiscal years starting on or after 1 January 2024.

Australia's Pillar Two rules apply to MNE Groups with consolidated annual revenue of at least €750m in at least two of the four fiscal years immediately preceding the test year, which is in line with the OECD Model Rules.

Amendments for Securitization Vehicles

Before the Bills passed the Senate, a minor amendment was made to include a definition of Securitization Entity. The amendment states that Securitization Entity has the meaning given by the Rules. Furthermore, the Consequential Bill was also amended to ensure joint and several liability to top-up tax of other group entities does not extend to Securitization Entities.

These amendments were required to align with the OECD Administrative Guidance released in June 2024, such that Australia's DMT can achieve qualified status through the self-certification process and the peer review process by Inclusive Framework members. The Senate made no other substantive amendments to the Bills.

As a result of these Government amendments, the Bills were referred back to the House of Representatives after passing the Senate. The House passed the amended Bills on 27 November 2024.

Financial reporting implications

In June 2023, the Australian Accounting Standards Board issued AASB 2023-2, Amendments to Australian Accounting Standards — International Tax Reform — Pillar Two Model Rules (the Amendments). The Amendments introduce a mandatory temporary exception to the accounting for deferred taxes arising from Pillar Two and require disclosures about an entity's exposure to income taxes arising from Pillar Two, including separate disclosure of its current tax expense (income) related to Pillar Two income taxes in periods when Pillar Two legislation is effective.

In-scope groups need to prepare for the financial reporting obligations that will be required under Pillar Two. This should include undertaking a detailed assessment of the potential impact of Pillar Two to determine what disclosures will need to be made for full year or interim reporting as of 31 December 2024.

ATO consultation and administration

The Australian Taxation Office (ATO) has formed a special-purpose working group to discuss and seek feedback on the administrative aspects of implementing the Pillar Two measures. To date, the following matters have been discussed during meetings of the working group:

• Overview on the new administrative obligations, including lodgment obligations, recordkeeping requirements, penalties, liability and payment, interest, assessments, objections and review rights
• Feedback on forms under development, including the GloBE Information Return (GIR), Foreign lodgment notification, Australian IIR/UTPR Tax Return (AIUTR) and Domestic Minimum Tax Return (DMTR)
• Instances that require specific forms be completed where the top-up tax liability is nil, along with aspects of the new lodgment obligations that would benefit from ATO guidance
• The definitions and key terms used to establish whether entities are within scope, such as Group Entity, Constituent Entity, Ultimate Parent Entity, Permanent Establishment and Joint Venture
• The definitions for terms related to Excluded Entities, including Pension Fund, Pension Service Entity, Investment Fund, Real Estate Investment Vehicle, Government Entity and Non-profit Organization
• The interaction of Pillar Two with existing Australian domestic tax laws in relation to hybrid mismatch rules, foreign hybrid rules, foreign income tax offsets (FITOs), controlled foreign entities, franking credits and tax treaties
• Timing issues for claiming a FITO in income tax returns for foreign qualified domestic minimum top-up tax (QDMTT) paid at a later point in time, along with practical issues of claiming the appropriate amount of a FITO for foreign QDMTT paid in respect of attributed foreign income of a controlled foreign company or a permanent establishment

The outcomes and next steps for the special-purpose working group include:

• Conducting a broader session on the potential impact of Pillar Two for joint operations and joint ventures
• Compiling a key-issue register to highlight feedback provided by the working group members and the actions taken as part of implementing this measure
• Conducting future sessions, subject to the release of subordinate legislation

Implications

The passage of the Pillar Two legislation represents a significant milestone in Australia's implementation of the OECD's Pillar Two global minimum tax solution. This gives Australian-based MNE Groups and foreign groups with a presence in Australia certainty to move forward with their Pillar Two impact assessments and implementation projects to meet the new financial reporting and compliance obligations.